America’s relationship with the free market is on the rocks as a result of the ongoing COVID-19 pandemic. Economic commentators have already begun calling the current crisis a recession. The government response to this apparent recession has been unprecedented. But there is another, better way to tackle our economic woes. If we take a look back at our history, we can find a model in President Warren Harding’s wildly successful laissez faire approach to tackling the Recession of 1920.
We’ve seen countless comparisons in today’s media of the coronavirus to the 1918 Spanish Flu. Not only is it natural to draw such comparisons, but doing so is key to understanding the U.S. response, both then and now.
However, the ensuing economic downturn of 1920 seldom appears as more than a footnote. This is especially true when the downturn is overshadowed by World War I, the 1918 pandemic and the ensuing market upswing that followed — the Roaring ‘20s. The fact that the decade itself ends with the United States’ most spectacular stock market collapse will always mean that the 1920 recession is less discussed.
But the 1920 recession is no mere footnote. It was a substantial economic downturn that saw unemployment increase from 4 percent to 12 percent, and gross national product fall 17 percent. All of this on the heels of the most destructive armed conflict the world had yet seen, as well as a global pandemic.
The end of America’s first taste of a war in Europe, World War I, brought waves of newly unemployed young men back to the United States. Immigration from Southern and Eastern Europe, which had been in decline, suddenly began to increase once again. Most importantly, the U.S. economy was still transitioning out of a war footing. Combined with many workers out sick with the Spanish Flu, unemployment increased and economic growth declined sharply.
Although by 1920 the United States was in a full-scale recession, the federal government’s response was negligible. Instead of a fiscal stimulus, President Harding cut the federal budget in half from 1920 to 1922, tax rates were slashed for all income groups and the national debt was decreased by one-third.
Rather than increase spending, Harding’s administration cut costs and let the market be. And it worked. By 1923, unemployment had fallen to nearly one-third of what it had been in 1920. The economy rebounded, paving the way for the economic expansion known as the Roaring ‘20s.
With time, real wages for workers once again rose along with the increased demand for labor. Compare this to today, when businesses are arbitrarily closed because they are not deemed “essential,” and one must wonder how we could ever recover economically with no demand for labor?
This is in contrast to the Keynesian mindset of government actors during both the Great Depression and the 2008 recession.
Economic downturn is unavoidable and cyclical. The argument can be made that the Keynesian response to the Great Depression actually inhibited U.S. recovery. The Great Depression was a deflationary recession. The federal government’s response to the similar 1920 depression shows that inaction may in fact be the best course of action.
1920 was also a deflationary recession, much like the one we are in today. Under these circumstances, the federal government’s arbitrary decisions in terms of bailouts and spending projects may actually do more harm than good.
Some of the recent approaches in Congress are correct, such as making small business loans available. But if history is any indicator, we need fewer instances of the federal government picking winners and losers during a crisis, and more instances of them getting out of the way. Direct bailouts and other redistribution is not the way to bounce back.
Not only did the 1920s’ economic recovery succeed without the heavy hand of the government, but it led to one of the greatest economic expansions in American history. As we move forward and begin to reopen our economy and address this recession, legislators should remember that oftentimes the best thing is to do nothing at all.
• Adam Brandon is the president of FreedomWorks.