THE CONSTITUTIONAL AND PROGRESSIVE
Download .doc file here VISIONS FROM COOLIDGE TO OBAMA By Burton Folsom, Jr. Let's set the stage. After 25
years of economic growth, the U.S. stumbles into a recession and double-digit unemployment. An unpopular war aggravates the crisis; the national debt skyrockets. In response, the
nation elects a fresh face--a first-term U.S. Senator from a Midwestern state, and a vice-president from an eastern state. They promise hope and change; their party builds a formidable
coalition of blacks, whites, and immigrants, and sweeps both houses of Congress. After his election, we had a President's Conference on Unemployment to deal with the job crisis. What
emerged was a sensational plan: A stimulus package to create jobs--especially infrastructure jobs--and thereby attack unemployment directly. Sound familiar? But it's not
what you think. The year was 1921, and the newly elected President Warren G. Harding and Vice-president Calvin Coolidge faced many of the same issues as Barack Obama and Joe Biden 88 year
later. What's different is how these men responded. Coolidge and Obama fiercely embody two contrasting visions of economic order. Over the last century, all presidents
have bought into one of these two visions. Harding, Coolidge, and Ronald Reagan have been Constitutionalists. Limit the government, they argue, and let entrepreneurs and free markets
create growth. By contrast, Barack Obama and most of his predecessors--especially Franklin Roosevelt--have been Progressives. Government planning, federal spending, and Keynesian fine
tuning of the economy are the methods they choose to spark the economy and sustain prosperity. In the case of the 1921 recession, unemployment had indeed soared to 11.7 percent, and
industrial income had fallen almost 25 percent in one year alone. But Harding and Coolidge (who became president in1923 when Harding died) were Constitutionalists. They opposed the
popular stimulus scheme to use tax dollars to build public works. "The excess stimulation from that source," Harding insisted, "is to be reckoned a cause of trouble rather than a source of
cure." They epitomized what President Obama would later call "The politics of No." But what they said yes to was cutting income and corporate tax rates and slashing federal
spending. That kind of discipline, they argued, would unleash entrepreneurs, reduce the federal debt, and release human energy for recovery. Andrew Mellon, their Secretary of
the Treasury, was a banking genius. He had helped launch Alcoa, Gulf Oil, and many other corporations. He designed the plan to cut tax rates and federal spending. In making his
case, he made the astonishing claim that cutting tax rates might actually increase revenue. "It seems difficult to understand," he said, "that high rates of taxation do not necessarily mean
large revenue to the Government, and that more revenue may often be obtained by lower rates." When Mellon's prediction was attacked, Coolidge came to the rescue. "I agree
perfectly with those who wish to relieve the small taxpayer by getting the largest possible contribution from people with large incomes. But if the rates on large incomes are so high that
they disappear, the small taxpayers will be left to bear the entire burden. With Congress in Republican hands, Harding, Coolidge, and Mellon began to implement their free market
plans piece by piece. Therefore, the 1920s budgets showed surpluses every year, and income tax rates were chopped across the board, leaving the wealthiest Americans paying at a 25 percent
marginal rate. The results were spectacular. By 1923, unemployment had plummeted to 2.4 percent. From 1921 to 1929, GNP soared a remarkable 48 percent; the "average annual
earnings of employees: rose 34 percent; and almost one-third of the national debt simply disappeared. Entrepreneurs enjoyed one of their most creative periods in U.S. history:
From radios to sliced bread to scotch tape, inventors marketed new products. Older inventions finally secured the capital to emerge: Air conditioners, refrigerators, vacuum cleaners,
and zippers thus found their way into millions of households across America. U.S. patent numbers were higher in 1929 than in every year thereafter until 1965. Calvin Coolidge
became an American icon. His reelection in 1924 was so overwhelming that the Democratic Party, with a mere 28.8 percent of the vote, appeared near death. In Coolidge's six years as
