Last Wednesday, the Tuck School of Business hosted a panel discussion titled "Obama and Coolidge: What the 44th President Might Learn From the 30th." The discussion included interesting talks by both economics professor Douglas Irwin and former Vermont Gov. Howard Dean. However, the most important point arguably came from Tuck Associate Dean Matthew Slaughter. Slaughter argued that we would all benefit if our politicians had a greater sense of humility, and I think politicians would be wise to heed Slaughter's advice.
This is especially true regarding our current economic malaise of slow growth and disappointing job creation. While many politicians like to claim credit for the jobs created during their time in office, it is almost entirely inappropriate to do so. Economic growth, especially over longer time periods, is a complex process that involves many interconnected factors. While government action, such as providing a basic standard of the rule of law, is almost certainly necessary for sustained economic growth, government action is not the only or even the most important ingredient for growth. As Slaughter pointed out, Coolidge wisely never tried to take personal credit for the booming economy of the 1920s. The country would likely be better off today if our current politicians recognized, like Coolidge, that their own power has limits. Instead of conceitedly thinking they can micromanage the economy, current politicians should remain focused on doing what governments need to do and refrain from taking actions that might derail growth.
For example, the federal government's budget is currently slated to run off a fiscal cliff at the end of this calendar year due to a combination of a $400-billion tax hike and $100 billion in spending cuts. As a progressive Democrat, Howard Dean argued in favor of allowing these tax increases and defense spending cuts to come to fruition. Furthermore, he dismissed claims that doing so would cause a devastating setback for the economic recovery. While Dean may be correct about the macroeconomic consequences of going off the cliff, Congress would be wise to avoid this outcome, which would hubristically risk a fragile recovery on an uncertain economic forecast.
But, as Irwin pointed out, the adverse consequences of politicians' hubris extend beyond the job market. From the mid-19th century to the mid-20th century, agriculture declined as a share of total employment in the United States. This decline became especially acute during the 1920s due to a collapse in grain prices after the end of World War I. As a result, Congress twice passed legislation that would have subsidized farmers at the expense of taxpayers and consumers. Coolidge twice vetoed this legislation, arguing that there would be "no justice and no end" once this kind of interventionist policymaking began. Of course, during the 1930s, Congress again passed agricultural legislation that accomplished everything that Coolidge had vetoed and more. With the benefit of hindsight, we can confidently conclude that Congress did not in any meaningful way prevent the relative decline of the agricultural sector. While American agricultural output is more than an order of magnitude higher today than in the late 19th century, agricultural employment has declined from over 70 percent of total employment in 1870 to less than 3 percent today. Yet with the Farm Bill up for renewal in the near future and the end of farm subsidies nowhere in sight, Coolidge's prediction of "no justice and no end" seems eerily prescient.
In many ways, the manufacturing sector's situation today is very similar to that of the agricultural sector in the first half of the 20th century. American manufacturing output more than doubled over the last 40 years, yet total manufacturing employment has declined by nearly half over that same period. As long as the general public wishes for the economy to grow and for living standards to increase, there is very little that the federal government can do to reverse the relative decline of the manufacturing sector. Yet politicians such as Rick Santorum still propose costly government interventions, like cutting the corporate tax rate to zero only for manufacturing firms. Politicians need to recognize that there is only so much that they can accomplish and much that they can make worse. Our current politicians need to set aside their hubris and humbly acknowledge the true complexity of our economy.
