Taming the budget the Calvin Coolidge way

The budget is an out of control beast, but this isn’t the first time elevated spending combined with massive inflation to threaten the economy. The Constitution gives the President the tools today as it did in the 1920s. All that’s missing is the will to do it the Coolidge way, cutting everywhere you can and growing the economy in the process.

“Silent” Calvin Coolidge took office shortly after World War I, when the federal budget and accompanying deficit had exploded and was in desperate need of reform.  The numbers seem downright quaint by modern standards, mere pocket change:  The total federal budget was $3.2 billion, the debt was $23.9 billion, both significantly less than a thousand times the current levels.  Coolidge, however, recognized, correctly in my opinion, that there was a danger in continuing the elevated spending necessary to win the war, which would result in ever more debt.  Congress, much the same as today, loved to spend, showering their districts and constituents with money, and the country in general had gotten used to the government spending more and more.  This left America subject to the whims of interest rates and the threat of rising inflation, meaning that paying the service charge on the debt could consume a larger and larger share of the budget, vulnerable to massive deficit spending in the event of a recession or, heaven forbid, another war.  His goal was not merely to balance the budget, but to maintain a surplus in the event an unexpected expenditure or downturn reduced revenues.  Inflation was also a concern, because he believed that spending and debt directly contribute to elevated levels.  “Inflation is repudiation. Deflation is assumption,” he told an audience in Chicago in 1922.  Lastly, he was also extremely conscious of the fact that the government has no money of its own, every dollar it spends is taken from someone else, an individual person or company he believed, on the whole, could spend the money more wisely.  As he put it in 1925, “I favor the policy of economy, not because I wish to save money, but because I wish to save people.”  The result was an unprecedented crusade against spending in every form accompanied by a radical new approach to taxation that had never been attempted in the country’s history.

On spending, Coolidge partnered with fellow New Englander and former General, Herbert Mahew Lord, and took advantage of a recently passed budgetary control law that empowered the Presidency to consolidate, direct, and report on federal finances.  Together, they set a target of reducing the total budget to $3 billion, a cut of around 10%, at least at first. Unlike in previous administrations, the two met to review budgetary concerns every week, usually on Friday at 9.30 to conceive and implement strategies that ran the gamut from large cuts in departments to potential savings from reducing the usage of postage stamps.  His predecessor, Warren Harding had talked the talk on budget control, but conducted his White House as something of a gambling house with weekly card games that lasted late into the night, a lot of comradery and conversation and a lot of illegal alcohol, but little real action. Coolidge was a quite, unassuming man, who preferred simply to get to work with as little talk or fanfare as possible. When it came to the budget, no cut was too large or too small, and no one was spared.  The Navy, recently expanded by the war and representative of the prestige of American power since Teddy Roosevelt sailed almost the entire fleet around the world in 1908, was targeted for a drastic reduction of 20% in a single year. Washington, DC, less high profile and more pedestrian by comparison, was ordered to come up with the same amount, some $6.5 million, $55,747.41 of which came from simply reducing telephone and transportation bills in less than six months.  Of particular interest was the Veterans Bureau, which had grown alarmingly large in a short period and was ripe with corruption, consuming a whopping one seventh of the entire federal budget for a total of $461 million before Coolidge took office.  Veterans, of course, were a popular constituency after the war, but Coolidge and Lord demanded at least $40 million in cuts, if not $50 million.  On the smaller side, the two found $25,000 in savings by renegotiating delivery costs for paper alone.  They also recycled used or surplus equipment, rather than purchasing new items, moving a boiler and other supplies to an Indian reservation school in California destroyed in a fire.  The cuts extended all the way to the most mundane things imaginable like pencils. Coolidge and Lord required government employees to turn in their stubs before being issued a new one, “Our item of expense for pencils is materially less,” a report noted.  Barely six months into office, the two had trimmed a total of $100 million, and expected a surplus of some $300 million.