president, he averaged 3.3 percent unemployment and less than 1 percent inflation -- the lowest misery index of any president in the 20th century. One might think that Coolidge's
spectacular success would have ended the economic debate. The Constitutionalists had triumphed. Instead, after 1929, the Progressives, starting with Herbert Hoover, dominated American
politics for the next 50 years. Hoover, who had been Secretary of Commerce in Coolidge's cabinet, was not Progressive in all his ideas, but he often dissented from the president. In
turn, Coolidge labeled him "Wonder Boy" and said privately, "That man has offered me unsolicited advice for six years, all of it bad." Hoover believed that targeted intervention could
improve the economy without losing any of the gains from Coolidge's free markets. Once in office, Hoover signed the highest tariff in U.S. history and then started a flow of federal
subsidies (and loans) to farmers, bankers, industrialists, and those unemployed. The Federal Reserve, which is somewhat independent of the president, also intervened and contributed to the
Great Depression that followed, by raising interest rates and shrinking the money supply. Wallowing in federal deficits, Hoover signed a bill raising income taxes to a top marginal rate of
63 percent. Entrepreneurs retrenched, and jobs rapidly disappeared. With unemployment at 25 percent in 1932, Governor Franklin Roosevelt of New York, the Democratic nominee for
president, was poised to oust Hoover from office. In doing so, FDR decided to campaign as a Constitutionalist, someone much less Progressive than Hoover. Calvin Coolidge could
have written FDR's campaign speech in Pittsburgh two weeks before the election. Hoover's deficits, FDR announced, were "so great that it makes us catch our breath." Such spending was
"the most reckless and extravagant past that I have been able to discover in the statistical record of any peacetime Government, anywhere, any time." Of Hoover's tax hikes, FDR concluded
that such a burden "is a brake on any return to normal business activity. Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through
production. If those taxes are excessive, they are reflected in idle factories…" Mellon was from Pittsburgh and, if he had been in the audience that day, he would have
cheered. You can't create jobs by taxing one group and giving to another--you can only redistribute existing wealth. To create wealth, you had to cut tax rates, not raise them.
That was the chief premise of the Constitutionalists. FDR may have used the rhetoric of limited government, but once in office he practiced the art of full-scale
interventionism. Farm prices were low because of overproduction, for example, so Roosevelt offered the AAA, which paid framers not to produce. Framers obligingly took the free cash
and stopped planting crops on part of their land; however, by 1935, the U.S. had crop shortages and had to import 36.4 million pounds of cotton, 34.8 million bushels of corn, and 13.4 million
bushels of wheat. We were thus paying farmers not to produce what we were importing instead. Then, under the NRA, FDR fixed prices for hundreds of industrial products, and
Jacob Maged, Sam Markowitz, and Rose Markowitz, among others, went to jail for giving discounts to customers. "For a parallel," the New York Herald-Tribune said, "it is necessary to
go to the Fascist or Communist states of Europe." For the unemployed, FDR launched the WPA (Work Program of America) with an astounding $4.8 billion, the largest appropriation of its
kind in U.S. history. The WPA built roads, schools, hospitals, and bridges--all of which gave work to many Americans. Coolidge had rejected that idea because of its constitutionality
and because it merely transferred jobs from the private to the public sector. Economist Henry Hazlitt, who wrote for Newsweek and the New York Times
during the 1930s, argued that the WPA destroyed as many jobs as it created. "Every dollar of government spending must be raised through a dollar of taxation," Hazlitt emphasized. If the WPA builds a $10 million bridge, for example, "the bridge has to be paid for out of taxes…". "Therefore," Hazlitt observed, "for every public job created by the bridge project, a private job as been destroyed somewhere else. We can see the men employed on the bridge. We can watch them work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project."
