Economy

Revitalizing Calvin Coolidge’s Approach to Reducing the National Debt

Written by Ainsley Jackman

At over $26 trillion, the U.S. national debt is larger today than ever before―and only seems to be getting worse. The annual budget deficit is climbing steadily upward and was initially projected to be around $1.1 trillion in 2020, though it’s now looking to be nearly $4 trillion due to the pandemic.

And yet, despite the obvious problem, the debt is never a priority when it comes to actual policy. Each politician pledges that he will be the one to turn the deficit around, but none in recent years have come anywhere close to following through on their promise. Perhaps because, despite all evidence to the contrary, the debt doesn’t seem like it has real and severe consequences. 

The opposite is true. In fact, data show that investors start to seriously worry about default when the debt-to-GDP ratio is greater than 77%. Every percentage point of debt above this 77% mark was found to cost the country 1.7% in economic growth. 

Alarmingly, our current debt-to-GDP ratio reached nearly 107%, and that was in 2019—before the pandemic reduced economic production and resulted in huge spending increases. Needless to say, the United States is in a very severe situation and ignoring it is only making it worse.

To solve the problem, we must look to the example of our predecessors. Calvin Coolidge, the last president who reduced the national debt while in office, used two tried and true economic policies.

First, cutting federal spending. Coolidge understood that the government wasted far more money than private institutions, and limited the government’s involvement in the economy wherever possible. He pushed government institutions to become more efficient and cut spending in nearly every area: public service, national defense, public works, and so on.

Of course, it’s impossible to discuss federal spending without broaching the controversial topic of welfare. Although in Coolidge’s time, such a thing did not really exist, it’s not difficult to guess what his stance would have been. He noted in a speech in 1924 that “the best help that benevolence and philanthropy can give is that which induces everybody to help himself.” Considering this, Coolidge likely would have considered welfare to be a mechanism that keeps the poor down by disincentivizing them. As such, most welfare systems are counterproductive and only waste taxpayer money—and therefore should be cut from the budget. Of course, there are always possible exceptions.

In the modern day, Coolidge would have probably recommended budget cuts, such as those proposed in the Simpson-Bowles Plan. He thought that all this money previously wasted on the government could be returned to the private sector in the form of lower taxes, which was the second part of his two-part plan to decrease the debt. He believed firmly that a low tax rate was at the root of a healthy economy.

This is particularly interesting because of the contrast with the common belief that reducing the deficit requires higher taxes. Coolidge considered this strategy counterproductive because it would slow the economy. Lowering taxes, on the other hand, creates a larger tax base, with more employed workers making more money and paying more taxes. 

Coolidge said that “if with increasing business our revenues increase… they should be applied to the lowering of taxes. In that direction lies the public welfare.” What money was made through the stimulated economy was meant to go back into lowering taxes, and begin the cycle all over again.

A healthy economy is self-generating, and that’s exactly what Coolidge wanted: “I am for economy. After that, I am for more economy. At this time and under present conditions that is my conception of serving all the people.”

To solve our current debt problem, we might follow his two-step process: cutting federal spending and lowering tax rates. And, as he says, hope for economy—and then for more economy.

 

Photo by GotCredit via Flickr