Trump’s Plan: Does it Resemble Calvin Coolidge’s Plans of the 1920s?

The proposed Trump economic plan resembles the Harding/Coolidge economic plans of the 1920s. The Harding and Coolidge era is often overlooked or considered a cause of the Great Depression. Did Harding/Coolidge economics cause the Depression? Challenging this notion, Amity Shlaes noted, “Can one assign Coolidge any blame for the Great Depression? Some, especially when it came to tariffs, which Coolidge’s Republican Party supported. But the greater culprits are Coolidge’s successors, Hoover, a more progressive Republican, and Democrat Franklin D. Roosevelt. Hoover raised taxes, signed the Smoot-Hawley Tariff Act and strong-armed businesses into wage increases they could ill afford. In addition, Hoover sent a general signal of government activism, which chilled markets. Roosevelt exacerbated the uncertainty with arbitrary interventions into policy in all areas.”

The 1920s opened with a severe recession with output falling by 10 percent, stock prices dropped in half and unemployment may have hit 20%, Depression numbers. Harding did not advocate Keynesian economics but instead balanced the budget and cut taxes to engineer an economic recovery. The Depression of the 1920s did not occur. Harding/Coolidge cut taxes but they also raised tariffs. The 1920s actually was a time for easy money as the United States financed loans and credits to aid other countries since the tariffs interfered with other nations’ ability to garner more income from exporting to the United States. The Achilles heel of the Harding/Coolidge era was high tariffs, especially since many of our European nations owed the United States billions but had trouble earning enough to pay back what they owed. Federal Reserve eased monetary policy to aid recovery from the 1920s recession.

Trump does not appear to be prepared to cut spending to the extent that Coolidge did but he is proposing to raise tariffs, or what Congress is calling a “border tax,” to go with lower marginal and business taxes. The Coolidge/Harding era shows tariffs don’t have to be an economic disaster but that there will be a price to be paid.

The Great Depression was aided by a complete collapse of monetary policy with a major contraction of money. Hoover added the mistake of raising the tariffs even higher to go with increased spending and higher taxes. As Milton Friedman observed, “The Depression, I may say, which started in 1929 was rather mild from 1929 to 1930. And, indeed, in my opinion would have been over in 1931 at the latest had it not been that the Federal Reserve followed a policy which led to bank failures, widespread bank failures, and led to a reduction in the quantity of money.” Tom Sowell noted that unemployment went down from 9% in December to 6% in the summer of 1930 before Hoover decided to sign off on the Smoot-Hawley act. The recession of 1929-30 snowballed into the Great Depression. (During the 1932 election, Franklin Roosevelt actually attacked Hoover for deficit spending and not balancing the budget.)

For much of our 20th century economic history, historians have celebrated the accomplishments of Franklin Roosevelt during the 1930s while belittling Coolidge’s and Harding’s accomplishments. Historians have convinced many Americans that progress entailed bigger government as the prosperous 1920s were nothing more than an illusion and the New Deal proved to be the cure. Roosevelt’s policies reversed the deflationary spiral but there is enough evidence to suggest that New Deal slowed down the recovery and after the 1936 elections there was another deep recession.

Over the past three decades, we have seen experiments in free market economics and Keynesian economics on steroids. The Reagan recovery, propelled by tax reduction, proved more robust and longer lasting than the Obama recovery. The Reagan economic policies led to a two plus decade growth in which all stratum of Americans prospered and even Bill Clinton, in 1996, declared the era of big government over.

The Obama recovery did occur but nowhere did it match the Reagan recovery and many Americans simply didn’t participate in the recovery which explained the Trump victory. Reagan not only lowered marginal tax rates but he liberalized trade, something that Trump is not anxious to do, blaming liberalized trade on the loss of jobs.

Economic situations differ in periods as each generation faces different challenges. In the 1920s, Americans saw the end of the first progressive era and the turmoil it created including being involved in the “War to end all Wars” and the recession of 1919-20. Hoover came from the progressive wing of the Republican Party and took a variety of solutions to end the recession that turned into the Great Depression including raising tariffs to ever higher levels, cajoling businesses not to cut salaries and employees, raising taxes and increasing spending. This led to Franklin Roosevelt’s election and the New Deal.

Trump inherited an economy growing more slowly than what Clinton inherited in 1992 as the Bush economy recovered from the shallow recession of 1990-91 but not soon enough to help Bush’s presidential election chances. Clinton raised taxes and attempted to expand the welfare state with Hillarycare the first two years of his administration, but the Republican takeover after the 1994 election saw bipartisan support for keeping spending in line and a cut in capital gains tax and welfare entitlement reform. Also, the tech revolution aided the economic recovery. The Clinton years saw growth and as Clinton once stated "I hope you're all aware we're all Eisenhower Republicans. We're Eisenhower Republicans here, and we are fighting the Reagan Republicans. We stand for lower deficits and free trade and the bond market. Isn't that great?" Reagan influence affected even the Democratic Party in the 1990’s and Bill Clinton moved his Party to the center for the 1996 election.

For Trump, the economy is hardly humming but it isn’t in negative territory. The difference is that he doesn’t have a party willing to negotiate. The Democrats today moved to the hard left and there are no Clinton moderates left in the Party. Not even his wife ran as a Bill Clinton centrist but as a Bernie Sanders Democratic Socialist. Trump’s challenge is to take an economy that is crawling and supercharge it with double the growth, and the question is, “can combining tariffs with lower marginal tax rates to go with lower business tax combination aided by regulatory reduction lead to enough growth to aid the middle class that has borne the brunt of Obamanomics?”