Hazlitt had an interesting point. In 1930, the United States had a top tax rate of 24 percent and a starting rate, after exemptions, of 0.5 percent. In 1935 and 1936,
the WPA spent billions of dollars on bridges, roads, airports, and school buildings, but the new tax rate, after exemptions, started at 5 percent and skyrocketed to 79 percent on top
incomes. The country also saw a host of new excise taxes passed in the interim and that tax money could have been invested in the very projects (or maybe better ones) than the WPA was
undertaking. Since Roosevelt was merely shifting employment from private jobs to public works, we would expect few new jobs to be created. Also, because of the high tax rates,
many entrepreneurs were investing in tax-exempt bonds, collectibles, and foreign businesses--all of which did little to jump-start the American economy. Thus, with a few ups and downs, the
unemployment rate was almost 21 percent in 1939--more than six full years after FDR took office. Henry Morgenthau, FDR's good friend and also his Secretary of the Treasury, was
frantic at the persistent unemployment. To leading Democrats, he confessed, "We have tried spending money. We are spending more than we have ever spent before and it does not
work… I say, after eight years of this Administration, we have just as much unemployment as when we started…and an enormous debt to boot!" Even spending for World War II did
not cure the ailing economy. We had more than ten million people unemployed going into the war, and we put twelve million Americans in uniform overseas. After paying their expenses,
and shelling out for weapons, we had increased the national debt six fold from $40 billion to $260 billion. Furthermore, in 1943, we made the income tax a mass tax and set the top rate at
90 percent. FDR wanted a 100 percent rate on all income over $25,000, but Congress insisted on letting wealthy Americans keep some of their earnings. The seven presidents after
FDR more or less continued the pattern of economic intervention. President Harry Truman signed the Employment Act of 1946, which empowered the federal government "to use all practical
means" to achieve "maximum employment." President Eisenhower, alarmed by several recessions, signed a bill to build interstate highways because they were a large public works project that
might lower unemployment. Instead, unemployment went up, and the Democrats took control of Congress in 1958 and the presidency in 1960. President Kennedy did support tax rate
cuts, and they did reduce the deficit, but President Johnson built the Great Society on a flurry of new entitlement spending, another tax hike, and massive federal debt. President Nixon
instituted price controls, passed a 10 percent tariff increase, and spurred the regulatory state by creating the EPA, OSHA, the Clean Water Act, and more. President Carter fully
subscribed to government fine-tuning of the economy, but his Progressivism hit a sour note. He encouraged the Fed to inflate the money supply and the highest inflation in the 20th century
resulted. Turning to the energy crisis, Carter called it "the moral equivalent of war." He tried gas rationing, wellhead price controls, a windfall profits tax, and urging businesses
and households to turn down their thermostats. When all of this failed, he declared, "We must face the fact that the energy shortage is permanent." By 1980, Carter's misery index
(unemployment plus inflation) was up to 20.8 percent--quite a contrast from Coolidge's 4.3 percent during the Roaring Twenties. After 50 years of interventionism, most Americans
(according to Gallup polls) no longer believed their children would have more prosperity in the next generation. Although our federal spending had not stopped the U.S. economy from
growing--at least not until the Carter administration--it had not delivered the freedom to expand into strong economic gain. As economist Lester Thurow concluded, "The engines of economic
growth have shut down here and across the globe, and they are likely to stay that way for years to come. Ronald Reagan thought differently. After he became president, he put
Calvin Coolidge's picture up in the cabinet room, and thus signaled his intent to pursue Coolidge's Constitutional policies of more limited government. Reagan did not accept the advice of
Keynesian economist Paul Samuelson, author of the best-selling economics textbook in the United States. Samuelson suggested, "five to ten years of austerity, in which the unemployment rate
rises toward an 8 or 9 percent average and real output inches upward at barely 1 or 2 percent per year, might accomplish a gradual taming of U.S. inflation." Instead, Reagan, through Fed
chairman Paul Volcker, stopped--or at least slowed down--printing money and inflating the currency. Also, Reagan, on the day he was inaugurated, signed an executive order ending all price
controls on oil and natural gas. Then he promoted a series of tax rate cuts on corporate and personal income. In other words, his strategy was to stop the printing presses, free up
the flow of oil, and turn entrepreneurs loose. And it worked--in a spectacular way. In Reagan's presidency, the U.S. GNP grew by more than one-third--a record 6.8 percent in
1984 alone. Inflation and unemployment plummeted and Reagan's misery index when he left office was a mere 8 percent--exceeded at that time in the 20th century by Coolidge alone.
