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Volume 16, Number 4
December 2011
On Power and the Use of Coercion
Two of the All-Time Greatest Successes in Cutting
Taxes and Spending
by Jim Powell
Federal spending has been
out of control for so long, it's
hard to imagine how big cuts
in taxes and spending — actual
cuts, not baseline cuts — could
ever be achieved. True, John F.
Kennedy and Ronald Reagan
achieved epic personal income
tax cuts, but neither controlled
spending, and both incurred
budget deficits every year
of their administrations. The
federal government has incurred
budget deficits more than 80
percent of the time since 1930,
a period when the number
of governmental functions
increased dramatically.
It's instructive to look
at two of history's greatest
successes cutting taxes and
spending. They occurred back
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LIMITS
when there were relatively few
governmental functions — and
that is where we need to return.
The first success occurred
in England. Considerable
credit goes to William Ewart
Gladstone (1809-1898), who
dominated British politics in
the heyday of market liberalism
(the opposite of contemporary
American liberalism). Gladstone
entered Parliament at age 23,
first held a cabinet post at 34
and delivered his last speech
as an MP when he was 84. He
served as Prime Minister four
times. He was Chancellor of
the Exchequer (equivalent to
our Treasury Secretary) in four
ministries. He was an inspiration
for Margaret Thatcher. Historian
Paul Johnson declared, “there
is no parallel to his record of
achievement in English history.”
Gladstone knew the national
government budget better than
anyone else, and in 1861 he
began his great tax-cutting
campaign. He had Britain
unilaterally lower tariffs (import
taxes), because he recognized
that the main beneficiaries of
lower tariffs are the people who
lower them, which makes things
less expensive — therefore,
people can buy more with their
hard-earned money. Gladstone
announced treaties that further
reduced tariffs affecting trade
with Austria, Belgium and the
German states. Gladstone helped
abolish more than 1,000 —
about 95 percent — of Britain's
tariffs. Then in 1865, Gladstone
brought the income tax down to
an astonishing 1.66 percent. The
British income tax had been 10
percent during the Napoleonic
Wars and 6.6 percent during the
Crimean War.
What was the secret of
Gladstone's extraordinary tax
continued on page 2
Public Interest Institute, December 2011
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December 2011
Volume 16, Number 4
Public Interest Institute
Dr. Don Racheter,
President
John Hendrickson,
Editor
LIMITS is one of our quarterly
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Copyright 2011
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Two of the All-Time
Greatest Successes
in Cutting Taxes and
Spending
by
Jim Powell
(continued from page 1)
cuts? As the Austrian economist
Joseph Schumpeter explained,
in Gladstone's view “the most
important thing was to remove
fiscal obstructions to private
activity. It was necessary
to keep public expenditure
low…this means the reduction
of the functions of the state to a
minimum.”
The more Gladstone cut the
cost of government, the more
people prospered. In 1859,
British imports were £179
million, and exports were £155
million. A decade later, British
imports soared to £279 million,
while exports hit £237 million.
Historian Asa Briggs hailed this
as an “age of improvement”
and noted how Gladstone “took
pains to emphasize the effect of
taxation not only on enjoyment
but on employment.” Economic
historian Charles More added,
“The improved living standards
of manual workers were
paralleled by improved living
standards for the middle class
and the very rich.”
A second great success
cutting both taxes and spending
involved an American President
who inherited one of the worst
depressions in American
history. It happened in 1921,
after World War I, as the
government cancelled orders for
war materials. Unemployment
doubled, and wholesale prices
plunged about one-third.
The President was Warren
Harding (1865-1923), who
shrewdly believed that if tough
adjustments must be made
— such as from a wartime
economy to a peacetime
economy — the most humane
policy is to get through the
inevitable adjustments as fast as
possible. Although the intention
of bailouts and relief programs
is to relieve misery, Harding
recognized that such policies
undermine incentives to make
adjustments rapidly and can end
up prolonging misery.
