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Title: Two of the All-Time Greatest Successes in Cutting Taxes and Spending
Source: CATO
URL Source: http://www.cato.org/pub_display.php?pub_id=13561
Published: Aug 11, 2011
Author: Jim Powell
Post Date: 2011-08-11 20:24:26 by CZ82
Keywords: None
Views: 7821
Comments: 16

Two of the All-Time Greatest Successes in Cutting Taxes and Spending

by Jim Powell

This article appeared in Forbes on August 10, 2011.

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% 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 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% — of Britain's tariffs. Then in 1865, Gladstone brought the income tax down to an astonishing 1.66%. The British income tax had been 10% during the Napoleonic Wars and 6.6% during the Crimean War.

What was the secret of Gladstone's extraordinary tax 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%, he cut taxes about 40%, 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% throughout the 1930s, and now Obama is plagued by chronic 9% 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%, and about 30% of the national debt was paid off. There were budget surpluses every year during the 1920s. Unemployment dropped to 1.8%, 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 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, are inefficient, counter-productive or obsolete. Obama's spending blowout and the resulting debt crisis has made clear that the government is grossly over-extended. 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

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#1. To: CZ82 (#0) (Edited)

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% — of Britain's tariffs.

So you count NAFTA as a massive tax cut?

Harding cut spending about 50%, he cut taxes about 40%

Are you aware that Harding cut military spending by 83% (from nearly $4 billion to $680 million).

You might want to look into how Harding scrapped battleship production at the same time the Japanese were beginning their military buildup. Meanwhile, Harding increased spending on roads (Federal Aid Highway Actof 1921) and federal support for women and children's healthcare (Sheppard–Towner Maternity and Infancy Protection Act of 1921)

So if Obama followed the Harding model, he'd gut defense spending by over $500 billion a year and use that money on infrastructure and public healthcare initiatives.

And finally, Harding raised tarrifs in 1921 in response to the economic slowdown (The Emergency Tariff Act of 1921). So is the author of this article pro or anti-tarrifs?

Tagline for sale - inquire within

go65  posted on  2011-08-11   22:53:26 ET  Reply   Trace   Private Reply  


#2. To: go65, CZ82 (#1)

You are both ignoring the real reason behind the Roaring Twenties.

Prohibition.

Why?

Because the peons couldn't get drunk often enough to miss work, have unwanted babies and forget where they lived, let alone face the reality of their wasted existence.

harrowup  posted on  2011-08-12   13:34:40 ET  Reply   Trace   Private Reply  


#3. To: harrowup (#2)

Prohibition.

Why?

Because the peons couldn't get drunk often enough to miss work, have unwanted babies and forget where they lived, let alone face the reality of their wasted existence.

Silly poster. Most then made their own hooch, as they did most other essentials.

mininggold  posted on  2011-08-12   14:32:19 ET  Reply   Trace   Private Reply  


#4. To: CZ82 (#0) (Edited)

They forgot Harry Truman who cut federal spending from 43.6% in 1944 to 14.8% in 1947.

The Keynesian idiots tried to get Truman to keep the wartime economy in tact. They argued that he should continue to build military equipment and just bury it in the desert in the name of "full employment".

Fortunately, Truman told them to take a hike.

Truman does not get enough credit for this.


This small group of terrorists [Tea Party members] have made it impossible to spend any money. -- Mike Doyle (D-PA)

jwpegler  posted on  2011-08-12   15:56:02 ET  Reply   Trace   Private Reply  


#5. To: jwpegler (#4)

Truman does not get enough credit for this.

That seem to happen alot nowadays, the right person "DOESN'T" get credit for what they've done....

It's more fashionable to lie about that person or just flat out ignore what they did...... or give the credit to someone else who had nothing to do with it like a Liberal.....

When asked by a Liberal what I bought my Granddaughter for her 1st birthday I replied, "MORE AMMUNITION"!!!! -----------------------------"People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf."