What made Reagan's prosperity different from the 1920s was that it lasted for fully 25 years. Coolidge's limited government dominated only his administration because he was followed by
Hoover and FDR--two of the most persistent interventionists of the 20th century. Reagan was followed by Bush, Clinton, and Bush, who were not exactly Constitutionalists, but they did
emulate some of Reagan's actions. At least they avoided massive government spending. George H.W. Bush, like Hoover after Coolidge, did raise the top income tax rate, but only from 28
to 31 percent. Clinton further hiked that rate to 39.6 percent, and the American economy stumbled a bit in the early 1990s. But the Republicans in Congress were led by Newt Gingrich,
the Constitutionalist Speaker of the House, and in 1994 he masterminded a Republican capture of Congress. His Contract with America abound the GOP to 10 reforms to limit government. To be fair, President Clinton accepted some of these reforms and they transformed his presidency. First, he cut the capital gains tax, and business began to expand. Then
he signed the third Republican welfare reform bill, which slashed the welfare rolls from over five million to less than two million people. From 1994 to 2000, Clinton enjoyed prosperity, a
low misery index, and even budget surpluses in the last years of his administration. President George W. Bush had a brief slowdown in 2001 because of the dot-com bubble and
the 9/11 attacks. But, to his credit, he resisted some pleas to inflate the currency and spend his way back to prosperity. Instead, he further limited government in the economy by
cutting the top income tax rate back to 35 percent, slashing the capital gains tax from 20 to 15 percent, and the dividend tax from 39.6 to 15 percent. That produced what economist Stephen
Moore called a "supply side recovery," business capital spending increased and, according to Moore, median household wealth increased by almost $20,000 ($40,000 to $60,000) from 2003 to
2007. Furthermore, individual and corporate tax revenue increased by 40 percent--the largest dollar amount of revenue increase in U.S. history.
With U.S. economic growth
dominating the world, leaders in other countries began to imitate the U.S. and reduce their governments' role in their economies. New Zealand curtailed farm subsidies and had growth in
agriculture; Ireland slashed its corporate income tax rate from 48 to 12.5 percent and, in 10 years, its economy easily outperformed the European average, and more than one thousand international
companies moved there. Russia cut its income tax from over 50 percent to 13 percent and watched the revenue increase. Over 20 countries, including socialist Sweden, cut their income
or corporate tax rates, and most enjoyed strong increases in economic growth. Germany and Switzerland even have no tax on long-term capital gains. The world followed the United
States, which had more than doubled its GDP from 1982 to 2007.
President George W. Bush (unlike his father) did recognize the value of cutting tax rates. Unfortunately, he did
not use his veto power to control spending. In fact, he encouraged federal intervention by promoting a prescription drug benefit for seniors. He allowed his fellow Republicans in
Congress to use earmarks to deploy federal dollars into their districts at home. The classic example was the proposed (but so far not enacted) Bridge to Nowhere in Alaska, a pet project of
Senator Ted Stevens, which cost $200 million to service an island of about 50 people. During Bush's last year in office, he veered far from Constitutional government. When
faced with rising unemployment, he supported not fiscal restraint but a $152 billion stimulus package. When the banking crisis hit later in 2008, he supported the TARP program of massive,
and mandatory, relief for all large banks. The 25 years of steady growth and prosperity were over. Enter hope and change. President Barack Obama fiercely admired FDR and
the two have much in common. Both went to Ivy League colleges and law school; then they started an active political life with a victory in the state senate. Neither had experience or
interest in business, and both men believed that the national economy needed much federal intervention to target spending and redistribute wealth. Interestingly, both used the rhetoric of
fiscal restraint in launching their presidential campaigns. FDR, as we have seen, promised a balanced budget, and 25 percent cuts in federal spending. Obama made a similar plea, only
he did so more shrewdly. He knew that Constitutionalists hated deficits because they shifted wealth to interest groups living now and imposed burdens on the future generations to pay the
dept and the interest on it. Thus, when President Bush urged a raising of the debt ceiling in 2006, then Senator Obama announced, "Washington is shifting the burden of bad choices today
onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership." Obama continued this cry for fiscal restraint during his campaign and sometimes
argued that the new programs he was proposing would actually help achieve a balanced budget. For example, during his presidential campaign, he regularly presented universal health care as a
money saver for the nation. More recently, as president, he said, "Our healthcare problem is our deficit problem. Nothing else even comes close." The statisticians at the
independent Congressional Budget Office emphatically disagree and argue that universal health care Obama style will cost at least $1 trillion over 10 years, and that assumes rosy economic growth
and no surprise expenses. Since almost all federal programs have cost overruns--for example, cash for clunkers was three times the anticipated cost--the $1 trillion deficit number is
probably wildly optimistic. Granted, when Obama came into office he faced hard economic times. So did FDR. In both cases, failed government programs triggered the
crises. In the case of FDR, poor Fed policy, the highest tariff in U.S. history, and a huge income tax rate hike stifled economic growth. In the current crisis, the Community
Reinvestment Act mandated that banks provide loans to low income Americans who could not meet traditional criteria for safe lending. These dangerous loans increased sharply when the Fed
lowered interest rates to one percent (and less) during 2003 and 2004. Some critics warned that banks were making too many risky loans, but the banks simply sold the "toxic assets"
to Fannie Mae (a New Deal creation) and Freddie Mac. Barney Frank told a nervous financial community not to worry: Critics of these loans to Fannie Mae and Freddie Mac, he said,
"exaggerate a threat of safety and soundness" and "conjure up the possibility of serious financial losses to the Treasury, which I do not see." When the housing bubble broke in 2007,
Fannie Mae and Freddie Mac, along with many banks, began to crumble. Thus, the creation of TARP to supply the banks with a sufficient reserve to hold off massive collapses.