Harding cut spending about
50 percent, he cut taxes about
40 percent, and he started
paying down the debt. There
were no bailouts, no "stimulus"
programs, no entitlements, no
government employee unions,
none of the things that made
it extremely difficult for later
presidents to cut spending.
Although FDR's New Deal
was plagued by unemployment
that averaged 17 percent
throughout the 1930s, and now
Obama is plagued by chronic
9 percent unemployment,
Harding's policies helped turn
around the American economy
within 18 months. The Roaring
Twenties were underway in
1922. Harding died in August
1923, but his successor Calvin
Coolidge (1872-1933) continued
his policies. Consequently,
during the 1920s, taxes and
spending were cut 50 percent,
and about 30 percent of
continued on page 3
Public Interest Institute, December 2011
the national debt was paid off.
There were budget surpluses
every year during the 1920s.
Unemployment dropped to 1.8
percent, the lowest in more than
a century. There were plenty of
jobs.
Economic historians have
acknowledged Harding's remarkable success. John M. Peterson
and Ralph Gray, for instance,
reported that “The postwar depression set records both for the
rapidity of the 1921 contraction
and for 1922's rapid climb back
to prosperity.” Gary M. Walton
and Hugh Rockoff wrote that the
policies launched by Harding
“added to an environment that
produced unparalleled business
prosperity. Spectacular advances
in the production of consumer
durables, electric power, new appliances, suburban housing, and
city skyscrapers highlighted the
decade.” According to economist
Stanley Lebergott, “The gain in
the standard of living during the
1920s was without precedent in
U.S. experience.”
If Harding's policies were so
good, then how does one explain the stock market crash and
the Great Depression that followed? The short answer is that
government policies changed.
There were a series of Federal
Reserve blunders that began
in 1928 and continued through
the late 1930s. Herbert Hoover
signed the Smoot-Hawley tariff
(1930) that throttled trade, and
he signed big tax hikes (1932)
that meant employers had less
money for hiring, and consumers had less money for spending.
Taxes tripled under FDR, who
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also signed a number of laws
that made it more expensive for
employers to hire people, so
there was less hiring.
Although Gladstone and
Harding affirmed that dramatic
tax and spending cuts could be
achieved, they're not likely to
happen again unless the number
of functions performed by the
federal government is reduced.
If government continues to do
everything it's doing now, efforts
to cut taxes and spending are
probably doomed. A bureaucracy might have its budget cut
for a while, but as long as that
bureaucracy exists, it can be
counted on to lobby aggressively
for bigger appropriations, and
they are bound to come.
The number of government
functions will have to be reduced
one at a time, starting with those
that cost too much or are inefficient, counter-productive, or
obsolete. Obama's spending
blowout and the resulting debt
crisis has made clear that the
government is grossly overextended. Financial pressures to
cut back are intensifying. Reducing the number of government
functions seems likely to emerge
as a leading strategy for cutting
taxes and spending — the sooner, the better.
Jim Powell is a Senior Fellow
at the Cato Institute and is the
author of FDR's Folly, Wilson's
War, Bully Boy, The Triumph of
Liberty, and other books.
This article originally appeared
on August 10, 2011 in Forbes
and was added to cato.org on
August 10, 2011. The article is
reprinted with permission from
the Cato Institute.
LIMITS
Question of the Quarter:
Do you think Congress will
seriously address the debt
crisis in 2012?
Send your thoughts on
this issue to us at
Public.Interest.Institute@
LimitedGovernment.org.
We may publish some of your
ideas in the March 2012
issue of LIMITS.
Thank you for your
continued support of
Public Interest
Institute.
Merry Christmas and Happy
New Year from all of us at
Public Interest Institute.
Thank you for all your support
in 2011 and your continued
support in 2012!
