Of the clown acts the Republican Congressional leadership currently has on display, the one with the broadest destructive potential is the contest between competing budget proposals. The House actually passed a budget resolution today, without benefit of Democratic votes of course, and the Senate is working on one, too. While it's been entertaining to watch Republican budget hawks spar with Republican war hawks (not to be confused with defense hawks), the resolution represents a proposal for what would be an austerity budget by any standard. Not surprisingly, the basic plan is to lower taxes, increase war spending, gut the ACA, and reduce other spending by enough to balance the budget, or so they say.
Because the Republicans still have competing proposals in the public view, they haven't yet applied the full weight of their propaganda machine to saturate us with their budget apologia. But it's only a matter of time, and I'm betting that one of their major arguments will be, as it so often is, an appeal to the memory of Republican heroes of years gone by. So who will it be this time? It can't be one of the Bushes, or even Saint Ronnie, because they weren't especially, well, austere in their spending. Ike? Nobody remembers what he really did anyway, but wait - he did sponsor a major infrastructure investment program, so that's no good. No, against all probability, the next Great Economic Hero of the Republican Party is Warren G. Harding. The basic story is that Harding's austerity policies corrected a sharp depression in 1920-21. If you can avoid choking on the orange cheese doodle, please join me below it, and I'll explain the story, and why it isn't even close to right.
Warren G. Harding served as President from his inauguration on March 4, 1921 to his death on August 2, 1923. He pretty much only survives in popular memory because we memorize lists of Presidents and because he gave us the dubious coinage normalcy. If you remember your high school history, you may also remember that he was mixed up with the Teapot Dome scandal (in which his Interior Secretary was convicted of bribery, having leased Navy oil reserves to private companies at cut rates), though that didn't really blow until after Harding's death. You might even remember him as the man that dubbed San Francisco "The City that Knows How." I've always assumed he was referring to San Francisco's remarkable ability to supply the 1920 Democratic National Convention with ample liquor in spite of the relatively recent enactment of Prohibition. (The Republicans met in Chicago.) But you won't remember Harding as a genius or hero, economic or otherwise. Even the White House web site, in its biographical sketch (there's one for each past President), reports that
A Democratic leader, William Gibbs McAdoo, called Harding's speeches "an army of pompous phrases moving across the landscape in search of an idea." [Yet] their very murkiness was effective.
By all accounts, Harding was a classic "Hale fellow, well met," gregarious and likeable. The 1920 Republican convention deadlocked for a long series of ballots, and Harding ("everybody's second choice," some said) emerged as a compromise candidate. He campaigned on his "return to normalcy," and won the general election in a landslide.
Harding's landslide maybe wasn't such a surprise. The US had financed much of the spending necessary to enter World War I through federal borrowing, with an assist from accommodating monetary policy from the (then relatively new) Federal Reserve. The result was a substantial budget deficit and wartime inflation. Once the war was over, the policy response was to drastically cut government spending and raise interest rates sharply. Economist Daniel Kuehn reports it this way:
However, after the war ended the deficit spending of the Wilson administration and the expansionary policy of the Federal Reserve were sharply curtailed to bring a halt to the inflation. By November 1919 the Wilson administration balanced the federal budget, slashing monthly expenditures by almost 75% in a matter of months. The New York Federal Reserve Bank raised the discount rate by 244 basis points over the course of eight months, with other Reserve System banks following suit. Shortly after these austerity measures were taken, the 1920–21 depression was under way. Postwar industrial production in the USA peaked in January 1920 as the economy moved into a major depression, with production levels dropping by 32.5% by March 1921.
- Daniel Kuehn, "A note on America's 1920-21 depression as an argument for austerity," Cambridge Journal of Economics 2012, 36, 155-160
Here's where Harding's latter-day admirers make their hay. Harding's approach to the depression was about like his approach to most things - he didn't do much about it. In a piece of preposterous Harding hagiography, the
WaPo puts it like this:
In 1922, under the unsung stewardship of the president best remembered for his underlings’ scandals and his own early death in office, the unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared.
And how did the administration of Warren G. Harding, in conjunction with the Federal Reserve, produce these astonishing results? Why, by raising interest rates, reducing the public debt and balancing the federal budget. Let 21st-century economists rub their eyes in disbelief. Eighteen months after the depression started, it ended.
Only, of course, that isn't exactly right. First of all, as
Paul Krugman points out, the 1920-21 depression wasn't at all like our current economic situation, or even like the crisis of 2008. The 2008 crisis was the child of excess investment and private debt, while the 1920-21 downturn was a depression that resulted from inflation-fighting policies. Here's Kuehn again:
This loss in output [in 1920-21] is second only to the Great Depression in American economic history, although its duration was considerably shorter. Declines in output were matched by precipitous drops in employment and the price level. The proximate cause of the 1920–21 depression was a deliberate fiscal and monetary retrenchment following World War I.
I'll admit it - it was Krugman that pointed me to Kuehn's note. Here's one last comment from Kuehn, this time in
a post by Krugman:
Austerity proponents depend on the argument that substantial cuts to federal spending moved the economy to a recovery in 1921, but this understanding fails on multiple counts. The bulk of both fiscal and monetary austerity occurred immediately prior to the onset of the depression. Any austerity in policy decisions by the Wilson administration, the Harding administration or the Federal Reserve Board after the depression began were moderate compared with the considerable austerity measures taken by the Wilson administration and the Federal Reserve before the downturn. The evidence seems to suggest, even more clearly than in the case of the Great Depression, that postwar austerity may have even helped cause the 1920–21 depression. Subsequent monetary easing by the Federal Reserve occurred concurrently with the economic recovery, which itself was underway by the time Warren Harding took the oath of office.
So next time you hear that Harding was an economic genius, who cured a depression by adopting a policy of fiscal austerity, here's your answer. First, the austerity policies weren't Harding's; they were Wilson's. And second, they didn't cure the depression, they
caused it - a mistake Democrats have tried to avoid repeating ever since.