"Never let a good crisis go to waste," White House Chief of Staff Rahm Emmanuel
reportedly quipped, and President Obama early in his presidency has followed that advice. When we study his $787 billion stimulus package, and the huge annual budge that followed, three
points need to be stressed. First, are the large numbers being use. FDR popularized the idea of discussing spending programs in the billions of dollars, instead of
millions. With Obama, we have graduated to using trillions, instead of billions. For example, the deficit for 2009 alone is projected to be $1.6 trillion. Until the 1980s, our
entire national debt was only about half that. Hitting the one trillion dollar national debt in the 1980s was eye-popping and sobering, but now it seems tiny. Second, such
massive spending has not been followed by either economic growth or a decline in unemployment. The same happened to FDR when he launched a flurry of spending in 1933. After two years
of FDR's unprecedented spending and deficits, the economy was sluggish and unemployment was 22 percent. When Obama sponsored his $787 billion stimulus package, he bragged it would "create
or save" about 600,000 jobs. Instead, we have lost more than that number of jobs in the last year, as unemployment has lurched from eight to almost 10 percent. Meanwhile, economic
growth has stagnated. Third, such massive federal spending has helped transfer cash from taxpayers to targeted interest groups. Not just the stimulus package, with its aid for
education, green jobs, and community organizing, but Obama's omnibus spending bill had more than 9,000 earmarks in it. Cap and trade, and even universal health care, target aid to special
interests and also favor unions. Obama has endorsed card check, which makes union organizing much easier, and he has increased the power and wealth of the Service Employees International
Union (SEIU), among others. When General Motors came under government control, Obama made sure the UAW received aid beyond that mandated by legal bankruptcy laws. To pay for
this cornucopia of spending, President Obama, like FDR, has targeted rich Americans. In fact, Obama has promised tax breaks for those Americans earning under $250,000 and wants to leave the
bill for his programs with the upper one to five percent of American families. He has proposed increases in the income tax rate and the capital gains tax, which, if enacted, are likely to
stifle investing and entrepreneurship. When FDR raised the marginal income tax rate to 79 percent, he discouraged investors from starting or expanding businesses. In 1929, with
the top income tax rate at 24 percent, federal income tax revenue was $1.1 billion; in l935, with the top rate at 79 percent, income tax revenue had plummeted to $527 million. Thus, FDR had
to rely on (and sometimes increase) excise taxes on cigarettes, liquor, cars, gas, telephone calls, and movie tickets, to pay for his New Deal. Likewise, Obama has already signed a tax hike
on cigarettes; and he is discussing higher taxes on gas, wine, liquor and soft drinks. Since these excise taxes tend to hit lower income earners hard, that will mean a transfer of wealth
from lower incomes to targeted special interests. When, during the campaign, President Obama was asked about the data that showed that cutting tax rates increased revenues, he
brushed it all aside and said the issue of fairness was most important. But the most recent data (from 2006) on income taxes shows that the top one percent of the population pays 39.9
percent of all income taxes. What is their fair share and what is the fair share for the bottom half of all workers, who currently pay 2 percent of all income taxes? Here is
another question: What will Obama do when his policies fail, when economic stagnation and unemployment persist at high rates? When FDR faced that problem throughout the 1930s, he had
three responses. First, he used businessmen as a scapegoat for supposedly thwarting recovery. With high tax rates on income, corporations, and even the undistributed profits of
corporations, most businessmen refused to risk their capital. FDR denounced them, and even used the IRS against some of them (Andrew Mellon in particular). Ray Moley, one of FDR's
speechwriters, discussed this strategy at length with the president. According to Moley, FDR "launched into denunciation of bankers and businessmen and said that, every time they made an
attack on him, as they did in the Chamber of Commerce of the U.S., he gained votes and that the result of carrying on his sort of warfare was to bring the people to his support."