In fact, they were so successful the surplus itself began to be seen as a problem given even Coolidge’s fellow Republicans in Congress wanted to spend it.  Democrat Carter Glass noted the additional funds were “an invitation to the treasury raiders” and claimed that Coolidge should have created a “deficit” first. Coolidge, however, was undeterred, spending the surplus to pay down the debt, a billion in his first year alone, and continuing in his crusade against the federal budget. Together with Lord they followed up mandatory cuts and changes in policy with a new “2% club” where departments would be honored for voluntarily trimming their budgets by that amount, followed by a “1% club.” The control they could put in place directly were accompanied by many a veto of congressional spending, and many a war even with his own party over spending in general, even over extremely popular measures like benefits and subsidies for veterans.  A bill that provided direct cash payments to veterans serves as a classic example. Coolidge vetoed the measure on May 15, 1924, against massive opposition. He accompanied the veto with a detailed examination of the bill’s financial implications, citing the fact that the program was not funded in the future and was therefore unsustainable.  “In other words, we will be committing this nation for a period of 20 years to an additional average annual appropriation of $114,000,000. This of itself should require most serious reflection, but if we are to have such commitment it should be in some form which would be in harmony with recognized principles of Government finance. The provisions of this bill are not so in harmony. Under it the Government will not have in the fund in 1945 two and a half billions of dollars. All it will have will be its own obligations, and it will owe two and a half billions of dollars cash. It will then be necessary to sell to the public this two and a half billions of bonds—a major operation in finance which may be disastrous at that time and may jeopardize the value of federal securities then outstanding.”  Ultimately, he concluded, “We have no money to bestow upon a class of people that is not taken from the whole people. Our first concern must be the nation as a whole. This outweighs in its importance the consideration of a class, and the latter must yield to the former.” The veto was quickly over ridden by Congress, and the bill passed into law against his wishes, but Coolidge and Lord were undeterred, leaving office in early 1929 the federal budget had shrunk to $2.96 billion, below the $3 billion threshold, and the debt had declined even more dramatically, to $17.3 billion, a more than $10 billion reduction while Coolidge was Vice President and then President.  To be sure, Coolidge applied this same level of economy to his own finances, telling the White House cook that reducing purchases from $11,667.10 to $9,116.39 was a very fine improvement.  Inflation also subsided dramatically, coming down from an unbelievable rate of over 16% in 1919 to barely a single percent when he left office.  So obsessive was Coolidge about these matters in his own quiet way, he once said, “the budget idea, I may admit, is a sort of obsession with me. I believe in budgets. I want other people to believe in them…Do you wonder, then, that at times I dream of balance sheets and sinking funds, and deficits, and tax rates, and all the rest?”  In the 100 years since, no one has ever cut a federal budget with such alacrity and effectiveness. In fact, the only time the budget has ever been trimmed at all in fact was a result of the sequester signed under President Barack Obama, which was promptly scrapped by both parties in favor of more spending.

Coolidge also addressed the tax side of the equation, first philosophically and then pragmatically.  He had a background in law and was no economist, but was convinced intuitively that rates were too high after the war. In his veto message of the veterans bill, he noted, “The one compelling desire and demand of the people to-day, irrespective of party or class, is for tax relief. The people have labored during the last six years under a heavy tax burden. This was necessary to meet the extraordinary costs of the war. This heavy assessment has been met willingly and without complaint. We have now reached a financial condition which permits us to lighten this tax burden.” Knowing he was far from an expert, however, Coolidge sought advice from Secretary of the Treasury, Andrew W. Mellon.  Mellon himself had a radical new idea, “scientific taxation.”  At the time, the top income tax rate was 58%, due to a combination of regular rates and a “supertax” surcharge.  Both men wanted to reduce them dramatically, but they differed as to why.  Coolidge believed people should be allowed to keep their money because it encouraged free enterprise and less money for the government could starve the beast.  Mellon believed there was an optimal tax rate which would generate even more money for the government even if it was lower, one that could potentially even cover new spending like the veterans bill.  This was far from conventional wisdom and the idea remains counterintuitive to this day, but Mellon convinced Coolidge by explaining it in terms he understood from his time in local government focused on the railroads:  If shipping costs got too high, companies looked for other options.  A railroad could price themselves out of the market, reducing their revenue even if they were charging a higher fare.  Likewise, if fares were reduced, the railroad could acquire even more freight and increase their profits though prices were lower.  Mellon also cited Ford Motor Company, which decreased the price of the classic Model T and increased both sales and profit dramatically, changing the landscape of America forever.  Coolidge chose his annual message to Congress to present the plan, the first President to actually turn it into a speech broadcast on the radio rather than simply delivering it in written form.  Lowering surcharge taxes, he said “will not greatly reduce the revenue from that source, and may in future actually increase it.”  He delivered an additional hand written message to the press, writing “to reduce war taxes is to give everyone home a better chance…Of all services which the Congress can render the country, I have no hesitation in declaring this one to be paramount” and the “country wants this measure to have the right way over many others.”

