The fiscal policy of Warren Harding

Warren Harding succeeded Wilson in 1921 as the American economy fell into a post-World War I inflationary recession. Although almost never mentioned, he turned an incipient Great Depression into the Roaring Twenties. I use this story in class as the last example of a classical economic policy ever put into play. Here is how his approach is described:

Harding’s pledge to restore America to a condition of “normalcy” led to his landslide victory in November 1920. In office, he cut government spending to the bone and reduced federal income tax rates across the board. As he said to Congress, the government acted during the war as if “it counted the Treasury inexhaustible”; if that pattern continued, it would result in “inevitable disaster.” To get government spending under control, Harding established the nation’s first Budget Bureau (the forerunner of today’s Office of Management and Budget) in the Treasury Department. As a result, federal spending dropped from $6.3 billion in 1920 to $5 billion in 1921 and then $3.3 billion in 1922. He supported the Revenue Act of 1921, which eliminated the wartime excess-profits tax, lowered the top marginal income tax rate from 73 to 58 percent, decreased surtaxes on incomes above $5,000, and increased exemptions for families. . . .

Many people, he noted, benefited from the gains made “as a result of the economic measures he implemented.” Unemployment fell from 15.6 percent to 9 percent. The industrial side of the economy revived at a rapid pace. A boom took place in construction, clothing, food, and automobile sectors. From 1921 to 1923, the volume of manufacturing climbed 54 percent.

Cut public spending, cut taxes and balance the budget. A radical idea even then and today beyond the pale.

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10 Responses to The fiscal policy of Warren Harding

  1. MartinG

    Cut public spending, cut taxes and balance the budget. A radical idea even then and today beyond the pale.

    It’s beyond Tony Abbott’s comprehension. His pathetic blathering on the ABC 7.30 program was embarrassing.

    Here

  2. Blogstrop

    It will all end badly again, just like in The Great Gatsby. Next stop The Grapes of Wrath.
    (incidentally, the thirties were in fact the hottest period in the 20th century, the dustbowl years)

  3. .

    Cut public spending, cut taxes and balance the budget. A radical idea even then and today beyond the pale.

    http://www.afr.com/p/national/budget_for_real_liberal_mABwgz5ztjYDmbIqpVVU3I

    DAVID LEYONHJELM
    A budget for a real liberal
    PUBLISHED: 12 MAY 2014 00:05:00 | UPDATED: 12 MAY 2014 04:27:55

    The Liberal Democrats believe it is economically and morally incumbent upon the government to fix the budget problems today

    A member of Parliament supports such an idea. So I don’t think it is too radical.

  4. MartinG

    Blogstrop
    #1387303, posted on July 19, 2014 at 7:11 am

    (incidentally, the thirties were in fact the hottest period in the 20th century, the dustbowl years

    True for the US but, 1939-1945 Global temps where 0.3C cooler than the average over the last 10 years.

  5. MartinG

    DOT
    #1387370, posted on July 19, 2014 at 8:51 am

    DAVID LEYONHJELM
    A budget for a real liberal
    PUBLISHED: 12 MAY 2014 00:05:00 | UPDATED: 12 MAY 2014 04:27:55

    The Liberal Democrats believe it is economically and morally incumbent upon the government to fix the budget problems today.

    Yea I know how the LDP would do it and despite disagreement with some of their policies I wish they controlled the senate and not Palmer’s freak show.

  6. How funny. He was the one with a mistress and child, and some very dodgy other financial dealings, wasn’t he?

  7. Yohan

    Tom Woods has done some economic historical research on Warren Harding and the crash of 1921. In 1921 economic indicators and fall in output and demand was worse than in 1929. So the Harding administration decided to cut spending, reduce taxes and not intervene in the economy. The recovery was then very swift.

  8. .

    Yohan
    #1388324, posted on July 20, 2014 at 1:45 am
    Tom Woods has done some economic historical research on Warren Harding and the crash of 1921. In 1921 economic indicators and fall in output and demand was worse than in 1929. So the Harding administration decided to cut spending, reduce taxes and not intervene in the economy. The recovery was then very swift.

    This is the kind of economic history the public deserves to be educated on.

  9. Roger

    Cut public spending, cut taxes and balance the budget. A radical idea even then and today beyond the pale. As demonstrated in the Stafford by-election here in Brisbane yesterday. But then Harding may have been a better communicator than Campbell Newman, I don’t know.

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