Public Interest Institute, December 2011
To continue our publications, Public Interest Institute relies on the suppor
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Did Obamacare Cause the National Economic Doldrums?
by James Sherk
Why did the recovery
stall? President Obama recently chalked it up to “bad luck.”
Even in more searching
discussions of why the economy remains flat, politicians
and economists largely ignore
the elephant in the room: the
Patient Protection and Affordable Care Act. Private-sector
job creation stopped improving almost as soon as Congress
passed the act.
This recovery has been anything but normal. Usually the
economy accelerates after a
deep recession. Entrepreneurs
find new ways to employ millions of idled workers, and the
economy quickly regains lost
ground. The boom following
the equally painful recession
of the early 1980s enabled
President Reagan to campaign
on “Morning in America.”
Not this time. Two years
after the recession officially
ended, almost a tenth of workers remain unemployed. Both
economic growth and job
growth remain sluggish.
Steady recovery
Few economists expected
this. Throughout 2009 and
early 2010, the economy
appeared to be recovering
steadily, though not spectacularly. Monthly reports of job
losses got progressively less
LIMITS
bad, improving by an average of
67,000 jobs a month. The White
House’s mid-2009 economic
forecasts — accounting for the
depth of the recession and the effects of the stimulus — projected
unemployment would fall to 7.5
percent by the 2012 elections.
By the spring of 2010,
private-sector job growth turned
positive. In April, job growth
increased to 230,000 net
private-sector jobs. The economy appeared on track for a
normal recovery from an awful
recession. The administration
began confidently predicting a
“Recovery Summer.”
course — prove causation. The
fact that job growth slowed after
Congress passed the Affordable
Care Act does not prove that
the legislation is at fault. There
are, however, good reasons to
believe that the law applied the
brakes to hiring.
Business costs
The act will significantly raise
business costs. Any company with
more than 50 workers must provide (generally more expensive)
government-approved health coverage or pay a financial penalty.
And any business with fewer than
50 workers has strong incentive to
But Recovery Summer fizzled make sure it does not hire a 50th
employee.
instead of sizzled
The law has also made it very
difficult
for businesses to plan
In May, private-sector job
for the future. What will the large
growth dropped sharply to less
than 50,000 net jobs. Thereafter, group health-care market look
monthly improvement in private like in five years? No one really
knows. How much will it cost to
job growth averaged just 6,500
provide health insurance to emjobs.
ployees in five years? Businesses
What else happened in the
can only guess.
spring of 2010? Despite obIn addition to this economic
stacles that many believed would
kill the bill, Congress passed the uncertainty comes administrative
Affordable Care Act. Within two uncertainty. Will a business get a
waiver or not? The law doesn’t say
months, the trend in job growth
— that is up to the bureaucrats to
dropped sharply. Monthly job
creation had been on pace to top decide. Will an entrepreneur who
out in the hundreds of thousands. owns multiple small businesses,
Post-Affordable Care Act, it has each with fewer than 50 workers
barely kept pace with population but collectively above the limit,
have to pay the penalty? Ask the
growth.
IRS in a few years for an answer.
Correlations do not — of
Public Interest Institute, December 2011
rt of individuals like you who believe in individual liberty and free-market
e-paid envelope to make your tax-deductible contribution to this effort today.
The health-care measure raises
business costs and makes planning for the future more difficult.
It should be expected to slow
hiring.
Federal Reserve officials report
that the law has had exactly this
effect. Dennis Lockhart, President
of the Atlanta Fed, reports that
“prominent among these (factors
businesses explain are impeding
hiring) is the lack of clarity about
the cost implications of the recent
health-care legislation. We’ve frequently heard strong comments to
the effect of ‘my company won’t
hire a single additional worker until we know what health insurance
costs are going to be.’”
Warnings
Surveys bear out these warnings. In a recent poll, one-third of
small business owners identified
the health-care bill as one of their
top two obstacles to hiring.
