Friday, September 30, 2011

Horwitz on Hoover

Steve Horwitz has a new briefing paper on Hoover. I'm a little curious about phrases like this: "Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage." That seems a little strong. Big spending? I'd have added a "-ger" to the end of Horwitz's chosen adjective. And "interventionist" is pretty vague too (it's such a strange word - "interventionist" - as if tariffs and tax increases are interchangeable with public investments or targeted tax cuts... it seems to me that talking about "interventionism" in general doesn't get you very far).

This is the fate of Hoover, though. It is bound to happen when anyone talks about him. Hoover was not the Ron Paul of 1931. But he wasn't the FDR of 1931 either. Is he the "father of the New Deal" as Horwitz asserts, or is he a "moderately proactive Andrew Mellon"? That's really in the eyes of the beholder, is it not?

Is he a "big spender" or was he just a "bigger spender" but not a "big spender"? Again - interpreting the facts is trickier than it first appears. One thing is for sure - and Horwitz does a service by pointing this out - he was not a smaller spender.


  1. Horwitz hasn't the foggiest idea what his talking about.

    Some of Hoover's interventions:

    (1) Hoover ran a budget surplus in the fiscal year 1930, not a deficit.

    (2) Hoover also cut spending in fiscal year 1933.

    (3) Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years.

    These were highly contractionary measures, and these the very antithesis of Keynesianism.

    As for his deficits, they were

    (1) caused tax revenue collapse, and

    (2) involved some spending increases, but were almost totally overwhlmed by state and local austerity.

  2. re: "These were highly contractionary measures, and these the very antithesis of Keynesianism."

    Right, and I don't think Horwitz claims he was a Keynesian. This is part of why talking about Hoover is so hard - he doesn't make anyone happy. How you characterize that usually says more about the person doing the characterizing than it does about Hoover.

    re: "(1) Hoover ran a budget surplus in the fiscal year 1930, not a deficit."

    It is intriguing that Horwitz mentions the deficits of 31 and 32 but chooses not to mention the surplus of 30, which is a fairly crucial year.

    I strongly agree with your point on the nature of the deficits. And again, it would have been nice to see revenue and spending data in explaining the deficits rather than just spending data and deficit data. That gives the wrong impression.

  3. "Horwitz hasn't the foggiest idea what his talking about."

    Then you can go on and debate him on his blog, instead of preaching to the Kuehn choir.

  4. Anonymous - what choir? I've argued Steve IS making a good argument, and I don't have all that many anti-Steve Horwitz commenters here.

    I do agree LK should raise these issues on Steve's blog. I'd agree with LK on the importance of many of his points. I'd disagree with LK that Steve "hasn't the foggiest idea what he's talking about".

  5. OK guys, do you agree with Christina Romer and Paul Krugman when they say that FDR's fiscal deficits of 1933-1936 generated an incredible recovery? (If so, then I have a follow-up question, but I don't want to put words in your mouth.)

  6. Have they said "incredible"?

    My understanding was that most of the recovery is attributed to going off gold - that the New Deal was weak fare (I guess it probably had some positive effect, but things like the NIRA likely countered that). Krugman has written, for example:

    "Now, you might say that the incomplete recovery shows that “pump-priming”, Keynesian fiscal policy doesn’t work. Except that the New Deal didn’t pursue Keynesian policies. Properly measured, that is, by using the cyclically adjusted deficit, fiscal policy was only modestly expansionary, at least compared with the depth of the slump. Here’s the Cary Brown estimates, from Brad DeLong: [image] Net stimulus of around 3 percent of GDP — not much, when you’ve got a 42 percent output gap."

    And my understanding is that Krugman primarily attributes 1937 to retrenchment at the Treasury.

    None of this is to say that the New Deal deficits weren't a good idea or that the 1937 balancing wasn't a bad idea. It's simply to say I've never known Krugman to consider them particularly impressive or important.

    What's your question, though? I think a lot of people do think this so it's still probably worth posing.

  7. I guess we have to do this the hard way, Daniel. But so be it.

    Christina Romer:

    AT A recent congressional hearing I cautiously noted some “glimmers of hope” that the economy could stabilise and perhaps start to rebound later in the year. I was asked if this meant that we should cancel much of the remaining spending in the $787 billion American Recovery and Reinvestment Act. I responded that the expected recovery was both months away and predicated on Recovery Act spending ramping up greatly. Only later did it hit me that I should have told the story of 1937.

    The recovery from the Depression is often described as slow because America did not return to full employment until after the outbreak of the second world war. But the truth is the recovery in the four years after Franklin Roosevelt took office in 1933 was incredibly rapid. Annual real GDP growth averaged over 9%. Unemployment fell from 25% to 14%. The second world war aside, the United States has never experienced such sustained, rapid growth.

    (In fairness, in that article she doesn't seem to single out FDR's deficits as the cause of the recovery--though she blames the 1937 austerity measures. In another of her pieces, she was more specific about FDR's deficits being important, but I can't dig that one up right now. If you think I'm wrong, I'll find it.)

    I am not as confident I can dig up quotations of Krugman saying that FDR's deficits from 1933-37 were engines of growth, but I might be able to. I would bet even money on it.