CZ82  posted on  2011-08-12   16:03:18 ET  Reply   Trace   Private Reply  


#6. To: mininggold (#3)

Sadly enough, jokes are always wasted on those who take themselves so seriously and don't have the sense to know they are needing the laugh.

harrowup  posted on  2011-08-12   16:06:09 ET  Reply   Trace   Private Reply  


#7. To: go65 (#1)

Sheppard–Towner Maternity and Infancy Protection Act of 1921

A total of 2.5 million dollars of federal money

tsk tsk

Way to obfuscate, leftard

Obama has played at being a president while enjoying the perks … golf, insanely expensive vacations at tax-payer expense. He has ignored the responsibilities of the job; no plans, no budgets, no alternatives … just finger pointing; making him a complete failure as a president

no gnu taxes  posted on  2011-08-12   16:11:56 ET  Reply   Trace   Private Reply  


#8. To: no gnu taxes (#7)

A total of 2.5 million dollars of federal money

In 1921, equal to about $29 billion today.

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go65  posted on  2011-08-12   17:23:23 ET  Reply   Trace   Private Reply  


#9. To: jwpegler, cz82 (#4)

They forgot Harry Truman who cut federal spending from 43.6% in 1944 to 14.8% in 1947.

We've been through this - again most of the cut was via defense and the economy did suffer as a result.

They argued that he should continue to build military equipment and just bury it in the desert in the name of "full employment".

That's the same argument tea party leaders are making now, as I pointed out to you the other day.

Tagline for sale - inquire within

go65  posted on  2011-08-12   17:25:46 ET  Reply   Trace   Private Reply  


#10. To: go65 (#9)

the economy did suffer as a result.

Nope.

Truman oversaw a massive transformation from a government directed economy to a private one. Yes, there were some minor dislocations as there are in all transformations.

The economy did not collapse and millions of people were not thrown out of work as the Keynesian claimed would happen.

Had Truman listened to the Keynesian idiots who wanted to build tanks and bury them in the desert, America would be a poor country today.

Truman cut government spending from 48% of GDP to 15% over 4 years. All we need to do is cut government spending from 25% of GDP to 18% over the next 3. The economy will boom.


This small group of terrorists [Tea Party members] have made it impossible to spend any money. -- Mike Doyle (D-PA)

jwpegler  posted on  2011-08-12   17:40:36 ET  Reply   Trace   Private Reply  


#11. To: go65 (#8)

A total of 2.5 million dollars of federal money

In 1921, equal to about $29 billion today.

For one, I forgot to mention that the 2.5 million was spread out over 8 years. And it was nothing compared to the overall budget at that time.

1 dollar in 1929 is worth over 1000 dollars today? Yeah right, inflation as we know it aside.

And that all aside, 29 billion dollars in todays budget is just Obama's vacation expenses.

Obama has played at being a president while enjoying the perks … golf, insanely expensive vacations at tax-payer expense. He has ignored the responsibilities of the job; no plans, no budgets, no alternatives … just finger pointing; making him a complete failure as a president

no gnu taxes  posted on  2011-08-12   19:34:27 ET  Reply   Trace   Private Reply  


#12. To: jwpegler (#10)

Truman cut government spending from 48% of GDP to 15% over 4 years. All we need to do is cut government spending from 25% of GDP to 18% over the next 3. The economy will boom.

Not according to any economist or the CBO.

And as for Truman, in September of 1945 he spoke before Congress:

Truman called for new public works programs, legislation guaranteeing "full employment," a higher minimum wage, extension of the Fair Employment Practices Committee (or FEPC, a war-time agency that monitored discrimination against African Americans in hiring practices of government agencies and defense industries), a larger Social Security System, and a national health insurance system.

http://millercenter.org/president/truman/essays/biography/4

Remember, Truman had a 32% approval rating by 1946. He's a model for Obama though, Truman, like Obama, had to deal with an obstructionist GOP Congress and staged his political comeback by running against a "Do-Nothing" Congress.

And after Truman won in 1948, he presented his "Fair Deal" which called for: "repeal of Taft-Hartley, an increase in the minimum wage, expansion of the Social Security program, a housing bill, national health insurance, development projects modeled on the New Deal's Tennessee Valley Authority, liberalized immigration laws, and ambitious civil rights legislation for African-Americans."