The road to scientific taxation, however, would prove to be a roundabout one.  Republicans in Congress embraced the idea of lower tax rates, but Democrats balked, claiming it was an untested theory.  Senate Minority Leader Joseph Robinson broadcast their opposition on the radio as well, saying it “could not be demonstrated that 25% is the one and only rate which will diminish investment in tax-exempt securities and commercial enterprises…From what evidence does it appear that a maximum of 40% levied on incomes over $200,000 will not have the same effect to a greater degree?”  Ultimately, Congress, in control of the GOP,  couldn’t resist fiddling with the numbers outside of what Mellon calculated to be optimal, placing Coolidge in the odd position of considering whether to veto a reduction in taxes he called for, but he ultimately accepted that lower rates were better overall and signed Congress’ bill into law, writing “A correction of its defects may be left to the next session of Congress. I trust a bill less political and more economic may be passed at that time.  To that end I shall bend all my energies.”  Coolidge, as we have seen with the budget, was also not afraid of grinding away to get what he wanted, and so after he was reelected with a clear majority, he continued pushing the original Mellon rates.  He was buoyed by the fact that revenues to the treasury jumped sharply after rates were reduced, even less than optimally.  Income taxes shot up from $1.691 billion to $1.841 billion in a single year.  The surplus far exceeded expectations again and was continually revised upward throughout his tenure in office, even in the face of new spending and after he succeeded in lowering rates further by implementing most of the original Mellon plan.  Of course, Congress being Congress, they continually came up with ways to spend the surplus and fiddle with the rates, endlessly.  Coolidge, however, held firm, believing that the economy needed stability above all else and wanting to evaluate the results of Mellon’s plan on their own without constant changes.  He also adamantly fought against subsidies for certain industries and individuals, farming being a hot topic in his second term as opposed to veterans.  “No complicated scheme of relief, no plan for Government fixing of prices, no resort to the public Treasury will be of any permanent value in establishing agriculture,” he believed, convinced that any relief had to come from the market itself because “Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.” It is difficult to see how Coolidge was anything except precisely correct. The results, a period of declining government expenditure and debt along with interest and inflation rates, and massive economic growth, speak for themselves and have never been rivalled in the entire American experiment.

Today, the situation is both different and the same, like most things in politics and life.  In recent years, the rapid increase in spending resulting from the coronavirus pandemic and the desire of some (or even most) in government to maintain those high spending levels is almost directly parallel to the situation after World War I.  In 2019, the government spent $5.14 trillion.  In 2022, a full year after the pandemic ended, we have elevated spending to $6.27 trillion, a more than 20% increase.  Spending in 2023 so far is $142 billion over last year, meaning we keep spending more and more even when there is no crisis to combat.  The debt has skyrocketed as a result, rising from $22.7 trillion in 2019 to staggering $32.9 trillion today.  As in the aftermath of World War I and precisely as Coolidge feared, inflation and interest rates have skyrocketed as a result, and the idea that continuing down the current path will address either the deficit, the debt, or inflation is just as suspect as it was then.  Unfortunately, the power the President has in the matter has diminished over the past hundred years even as the overall powers of the office have expanded in other areas.  A huge percentage of the current federal budget is effectively on autopilot, money authorized by Congress that needs to be spent.  Known as non-discretionary spending, it is required by law that the funds for Social Security, Medicare, and similar programs be disbursed.  This “non-discretionary spending” accounts for 63% of the federal budget, and can only be changed by an act of Congress, requiring 60 votes in the Senate, which as we have seen is difficult to achieve.  About 30% of the budget is discretionary, however, and here, there is a facet of our Constitutional order that a President serious about the budget in the fashion of Silent Calvin Coolidge can take advantage of:  Namely, under our system of government, Congress authorizes funds, but the President actually spends them and, when it comes to non-discretionary spending, he or she is not legally obligated to do so.  Therefore, the President on their own can demand budget cuts across most agencies in the government, from the military to the Department of the Interior.  Whatever budget Congress has actually passed, he or she can simply refuse to spend the appropriated funds, and demand that each department submit a budget with appropriate cuts.  Think of it as a modern 2% club, except we would likely need 5 or even 10 percent for most departments.  The President can also more fully exercise their veto power over spending, even though there may be some personal political risk.  Coolidge took that risk over and over again, and prevailed.  Congress will undoubtedly moan, and the usual suspects will howl, but there is nothing stopping a President from exercising these powers, demanding budgetary controls by Executive Order, and refusing to allocate funds unless their demands of their own departments are met while simultaneously pushing tax reform aimed at generating the most revenue at the lowest possible rate.  The Constitution and our present situation, in fact, demand it.  All that is missing is the will to do with the Coolidge way.

All of us should do well to remember his remarks in 1925.  For a man said to be so quiet he was fluent in silence in seven languages, he could be incredibly perspicacious and incisive when the situation demanded it.  Few statements sum up the American dream and the importance of wealth to the American project than, “After all, the chief business of the American people is business. They are profoundly concerned with producing, buying, selling, investing, and prospering in the world. I am strongly of the opinion that the great majority of people will always find these are moving impulses in our life…In all experience, the accumulation of wealth means the multiplication of schools, the encouragement of science, the increase of knowledge, the dissemination of intelligence, the broadening of outlook, the expansion of liberties, the widening of culture. Of course the accumulation of wealth cannot be justified as the chief end of existence. But we are compelled to recognize it as a means to well-nigh every desirable achievement. So long as wealth is made the means and not the end, we need not greatly fear it. And there never was a time when wealth was so generally regarded as a means, or so little regarded as an end, as today.”