  8. I've seen her say it helped in anecdotes before, Bob, but the only academic paper of hers on the subject I read primarily attributed the recovery to leaving the gold standard (she may even have thrown in a remark about the New Deal being less significant in the grander scheme, but I'd have to dig it up on a different hard drive before I endorse that view).

    If she takes a different position elsewhere I would love to read it.

  9. "OK guys, do you agree with Christina Romer and Paul Krugman when they say that FDR's fiscal deficits of 1933-1936 generated an incredible recovery?"

    "Incredible" would have meant the return of the economy to high employment (unemployment below 2% and achieved very quickly), the paying down of debt and elimination of the problem of debt deflation, in my view. Neither of course happened, and the recovery was not "incredible" in that sense.

    But fiscal policy was large enough to bring unemployment down to nearly 10%:

    Real GNP growth was impressive. As krugman says, fiscalpolicy was "modestly expansionary" and of course that was an engine of growth. As Cary Brown showed a long time ago state and local austerity impedes federal fiscal stimulus, reducing it (as an aside, Sweden was also a nation in the 1930s that used mild to moderate fiscal stimulus).

    Now contrast America under Roosevelt with New Zealand under its Labour government from 1935-1938, when the government did use large-scale fiscal stimulus from 1936 and unemployment came down to very low levels quickly:

    Japan also used highly expansionary fiscal policy to escape the Great Depression:

    As did Germany:

    And don't waste my time screaming that the latter two examples are some kind of apology for fascism, because it isn't.

  10. Correction:

    the paying down of *private* debt and elimination of the problem of debt deflation in the *private sector*

  11. Bob, my understanding is Romer's (and Krugman's) position is that the incredible growth came from (unintentional) monetary expansion (See Romer's "What Ended the Great Depression?", available from her website, but that the same results could have been accomplished by deficit spending of an appropriate scale. More to the point, in the article you quote, she is arguing that fiscal and monetary austerity in '37 caused a recession, which is different than saying that deficits in '33-'36 fixed the Depression (since she thinks the cure was mostly monetary).

    Quoting from her encyclopedia article on the Depression (see her website):
    "Fiscal policy played a relatively small role in stimulating recovery in the United States. [...] Franklin Roosevelt’s New Deal, initiated in early 1933, did include a number of new federal programs aimed at generating recovery. [...] However, the actual increases in government spending and the government budget deficit were small relative to the size of the economy. This is especially apparent when state government budget deficits are included, because those deficits actually declined at the same time that the federal deficit rose. As a result, the new spending programs initiated by the New Deal had little direct expansionary effect on the economy."

  12. Whilst fiscal policy undoubtedly played a role, we can explain the entirety of the 1930s (and onwards) from the perspective of long term interest rates, Keynes' main concern.

    In 1928 they shot up from 5% to over 20%. By 1933 they had come back down to 2% which explains the green shoots. They remained fairly low throughout the New Deal, but catapulted back up to 8% in 1937, triggering another depression. From 1939 onwards and throughout WW2 they remained incredibly low, getting as low as -10%.

    Post WW2, thanks to Keynes' influence, they didn't go above 5%. In 1980 they went back up over 10% and have remained high ever since, explaining the volatility we've seen since then.

    Why, you ask? Adam Smith can field this one:

    "...In a country, such as Great Britain, where money is lent to government at three per cent. and to private people upon good security at four, and four and a half, the present legal rate, five per cent., is perhaps as proper as any.

    The legal rate, it is to be observed, though it ought to be somewhat above, ought not to be too much above the lowest market rate. If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent., the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into the those which were most likely to waste and destroy it. Where the legal rate of interest, on the contrary, is fixed but a very little above the lowest market rate, sober people are universally preferred as borrowers to prodigals and projectors. The person who lends money gets nearly as much interest from the former as he dares to take from the latter, and his money is much safer in the hands of the one set of people, then in those of the other. A great part of the capital of the country is thus thrown into the hands in which it is most likely to be employed with advantage."

  13. That's one of my favorite passages from Smith, Cahal.

    Anyone know which Nobel laureate that anticipates?

  14. Bob - my personal concern in how I answered you was that I wasn't sure if there was a "gotcha" lurking. I think both Romer and Krugman would say the deficits were a good thing. I think they were a good thing. I think Hoover's deficits were a good thing too. At the end of the day, though, I think the claim is that they were (1.) insufficient, (2.) not a primary factor, and (3.) coupled with a lot of really bad policy in other parts of the New Deal.

  15. Lord Keynes,

    Aren't you leaving out the real star performer from the 1930's - the Soviet Union who did such a good job of controlling AD (and AS) that they had 0% unemployment?

    My serous point is: Basic economics confirms the fundamental tenet of Keynesian - in a period of depressed AD then direct government intervention not funded by taxation will "cure" the unemployment problem. The question - at what cost to the economy and society generally? The examples you give (I think NZ had too many sheep to count) are hardly reassuring. Despite your rejoinder to leave politics out of it - the German economic experience of 1933-1938 surely cannot be a model for those who value freedom.


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