by Jim Stehr
The 1918 influenza pandemic killed an estimated 17 to 100 million people world-wide, including 600,000 in the United States. Warren Harding became president in March 1921 when unemployment was 23.1%. Harding, and more so his successor Calvin Coolidge, cut taxes and spending. By 1929 unemployment was 3.2% and most people in the US became much wealthier than ever before.
Also in 1929 the 15-year-old Federal Reserve severely contracted the money supply. Herbert Hoover became president, raised taxes and spending to be far out done by his successor, Franklin Roosevelt. The unemployment rate in 1938, the 6th year of the New Deal was 19.0%.
The coronavirus pandemic is causing an economic downturn. President Trump is proposing a temporary payroll tax cut, Democrats oppose the tax cut and demand increased spending while ignoring the federal debt and unfunded entitlement liabilities. I predict the extra spending will happen and a payroll tax cut if any, will resemble the 2009 two-year payroll tax credit for employees, not employers.
The best fiscal policy is to enact HR 25 the Fair Tax now which permanently abolishes payroll and income taxes and replaces them with a federal retail sales tax plus a monthly consumption allowance payment from Social Security to all legal residents of all ages. The Fair Tax was designed to be revenue-neutral in a static sense, without considering its economic effects, while dynamic economic models which incorporate changes in economic behavior, predict substantial revenue-enhancement.
Means-test Social Security and Medicare starting now. This will free up many billions per year to fight the pandemic and pay down the federal debt which will enable the federal government to deal with future crises. I think voters will appreciate honesty when they are told that for decades the federal government lied to them when it claimed that using these programs means getting back the money retirees were taxed when they worked. No, Social Security and Medicare always were direct transfers from workers and employers to the elderly. The oldest age quintile is also the wealthiest.
My economics professors said that counter-cyclical fiscal policy does not work because of the lag time between recognizing a recession and the time the increased spending occurs; the stimulus continues after the recession is over, exacerbating over-consumption and debt. Ivy League economic advisors to presidents of both parties either do not know this simple lesson or the political class refuses to learn it, or some combination of both.
Economist John Maynard Keynes, the 1930s author of counter-cyclical fiscal policy, said that the federal government ought to have debt only during recession and should have surpluses during economic expansion. Instead we have debt and more debt. “Stimulus” spending stimulates bigger unsustainable government, market distortions and costly dependencies. Government intervention prolonged the Great Depression and slowed the recovery from the Great Recession. Don’t do it again. Modern high-speed market forces will rapidly recover. Balance the budget and pay off the debt.
The best monetary policy is to re-charter the Federal Reserve to have only one goal: zero inflation. The current goal is 2% inflation per year which significantly erodes savings and stimulates consumer debt. Zero inflation will be a quick counter-cyclical monetary policy; during economic downturns there will be easy money, during expansions the Fed will tighten, adjustments can be made continuously.
Be cool like Coolidge for health and prosperity now and for the future.