Presidential debate 101: Does Romney have 'economic policies of the 1920s'?
In Monday's presidential debate, President Obama accused Mitt Romney of wanting to take America back to the economic policies that preceded the Great Depression. It was a timely zinger, but its accuracy depends on what Obama actually meant.
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The economy began to improve even before Harding's tax cuts came into effect. Some historians credit falling tax rates with improving the economy in the next few years, with unemployment falling from nearly 9 percent to about 5 percent by 1923. After Harding died in office, Coolidge took over with a philosophy that emphasized states rights and minimal federal regulation. "The chief business of the American people is business," he famously declared.Skip to next paragraph
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After the US had operated with high deficits during the war, Republicans held spending down to run budget surpluses and bring down the national debt.
Today's tax narrative, however, is quite different from that of the 1920s. By the end of World War I, for example, the highest income tax rate was 77 percent; today it is 35 percent.
Moreover, while both presidential candidates today talk of reining in federal budgets, no one considers surpluses remotely likely in the near term. Yes, Romney has positioned himself closer to the Harding-Coolidge policy model than Obama has, by espousing low taxes and regulation. But his proposal to cap federal spending 20 percent of the nation's gross domestic product (GDP) would sound profligate to "Silent Cal."
By the time Hoover took over from Coolidge in 1929, federal spending ran about 3 percent of GDP.
Yet simply bringing deficits down would be an achievement today. In part, that's because many economists warn against too-rapid efforts at fiscal reform, saying it could drag down economic growth in the short run. (That's what today's "fiscal cliff" debate, revolving especially around expiring tax cuts, is about.) In addition, despite the political rhetoric, no one is advocating an end to entitlements like Medicare, but rather ways to reform them.
Beyond these more obvious interpretations of Obama's one-liner, there could be another resonance, intended or not.
The Harding administration became known as a haven of corruption, which spilled over into the private sector in incidents such as the Teapot Dome scandal. The scandal involved bribes paid to the Interior secretary in return for a sweetheart oil-lease deal. Obama has called out Romney as having ties to Wall Street and to corporations that outsource jobs overseas, and deregulation is broadly seen by critics as turning the keys of government over to business.
On this point, though, Romney could hit back. He has complained about Washington's ties to corporate cronies – citing Obama's banking reforms and his deals to fund green-energy firms as cases in point.
So, in the end, was Obama suggesting that Romney policies would set the US up for another epic crash? It seems so, and certainly the 1920s ended badly. But business cycles have happened, with greater or lesser degrees of severity, whether tax rates or deficits in the US have been high or low. If anything, the 1920s may stand as a warning for the next president not to be complacent, whether that person is named Obama or Romney.