A Return to Normalcy

​History repeats itself, and at milestone intervals.

It was 100 years ago that President Warren Harding called for a return to normalcy. His vice president and successor, Calvin Coolidge, prickled at this loose expansion of the English language, but agreed with the sentiment.

After a series of traumatic events for the nation, including the Spanish flu pandemic, Harding knew that the nation needed to return to normal, starting with the government. In 1921, he called for a series of reforms which sound like they were written for 2021—cut government spending, cut taxes, and stop inflation.

Government spending is now, as it was then, out of control.

Federal spending increased by 89% during the pandemic and its share of America’s private sector output has skyrocketed to 45%, the highest since World War II before the latest shutdown recession. Despite tax receipts being at a nominal all-time high, the federal government is running record-breaking $3 trillion deficits with little help in sight.

Governments at all levels in the U.S. are now taking 34% of our private economy. This means that every year we work from Jan. 1 to May 4 just to pay our taxes. Meanwhile, inflation is also getting out of control. It is not only high, but accelerating.

At the current rate, prices will double in less than 14 years. And yet wages are moving in the other direction. While the general price level in June rose 5.4% from one year prior, average hourly earnings in the private sector adjusted for inflation fell 1.7%, hurting families’ purchasing power.

Harding faced similar problems in 1921—government spending had ballooned because of World War I, taxes were punitively high, and the Federal Reserve (Fed) had caused rampant inflation. And yet, the Harding administration turned it around quickly. In the summer of 1921, exactly 100 years ago, Harding spoke using words that sound like they were written for today:

“There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,” he said. “There has seemingly grown up an impression that the public treasuries are inexhaustible things, and with it a conviction that no efficiency and no economy are ever to be thought of in public expense. We want to reverse things.”

A good first step in reversing things would be to control the growth in government spending with passage of the Foundation’s Responsible American Budget.

This fiscal rule limits spending growth to a maximum rate of population growth plus inflation to keep federal expenditures below the average taxpayer’s ability to pay for them. This needed restraint would help curtail spending. Further cuts can then be made, targeting handouts that disincentivize work and welfare that traps people in poverty.

To provide tax relief at the federal level, Washington should cut marginal tax rates.

After Harding and Coolidge cut tax rates, tax revenue increased. The same phenomenon occurred when JFK, Reagan, Bush, and Trump cut tax rates, too. States should also move to cut taxes—and several states have already done so. Texas, with an abnormally high local property tax burden, should enact reforms to drastically reduce property taxes that are quite literally forcing Texans out of their homes.

To stop inflation, the Fed just needs to do what it did a century ago: It must stop furiously expanding the money supply.

Like it did in WWI, the Fed is currently acting as the financing arm of the radical growth in federal spending by purchasing a large share of government bonds—that should stop. The Fed also needs to return to its mission of price stability via a monetary rule, and nothing else. This means an end to targeting full employment and to engaging in social engineering, and a start to a monetary rule.

The effect of Harding’s and Coolidge’s reforms in the 1920s was a booming decade so prosperous that it resulted in the Roaring Twenties. The government ran a surplus and retired debt for every year of the decade. In the 1930s, the bad policies of the Hoover and Roosevelt administrations and associated Fed policy caused and prolonged the Great Depression.

If the nation implements similar reforms as those from a century ago, instead of the Biden administration’s proposals, then America can repeat her previous success. Reining in misdirected fiscal and monetary policy will bring a return to normalcy, so that we can let people prosper again.

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