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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 What's New at PII? Check our Website at: www.LimitedGovernment.org 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 LIMITS December 2011 Volume 16, Number 4 Public Interest Institute Dr. Don Racheter, President John Hendrickson, Editor LIMITS is one of our quarterly membership newsletters, arriving in March, June, September, and December. It consists of short articles and essays on protection of human rights by limiting the powers of government. LIMITS is published by Public Interest Institute at Iowa Wesleyan College, a nonpartisan, nonprofit, research and educational institute whose activities are supported by contributions from private individuals, corporations, companies, and foundations. The Institute does not accept government grants. Contributions are tax-deductible under sections 501(c)(3) and 170 of the Internal Revenue Code. Permission to reprint or copy in whole or part is granted, provided a version of this credit line is used: “Reprinted by permission from LIMITS, a quarterly newsletter of Public Interest Institute.” The views expressed in this publication are those of the authors and not necessarily those of Public Interest Institute. If you have an article you believe is worth sharing, please send it to us. All or a portion of your article may be used. The articles in this publication are brought to you in the interest of a better-informed citizenry, because IDEAS DO MATTER. We invite you to: CALL us at 319-385-3462 FAX to 319-385-3799 E-MAIL to Public.Interest.Institute @LimitedGovernment.org VISIT our Website at www.LimitedGovernment.org WRITE us at our address on page 8 Copyright 2011 LIMITS 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 LIMITS 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 solutions to today's public-policy challenges. Please use the enclosed postage 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. LIMITS 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 LIMITS 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 LIMITS 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 LIMITS NONPROFIT ORGANIZATION U.S. POSTAGE PAID MAILED FROM ZIP CODE 52761 PERMIT NO. 338 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