July 4th – Celebrating Silent Cal

Today we celebrate the signing of the Declaration of Independence and the birth of the United States of America. We thought it’s also worth recognizing another important birthday on this July 4th – that of Calvin Coolidge who was born July 4, 1872 and later went on to become the 30th president of our nation. Coolidge’s place in our nation’s history is noteworthy, especially considering the current budgetary environment.

Coolidge was Vice President in 1923 when Warren G. Harding died suddenly of a heart attack while on a speaking tour in California. Thrust into the presidency, Coolidge was faced with massive national debt accumulated through World War I. Instead of raising taxes, he cut the tax rate and government revenues increased. Federal spending remained flat during Coolidge’s administration, despite that he presided over the “Roaring 20s”. Ultimately, he retired one-fourth of the federal debt during his presidency, largely adhering to a policy of small government, especially at the federal level. He practiced a passive style of leadership leading political analyst Walter Lippmann to note that Coolidge’s political genius was his talent for effectively doing nothing:

“This active inactivity suits the mood and certain of the needs of the country admirably. It suits all the business interests which want to be let alone…. And it suits all those who have become convinced that government in this country has become dangerously complicated and top-heavy….”

More than 50 years later, President Reagan would order Coolidge’s portrait to be hung in his Cabinet Room, a symbol of his own laissez-faire vision that government that should regulate lightly and decrease taxes allowing for business to prosper and the economy to grow.  However, Reagan’s debt reduction efforts would have disappointed Coolidge.  The Reagan presidency marked a significant run-up in federal debt.  This trend, save for a portion of the Clinton administration, has continued and accelerated to the present day where it stands as the highest level of debt since World War II.

Earlier this month, the Congressional Budget Office (CBO) released its Long Term Budget Outlook which provides a sobering estimate of the future path of our federal debt.  The CBO Director wrote in his accompanying statement that “the path of debt under current law would still leave debt at a historically high level relative to GDP, and even achieving that path would require very large changes in current policies.”

Capitol Markets doesn’t engage in political editorial, instead we seek to understand the effect that politics and budgetary policy have on the government real estate inventory.  In this case, it’s somewhat difficult to predict.  On the one hand, growth in total spending and the federal leased inventory appear to correlate, both increasing nearly every year over the past four decades.  This growth has been financed through increased public debt.  Since 2001, U.S. federal debt has doubled from 33% of GDP to 68% of GDP.  During the same period GSA’s leased inventory grew 27% nationally (and in the nation’s capital it has grown almost 50%).

However, common sense tells us that this can’t possibly continue.  Increased government spending primarily serves entitlement programs and interest payments on the growing national debt. While this may contribute somewhat to federal inventory growth, we note that mandatory spending is sure to crowd out discretionary spending. In fact, this has already begun leading both the Executive and Legislative branches to institute austerity measures including a freeze on inventory growth, substantial reductions in space utilization and more activist oversight of prospectus leases.

Half of the discretionary budget is defense spending, which by current estimates is likely to decrease substantially. For markets such as Northern Virginia this could have a substantial impact on the office market.  More likely, the effects of austerity will be felt across the board.  All agencies are already under acute pressure to reduce costs, including those for real estate leases.  The expanding federal debt has been astonishing, as has been the expanding federal leased inventory.  By all accounts, we are due for a correction, and when it comes it will impact federal demand for leased space.

Coolidge was nicknamed “Silent Cal” for his typical demeanor.  At one dinner the matron seated next to him told Coolidge that she had bet that she could get him to say at least three words that night. His response: “You lose.”  A comedienne of the era noted that Coolidge’s pursed lips and dour expression made him look as though he had been “weaned on a pickle”.  Were Coolidge alive today his expression would surely remain unchanged, though he’d have plenty to say about the present fiscal policy.

“I favor the policy of economy, not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the Government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we prudently save means that their life will be so much the more abundant. Economy is idealism in its most practical form.”

– Calvin Coolidge