Transitional Presidencies
Lately I’ve been focused on the predictability of U.S. political transitions, which occur every 50 years or so and which indicate that we are now at the point of transition.
I’ve touched on the critical elements that force systematic change, but I confess that I have elided the precise issues and types of policies and politicians that were at the heart of what we might call political revolution. It’s useful to start by naming the so-called revolutionaries that seized the presidencies and in doing so transformed a system that had been in place for 50 years into something that would take its place for another 50.
Few live long enough to see the changes manifest, but they are nonetheless so consequential that their successors, even those who hold very different views, are forced to adhere to the new system they occupy.
Going backward, these presidents were Ronald Reagan, Franklin D. Roosevelt, Rutherford B. Hayes and Andrew Jackson, all of whom harnessed tax and tariff power to change the system. Each had strategies that were profoundly unorthodox and generally rejected by the financial community.
Reagan ran for president in a system radically affected by Richard Nixon. Nixon abandoned the gold standard, froze prices and wages, and had to absorb the force of the Arab oil embargo.
Contrary to his predecessors, Reagan believed the fundamental problem was a lack of money in the system, as a matter of both consumption and investment. He was elected on this platform due to the pressures felt by all sectors of the economy. Once in office, his first move was to persuade Congress to cut income taxes from 70 percent to 50 percent. He later cut the capital gains tax. The fear was that this would set off massive inflation.
Technical arguments aside, Reagan asserted that nothing could be worse than the current reality. He violated the rule that tax cuts for the well-to-do were politically untenable, imposing his will on an issue he held even before he took office.
FDR faced a similar problem. He inherited the Great Depression, which was widely believed to be manageable only through rigorous rules to encourage investment. His wealth tax of 1935, which took up 75 percent of the highest incomes, created enough demand to prevent economic collapse. The conventional wisdom failed to see the complexity of the economy and used common sense to demand austerity. Roosevelt ignored common sense.
Hayes was elected after the Civil War. The conflict had created an economic disaster, and the federal government had been forced to print massive amounts of money that helped the war effort but led to economic duress so dire as to question the very value of American currency. The inability to form capital and facilitate trade and jobs created a disaster.
Despised by many, Hayes made the case to retire the greenbacks and back them with gold. The conventional wisdom was that moving to a gold-based economy would lead to an economic breakdown and a long-term depression in the United States. His argument was that the country could not be run on a worthless currency, and a carefully staged process of building value was the only option possible.
Jackson became president while the U.S. was entering the industrialization era. Northeastern industrial concerns believed that low tariffs on imported manufactured goods and raw materials were economically detrimental.
Massive tariffs were therefore imposed, leaving the South in a bad position. The tariffs were not especially selective, and they hurt virtually every segment of society save northern bankers, who invested in any trade that made them money.
Each of the definitive transitions, the ones that arrived every 50 years, pivoted on tax and tariff policy. The idea persists that the public holds a simplistic self-interested view of things, or is manipulated by the wealthy and politicians. The public tended to embrace seemingly irrational approaches as their betters sought to destroy them, or so the thinking goes.
It is overstated to say that the public was more sophisticated than the elite, and it’s also true that there were many aspects and forces in every election that had nothing to do with this view. But the pivotal ones, the ones that I think define American history, were fought on these kinds of battlegrounds, and the politicians who won the battles became president and governed with an eye on the economy. Sometimes they got it wrong.
My interim view on this transitional election is that it will come down to taxes, but the conventional wisdom on how to solve the problem and the public’s openness to what appears simplistic and self-serving, while prudent, will be seen as absurd and dangerous.
Most transitional presidents seem to have understood as much, some just couldn’t bet the farm on it. The ones that failed paid too much attention to the experts. In that sense, economics is like war: When you’re in the field, don’t listen to the guy who wrote the book on it; look to the guy who threw the book away.