Tagline for sale - inquire within

go65  posted on  2011-08-13   10:47:49 ET  Reply   Trace   Private Reply  


#13. To: go65, capitalist eric, Get Outta Dodge!, hondo68, Liberator, sneakypete, Murron, CZ82, BorisY, Happy Quanzaa (#12) (Edited)

And after Truman won in 1948, he presented his "Fair Deal" which

Rhetoric versus reality. Truman kept government spending at about 15% of GDP between 1947 and 1951. Federal spending jumped to 19.4% of GDP in 1952, entirely due to increases in national defense.

Spending during the Truman era versus today (from the White House Office of Management and Budget):

Year 1944 1945 1946 1947 1949 1949 1950 1951 1952 2011
National Defense 37.8 37.5 19.2 5.5 3.5 4.8 5.0 7.4 13.2 5.1
Human Resources 0.9 0.8 2.5 4.2 3.8 4.0 5.2 3.4 3.4 16.6
Physical Resources 2.6 0.8 0.4 0.5 0.9 1.1 1.3 1.2 1.2 1.4
Net Interest 1.1 1.4 1.8 1.8 1.7 1.7 1.8 1.5 1.3 1.4
Other 1.8 2.0 1.6 3.4 2.3 3.3 2.9 1.5 1.2 1.4
Undistributed offsetting receipts -0.6 -0.6 -0.7 -0.7 -0.6 -0.7 -0.7 -0.7 -1.0 -0.6
Total 43.6 41.9 24.8 14.8 11.6 14.3 15.6 14.2 19.4 25.3

Look how fast Truman wound down the war time economy: Government spending went from a peek of 43.6% of GDP to 11.6% of GDP in 4 years.

Unless you were a black in the south, life during the late 40s and early 50s was pretty good, because the government mostly kept it's nose out of our business.

The problem we have today is very clear -- a bloated and unsustainable welfare / entitlement system.

We need to take a lesson from Truman and unwind as much government spending as possible in as short a time as possible.

We don't need to go from 43.6% of GDP to 11.6% of GDP. We only need to go from 25.3% to 18%. That, plus simplification of the 80,000 page tax code is all we need to do to restart the economy.


This small group of terrorists [Tea Party members] have made it impossible to spend any money. -- Mike Doyle (D-PA)

jwpegler  posted on  2011-08-13   13:17:03 ET  Reply   Trace   Private Reply  


#14. To: jwpegler (#13)

We only need to go from 25.3% to 18%. That, plus simplification of the 80,000 page tax code is all we need to do to restart the economy.

I believe that some easing of gov regulations (EPA, green mandates, etc.) is an essential component in stimulating business. Even if it doesn't effect you personally, it's a great psychological stimulus, in that it signals that government is willing to get the hell out of the way and let business succeed.


"We (government) need to do a lot less, a lot sooner" ~Ron Paul

Obama's watch stopped on 24 May 2008, but he's been too busy smoking crack to notice.

Hondo68  posted on  2011-08-13   13:41:14 ET  Reply   Trace   Private Reply  


#15. To: jwpegler (#13)

The problem we have today is very clear -- a bloated and unsustainable welfare / entitlement system.

You seem to be deliberately ignoring the fact that Truman wanted to expand welfare and entitlements.

Tagline for sale - inquire within

go65  posted on  2011-08-13   13:50:32 ET  Reply   Trace   Private Reply  


#16. To: hondo68, jwpegler (#14)

I believe that some easing of gov regulations (EPA, green mandates, etc.) is an essential component in stimulating business. Even if it doesn't effect you personally, it's a great psychological stimulus, in that it signals that government is willing to get the hell out of the way and let business succeed.

The only way we're going to get the economy growing again is to unwind consumer debt, that's going to take a long while.

Cutting taxes doesn't stimulate the economy when people are still in debt up to their ears as we've seen now over the last few years. One thing that would help is investment in infrastructure, but the current Congress will not support such initiatives and Republicans have already proposed cutting road construction budgets almost in half while zeroing out spending on rail.

Tagline for sale - inquire within

go65  posted on  2011-08-13   13:54:15 ET  Reply   Trace   Private Reply  


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