Obama has already adopted this scapegoat approach. He started with President Bush, the alleged source of most economic trouble, and then, like FDR, shifted to businessmen. They were
benefiting from tax cuts and their salaries were outrageous. With healthcare, Obama switched to insurance companies, who were supposedly ripping off consumers. Doctors as well, the
president insisted, were removing tonsils unnecessarily and cutting off feet for loads of cash. Businessmen may well return for an encore of denunciation. The Fed has
inflated the money supply more dangerously than ever before in history and we run a strong risk of inflation. When that happened to Jimmy Carter, he blamed businessmen for raising prices,
and that option will be open to Obama as well. FDR's second tactic for surviving failed policies was to use much of his federal spending, in effect, to buy votes. When the WPA
received $4.8 billion in 1935, much of it was targeted to key voter groups for his re-election bid in 1936. As Senator Carter Glass of Virginia concluded, "The 1936 elections would have
been much closer had my party not had a four billion, eight hundred million dollar relief bill as campaign fodder." In a somewhat similar way, Obama has benefited from the work of
ACORN, which registered more that 1.7 million voters between 2004 and 2008. Rep. Darrell Issa has issued an 88-page report documenting illegal registrations and other criminal
activity. Two amateur investigative reporters, with videos documenting ACORN officials offering to help set up brothels with under age immigrants, may have damaged ACORN beyond
repair. The House and Senate have voted to cut off their funding. Oddly, FDR also lost much of his WPA war chest when reporter Thomas Stokes exposed how the WPA used its
workers to campaign for one of FDR's favorite senators, Alben Barkley of Kentucky. Stokes won a Pulitzer Prize for his expose, and Congress passed the Hatch Act to limit the campaign
activities of federal employees. Like FDR, Obama has much of the media in his favor. In radio, FDR solidified that advantage by having the FCC reduce the period for renewing
radio licenses from three years to six months; some radio station owners who did not cooperate with FDR did not have their licenses renewed. When FDR gave a fireside chat, radio stations
rarely provided rebuttals. When Obama makes a major address, NBC, CBS, and ABC tend to be supportive, but FOX News presents both sides and talk radio is often critical. If
President Obama persists in massive federal intervention, he will--if history repeats itself--be faced with economic stagnation and high unemployment after four years in office. Whether he
can be re-elected, and win further support for his ideas, depends on whether he is more like FDR or Jimmy Carter. With the WPA, a good scapegoat, and strong media support, FDR won elections
and had high poll numbers even when he had unemployment over 20 percent in 1939. But even FDR had some luck. Polls had him losing to Willkie in 1940 until World War II knocked the
ongoing depression off of the front pages of newspapers. Obama is developing his own scapegoats and he still has strong media support, even though he may have lost ACORN, he still
has the 1.7 million voters registered by them in recent years. FDR had the good fortune to draw Alf Landon, the lackluster governor of Kansas, as his opponent in 1936; Jimmy Carter, by
contrast, drew the great communicator Ronald Reagan in 1980. If Obama in 2012 should face someone who can effectively articulate the historical vision of economic growth and prosperity
through limited government, then there will be new hope and change: Hope for Constitutionalism and change in the executive branch.
_____________________________________________________________________________________ Burton Folsom, Jr. is professor of history at Hillsdale College, and author of
New Deal or Raw Deal? (Simon &Schuster, 2008); he blogs at BurtFolsom.com. This article is adapted from "Obama's Vision Through History" in The American Spectator (November 2009
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