On April 1st the New York Times published an article by Paul Krugman that was linked at RCP. The title that it was under at RCP was “Mellon Doctrine Gives Me a Headache”. It was Krugman’s usual cherry-picking of facts to make a weak point. The point he tries to foist upon his readers is that Andrew Mellon’s supposed advice to Herbert Hoover once the Great Depression began is exactly the policy that the GOP is using today. Where his great disservice is done (as is typical with Krugman) is to ignore the history of Mellon’s tenure as Treasury Secretary and his accomplishments. I got a headache reading the article, since I know quite a bit about Andrew Mellon. As facts are always dangerous things for liberals like Krugman, let’s take a look at them!
Andrew Mellon was the Treasury Secretary from the beginning of the Harding administration in 1921 to February 1932. Harding was a firm believer in lower taxes and reducing government spending. As the country was just out of World War I, the nation had accumulated a great deal of debt and government spending was rampant. This plunged the country into a Depression in 1920 that, by the numbers, was worse than the 1929 crash. Harding, being advised by Mellon, actually campaigned in 1920 that the government should do nothing. The government was too deep in debt and was already spending too much. He asserted that if the government stayed on the sidelines and let the marketplace correct itself. And much to the chagrin of Krugman & Co., Harding and Mellon’s plan worked perfectly. Within a year and a half the Depression was over. The “Roaring 20’s” were just getting started with the help of Andrew Mellon’s plan.
Mellon came from the banking industry so was well suited for the task to set the country on a solid course towards prosperity. He devised a plan that it would be possible for the government to cut it’s expenditures and debt while simultaneously lowering taxes on everyone. He firmly believed that it would unleash the private business sector and bolster the economy for everyone. Harding and Mellon set out to implement the plan he had put together. While beginning to reduce the size of the federal budget, the Revenue Act of 1921 was passed reducing the top marginal rate from 73% to 58% (rates were lowered across the board). The results were almost immediate in 1922. The unemployment rate plummeted. The GDP rose 7% in just that one year, increasing by almost 5 billion dollars. The rate was lowered further in 1923 to 50%.
Warren Harding died of a heart attack on August 2, 1923 and Calvin Coolidge became the 30th President of the United States. Coolidge was very much on the same page as Harding and supported Mellon’s plan wholeheartedly. They worked to pass the Revenue Acts of 1924 and 1926, which further lowered top marginal rates to 46%, then to 25%. It was further lowered to 24% in 1929 (again, rates were lowered across the board at each step). While lowering tax rates, Mellon’s plan included reductions in government spending and debt reduction. From 1921 to 1929 the federal budget was reduced from $5.1 billion to $3.3 billion. The federal debt was also reduced by $5.5 billion.
Now Krugman and his ilk would say that the country would have been in shambles! That the rich got richer off the backs of the poor with the middle class and poor picking up the tab. People would be starving in the streets while the fat cats just kept getting fatter. We all know the usual talking points about this kind of thing, but as I said before, facts are a dangerous thing. Paul may want to grab the Tylenol for this one!
Let’s start with the economy in general. From 1922 to 1929 unemployment averaged 3.3%. 1922-1928 saw employee wages (real earnings) grow by 22%. 1922-1928 per capita income rose by 30%. Between 1924 and 1929 GDP grew at 7%. These numbers show why it was called the “Roaring 20’s”. It wasn’t just the rich getting richer, it was EVERYONE getting richer. This kind of economic expansion has not been seen since (although the Reagan tax cuts posted numbers close).
Ok, Krugman & Co. might say, but the rich weren’t paying their share! They were still getting richer from “tax breaks for the rich”! They were benefiting off of the back of the poor and middle class! Sorry to break out some more inconvenient truths, but the number from the Treasury Department don’t lie. So, let’s take a peak, shall we?
Let’s start with the top end and work down. In 1920 those who made over $100,000 (a huge sum of money in 1920, or “the evil rich”) and were paying a top marginal rate of 73% paid $321 million in taxes. By 1928, with a rate of 25%, the take of the Treasury was $714 million. The average income reported in this bracket increased by 15%, but the number of taxpayers earning over $100,000 increased four fold. Meanwhile, their share of federal income tax paid went from 29.9% of all income tax paid to 61.3%. How can this be?!? According to Krugman and his merry band of socialists, this is impossible!!! Let’s look further into the data at the lower brackets.
The number of taxpayers in the $10,000-$100,000 brackets increased by almost 85%. The taxpayers in the under $10,000 bracket fell dramatically. In 1920 the share payed by taxpayers $10,000 and under was 25.4%. That’s not that far away from the share of the $100,000 percentage paid in 1920. The middle brackets paid 45.6%. In 1928 it was a far different story. In the $10,000 and under brackets, the share of income taxes paid were 3.3%. The middle brackets fell to just 35.5% of income taxes paid. So, the rich paid more, the middle and lower incomes paid dramatically less, and everyone made a lot more money. All through drastically lower rates…imagine that Paul!!!!
Andrew Mellon wrote in 1924: “The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business.” How right he was and his plan sparked the “Roaring 20’s”. Krugman tries to wrap the Great Depression around his neck with advice that he “supposedly” gave Hoover (to be fair, he did note that the only one who says that Mellon said it was Hoover, who, given a great gift more than squandered it, but that’s for another article). Of course, Paul ignores what the Mellon plan gave to this country at the time, and what it could do for us now. We sure could use another Andrew Mellon right now, it would be fun to see Paul Krugman and his minions apoplectic over the success it would bring!