The data suggest these business owners’ complaints are not
idle. Job growth slowed almost
as soon as Congress passed the
bill. If Congress wants to lift the
brakes on hiring, then rolling back
the Affordable Care Act would be
a good place to start.
James Sherk is a Senior Policy
Analyst in labor economics at
The Heritage Foundation.
This article appeared on
November 23, 2011, and is
reprinted with permission from
The Heritage Foundation.
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A Quick Review of State
and Local Ballot Issues
by
Brent Mead
The results are in, and the
winner is…well, that is complicated. Voters went to the polls
across the country yesterday and
NTU tracked the results of statewide and local ballot measures
in ten states. While the headlines
are focused on the defeat of Issue 2 in Ohio, there were more
positives than negatives, and the
2011 elections on balance show
a continued voter preference for
lower taxes and less government.
All the results from last
night should also be colored by
the enormity of the victory in
Colorado last week. Proposition
103 in Colorado was the only
statewide tax increase in the
country and it went down by a
2-1 margin. The policy choices
expressed by voters last night
do not necessarily reflect a tax
preference. That preference is
still very much clear by looking
at the number of local tax hikes
which went down in defeat.
In Ohio, Issue 2, the repeal
referendum on the state’s collective bargaining reform law, went
down handily. However, those
same voters were even stronger
in their antipathy for President
Obama’s health-care law, voting
to protect health-care freedom of
choice by a 65 percent-35 percent margin. The early message
from big government apologists
seems to be that this vote was
only symbolic. However, even
as a symbol it shows continued
strong disapproval of the federal
health-care law. When coupled
with similar actions by states
such as Missouri, it shows that
federal overreach will continue
to be an issue for voters going
into 2012.
Additionally, a majority of
the local tax and bonding measures went down in defeat. Thus,
while voters said no to the state’s
collective bargaining reform
efforts, they sent an even stronger message that the solution to
Ohio’s budget woes will not be
found in tax hikes and government mandates.
Another potential harbinger
of things to come can be found
in California. San Francisco
residents voted for Proposition C, which would save the
city over $1 billion in public
employee pension costs. While
voters rejected a more expansive
proposal, Prop C shows a basic
recognition by even the most
liberal of cities that pension
costs are quickly reaching unsustainable levels and reform, not
higher taxes, is the answer. On
the tax front, Bay Area residents
also rejected a .5 percent sales
tax increase to pay for public
safety programs.
The state of Washington also
provided a solid win for taxpayers. Voters approved I-1183 to
privatize state liquor stores and
sell off the related assets. In the
process, I-1183 became the most
expensive ballot campaign in the
continued on page 8
Public Interest Institute, December 2011
The Reconsideration of President Warren G. Harding
by John Hendrickson
In response to the current
economic problems and the
debt crisis, President Warren G.
Harding has been resurrected
as a hero among both conservatives and libertarians. President
Harding is finally starting to get
a fair reevaluation by a number
of academics and journalists
who see that his policies and
political philosophy stood for
a conservatism that was rooted
in the American Founding. In
The Weekly Standard, Ronald
Radosh and Allis Radosh wrote:
Warren G. Harding
has come to be thought
of as one of the worst
Presidents America has
ever had. Yet the truth
about his Presidency is
quite the opposite. He
achieved a good deal
more in the two and
a half years he served
before his sudden death
than many Presidents
accomplish in a full
term.1
James Pethokoukis, an
economics columnist, recently
praised President Harding in
Commentary when he wrote
about the President’s handling
of the depression of 19201921.2 As the nation continues
to suffer from slow economic
growth, 9 percent unemployment, and an escalating debt
crisis, policymakers can learn
much from President Harding, who confronted similar
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policy challenges after he won
the presidency in the landslide
election of 1920. As President,
Harding committed the nation
to a course of following constitutional limited-government
policies that consisted of cutting spending, paying down the
national debt, tax reform, and
eliminating unnecessary regulations, among other policies that
led to the economic prosperity of
the “Roaring Twenties.”
