The Warren G. Harding Model

If we are to step back in time and gain insights to repair our economy, we don’t have to stop with FDR:

In the first half of last century two presidents inherited recessionary economies from their predecessors. Both campaigned on smaller government, and both blamed the profligate ways of the previous president for their economic problems. One ended the recession in less than three years; the other lengthened it by seven. One responded with laissez-faire capitalism; the other with unprecedented government expansion. Scholars rank one among the worst presidents ever; the other they rank as one of the best. These two men are Warren Harding and Franklin D. Roosevelt.

Warren Harding was elected president in 1920 at the end of World War I, directly following the popular Woodrow Wilson. Harding inherited an economy transitioning away from wartime production as well as decreasing international demand for many American goods that had driven economic growth during the war. American factories were retooling and soldiers were coming home looking for work. The nation’s output, by some measures, fell as much as 24 percent and unemployment more than doubled between 1920 and 1921. Between 1919 and 1921, farm income had dropped by 40 percent. The country was falling deep into recession.

Instead of bailing out failing businesses, expanding government, and redistributing taxpayer money with a “stimulus” plan, Harding responded by cutting spending and removing burdensome regulations and taxes. During his campaign, he argued, “We need vastly more freedom than we do regulation.” In stark contrast with the Bush-Obama response of ever-more government spending and debt, Harding had federal spending cut in half between 1920 and 1922 and ultimately ran a surplus.

As a result, the recession that started in 1920 ended before 1923. Lower taxes and reduced regulation helped America’s economy quickly adjust after the war as entrepreneurs and capital were freed to create jobs and push the economy to recover. Harding’s free market policies lead to the Roaring Twenties, known for technological advances, women’s rights, the explosion of the middle class, and some of the most rapid economic growth in American history.

Harding ran afoul of personal failings and was tainted by the horrific “Teapot Dome” scandal…but given that Obama is already has a taint of scandal to his Administration, lets not get too particular here. What we want right now is a road map out of our economic morass…and cutting spending and taxes is just what the economic doctor ordered. Its really just as simple as the Harding quote makes it – more freedom will result in more prosperity. There are, right now, millions of American champing at the bit for a chance to start their own business, or expand the one they already own…but they are held back not so much by economic uncertainty (even in the best of times starting a small business is the definition of “uncertainty”) but by concerns over taxation and regulation. No one knows what tomorrow will bring in the form of new government imposts and regulatory fiats, and you can’t plan if you are that uncertain about what may happen, government-wise.

If, on the other hand, Obama could assure the American people that he’ll spend less each year he’s in office and that he’ll at the very least keep President Bush’s tax cuts, that would be enough to get the economic ball rolling again. There would be enough certainty about government that people would feel comfortable risking their capital and their sweat equity in new ventures. This isn’t rocket science, boys and girls; its just economics. Allow people to produce and consume and, hey presto!, they will produce and consume…stick a government monkey-wrench in there, and you’ll seize the whole thing up. Will Obama be our new Harding, or our new monkey-wrench?