Instead of bailing everyone out and stimulating more old rich white men than Viagra, the government would do better to spend nothing on the stimulus.  And what’s better than nothing?  Less than nothing:  lower taxes.  It may sound counter-intuitive to the less economically-inclined among you, but we have lessons to learn from history that seem to verify that this is, in fact, a great way to fight a recession.

While FDR’s “New Deal” took decades to bring us out of depression, Warren G. Harding’s (yes, that Warren G. Harding; the same President regularly dogged in public schools) low-government  in the early 1920’s set the stage for the roaring 20’s.

Says RealClearPolitics:

Warren Harding was elected president in 1920 at the end of World War I, directly following the popular Woodrow Wilson. Harding inherited an economy transitioning away from wartime production as well as decreasing international demand for many American goods that had driven economic growth during the war. American factories were retooling and soldiers were coming home looking for work. The nation’s output, by some measures, fell as much as 24 percent and unemployment more than doubled between 1920 and 1921. Between 1919 and 1921, farm income had dropped by 40 percent. The country was falling deep into recession.

Instead of bailing out failing businesses, expanding government, and redistributing taxpayer money with a “stimulus” plan, Harding responded by cutting spending and removing burdensome regulations and taxes. During his campaign, he argued, “We need vastly more freedom than we do regulation.” In stark contrast with the Bush-Obama response of ever-more government spending and debt, Harding had federal spending cut in half between 1920 and 1922 and ultimately ran a surplus.

As a result, the recession that started in 1920 ended before 1923. Lower taxes and reduced regulation helped America’s economy quickly adjust after the war as entrepreneurs and capital were freed to create jobs and push the economy to recover. Harding’s free market policies lead to the Roaring Twenties, known for technological advances, women’s rights, the explosion of the middle class, and some of the most rapid economic growth in American history. Still, he is ranked as one of the worst presidents by many in academia’s ivory tower.

So, there you go:  a real, historical blueprint for not only getting out of a recession but getting the government back to surplus.

But weren’t the Roaring 20’s just a big bubble that lead to the greatest economic drop we’ve ever had?

You’ll have to ask yourself what exactly causes a bubble:  usually it’s something relating to prices that are inflated beyond their real-market value.  In 2000, it was the tech bubble, as overpriced tech stocks finally dropped back to reality.  In 2008, it was the housing bubble.

Bubbles usually inflate because something is propping prices or credit up artificially – after all, there’d be no need for a crash if every stock in the system was already valued at about the right level.  Austrian economists hold that credit was far too easy to acquire in the 1920s (thanks to regulation from the Federal Reserve), eventually leading to an inevitable recession/depression, which was then aggravated by further government interference from Hoover and FDR.

What if the Roaring 20’s followed Harding’s free-market policies, but then the Federal Reserve had tightly held credit and money supply in check throughout?  Would there have been a need for a depression?