President Harding,
immediately upon taking office,
faced the economic crisis of the
depression of 1920-1921, which
consisted of not only an economic depression but an unemployment rate of at least 11 percent.
Harding also faced a national
debt of at least $24 billion, a
federal budget of $6 billion, and
high wartime tax rates at over 70
percent.3 In confronting the
depression of 1920-1921, President Harding, just as Presidents
Calvin Coolidge, Dwight D.
Eisenhower, and Ronald Reagan,
surrounded himself with capable
individuals who helped form
the Harding economic program.
Two notable examples were
Andrew Mellon, who served as
Secretary of the Treasury, and
Charles G. Dawes, who served
as the first Director of the Bureau of the Budget. Both Mellon
and Dawes shared Harding’s
belief in the need for spending
and tax reduction.4
To meet the objectives of
budget and spending reforms,
or “economy in government,”
President Harding and Dawes
organized a series of meetings
with the entire administration under the heading of the
Business “Organization of the
Government.”5 It was at these
meetings that Dawes set forth
the agenda of the Administration
to roll back government spending. Harding also led efforts to
force economy in government
by backing Dawes and leading
the overall Republican efforts at
reducing federal spending.
Under President Harding,
“federal spending had dropped
from $6.3 billion in 1920 to $5
billion in 1921 and then $3.3
billion in 1922.”6 Harding and
Mellon started to reduce the high
wartime tax rates across-theboard, and the top income tax
eventually fell to 24 percent in
1929.7 After Harding’s sudden
death, Vice President Calvin
Coolidge assumed the Presidency and continued the Harding policies of tax and spending
reform. Harding, “by the time
he died in August 1923, had cut
spending almost 50 percent, cut
taxes almost 40 percent, and he
began paying down the national debt,” noted historian Jim
Powell.8 In addition, President
Coolidge “further cut spending,
down to $2.8 billion in 1927.”9
The Harding economic policy
turned the severe depression of
1920-1921 into a short-lived
economic downturn and it resulted in an economic expansion
Public Interest Institute, December 2011
with low unemployment and
budget surpluses. It was the Harding, and later Coolidge, policies
of reducing spending, cutting
taxes, paying down the national
debt, and reforming regulations
that unleashed the private-sector
economy.
Although much has changed
since the 1920s, especially with
the rise of the welfare state and
the increase in regulatory activity by the federal government,
policymakers can still implement
the policies that Harding used to
confront the depression of 19201921. The debt crisis the nation
faces is very severe, as spending
has reached about 25 percent of
Gross Domestic Product (GDP).
The national debt is over $14
trillion and the government is
running deficits in the trillions,
while entitlement programs
threaten to consume the entire
federal budget unless reformed.
The economy is also suffering
from close to 9 percent unemployment and slow economic
growth, while the albatross
of uncertainty hangs over the
economy because of the current
regulatory (including the Patient
Protection and Affordable Care
act), tax, and spending policies.
In confronting spending, policymakers must take the Harding
approach and push for significant spending cuts. Senator Tom
Coburn (R-OK) as an example
has proposed “Back in Black: A
Deficit Reduction plan,” which
would “gradually reduce the
size of government by about 25
percent and balance the budget
within ten years.”10 Coburn’s
proposal is significant because it
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addresses the spending problem
and brings fiscal stability back to
the federal government, which is
exactly the Harding approach.
Reducing spending will be
a difficult challenge for policymakers and it will take committed leadership to resolve
both the debt crisis and create
economic growth. The New
Deal-Great Society has greatly
impacted how Americans view
their government, and reforming
the welfare state will be a major
endeavor. Although Harding
was committed to an economic
philosophy that was rooted in
limited government, even more
important was his admiration
for the American Founders and
the Constitution. The recent
reevaluation of the policies and
political philosophy of President
Harding and his Administration
provide not only an opportunity to see how his Presidency
shaped the 1920s, but also how
policymakers can apply his policies to the problems of today.
