I just finished reading the book Coolidge by Amity Shlaes. I highly recommend the book if only because it is refreshing to read about a man serving as President who was modest, unassuming, and did not think himself to be so important that the country could not survive without him. From the perspective of an economist, I was struck by several economic policy positions that Coolidge and his Treasury Secretary, Andrew Mellon, espoused that are actually quite sophisticated and discussed today in economic policy discussions.
Coolidge and Mellon both believed in the Laffer Curve before Laffer told us about it! They engineered a tax cut in 1926 and argued that reducing tax rates would raise the government’s tax revenue because lower tax rates would stimulate economic activity. Most economists take the position that while it may be possible for a cut in a tax rate to increase tax revenue, there is no serious evidence indicating that this is the case. But it is a bit of a shock to see this position taken so long ago.
Coolidge and especially Mellon argued that policy uncertainty was damaging to the business environment and so government policies should be as predictable as they could be so the business community could make better business decisions. Policy uncertainty, Mellon argued, would damage and reduce economic activity. Critics of Obamacare have made this point many times in claiming that the law would reduce economic activity.
Coolidge and Mellon believed that economic activity would change in advance of changes in economic policy. So a tax cut a year from now would stimulate economic activity today. This is a very sophisticated position, one proven by economists many years later using what were, at the time, advanced mathematical methods. It is remarkable to see Coolidge make this claim so long before the economics profession discovered it.
Finally, during Coolidge’s tenure in office, there was the inevitable battling over how much the rich should pay to finance government activities and so critics of the tax cut advocated by Coolidge claimed that it was a subsidy to the rich. Coolidge argued that a tax cut would cause the rich to pay a higher fraction of the government’s tax revenue because lower tax rates would cause the rich to do less legal tax avoidance. After the tax cut occurred, Mellon was quick to point out the next year that those earning over $50,000, an enormous income at the time, paid a bigger share of the personal income tax revenue.
Some things never change and much of the battling over economic policy is the same today as it was in Coolidge’s time. But Calvin Coolidge and Andrew Mellon had remarkable economic insight into the effects of economic policy. They understood many sophisticated economic policy issues without needing the fancy math used by economists today.