Endnotes:
Ronald Radosh and Allis Radosh,
“Time for Another Harding: How a
much-derided Republican president
actually succeeded in cutting the
budget and fixing the economy,”
The Weekly Standard, October 24,
2011, p. 19.
2
James Pethokoukis, “Did Obama
make it worse?: What might have
been without the stimulus.” Commentary, September 2011, p. 44.
3
John Hendrickson, "The HardingCoolidge Path to Prosperity: What
Policymakers Can Learn From the
1920s to Solve the Budget Crisis
and Create a Sound Economy,"
1
Policy Study, No. 11-4, Public
Interest Institute, August 2011, p.
21-24.
4
It should be noted that other Harding administration officials were
just as important as Mellon and
Dawes, especially Charles Evans
Hughes, who served as Secretary
of State, and Herbert Hoover, who
served as Secretary of Commerce.
Harding also appointed a number
of conservatives to federal agencies
and the judiciary.
5
Hendrickson, p. 21.
6
Radosh and Radosh.
7
Veronique de Rugy, “Tax Rates
and Tax Revenue: The Mellon
Income Tax Cuts of the 1920s,”
Tax & Budget Bulletin No. 13, Cato
Institute, February 2003.
8
Jim Powell, “Not-So-Great Depression,” cato.org, January 7,
2009, <http://www.cato.org/pub_
display?pub_id=9880> accessed on
October 8, 2010.
9
Jim Powell, “Jump-starting the
economy, Harding-Coolidge: 1.8%
unemployment,” The Washington Times, September 10, 2010,
<http://www.washingtontimes.
com/news/2010/sep/10/hardingand-coolidge-18-unemployment/>
accessed onSeptember 17, 2010.
10
Senator Tom Coburn, “Back in
Black: A Deficit Reduction Plan,”
Office of United States Senator
Tom Coburn, <http://coburn.senate.
gov/public/?p=deficit-reduction>
accessed on November 9, 2011.
John Hendrickson is a Research
Analyst at Public Interest
Institute and has written a series
of essays exploring the
policies and political philosophy
of President Warren G. Harding
and his Administration.
Public Interest Institute, December 2011
Public Interest Institute
at Iowa Wesleyan College
600 North Jackson Street
Mount Pleasant, IA 52641-1328
A Quick Review of State
and Local Ballot Issues
by Brent Mead
(continued from page 5)
state’s history. They also voted
to strengthen the budget stabilization fund. However, I-1125,
which would ensure transportation revenue goes to transportation needs only, was narrowly
defeated 49 percent-50 percent.
On the local level, results
were also mixed. For instance,
residents in Seattle approved a
$32 million property tax increase, but rejected a $20 million
vehicle fee increase. In San Juan
County, voters narrowly decided
to extend the real estate excise
tax and decisively shot down a
new solid waste disposal
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user fee.
While NTU is still in the
process of compiling the results
of the hundreds of elections last
night, [November 8, 2011] a
couple basic trends can be found.
Voters did express a willingness
to raise taxes if the measure delineated what the funds would be
used for and was for a set period
of time. However, overall, far
more tax increases were defeated
than passed. I think the big
story is that despite the spin over
Ohio's Issue 2 from proponents
of big government, voters were
in no mood to write blank checks
to big-spending public officials.
Brent Mead is State Government
Affairs Manager for the National
Taxpayers Union.
This article appeared in NTU's
blog GovernmentBYTES: The
Official Blog of the National
Taxpayers Union on November
9, 2011 and is reprinted with
permission from the National
Taxpayers Union.
Visit our other Websites:
www.IowaTransparency.org
and
www.IowaVotes.org
Employees of Public
Interest Institute are available
for speaking engagements on
a variety of issues.
Public Interest Institute, December 2011