Depression Era Austerity

The comment section of Steve Horwitz's post on the Hoover administration's austerity was surreal. I was accused by Steve, Don Boudreaux, and even Bob Murphy of endorsing Krugman's claim that Hoover "slashed spending", when I did nothing of the sort in that comment section and even dismissed Krugman's interpretation of Hoover's spending on this blog!

When I agree with Krugman, they don't like it. When I disagree with Krugman, they don't like it or just assume that I actually agree with Krugman! I'm not sure what else to do here. I'm at my wits end with this sort of thing.

LK (who agreed with me, Steve, Don, and Bob that Hoover did not slash spending) has a great response post here.

Anyway - the early thirties is still a critical time in U.S. economic history, and worth talking about, so I put together the chart below with OMB spending data (I think these are in Fiscal Years, but it's unclear - anyway you'll see that doesn't matter all that much - it's in millions of dollars). I've gone from 1920 to 1945 so we can see the full context of Hoover's budgets. Harding and Coolidge's budgets are in blue, Hoover's are in red, and Roosevelt's are in green.


In the last post I pointed out that the Hoover administration had one unambiguous austerity policy - raising taxes in the middle of the Great Depression. That's grade-A dumb.

So what about spending? Did he slash spending? No. Of course not. The data is out there for everyone to see. Spending increased under Hoover, from the low point it was at in the mid-1920s, to just under the FY1921 budget (which - I'm told - was a period of austerity that disproves Keynesianism). The increase continued through the early Roosevelt administration, so that in 1935 Roosevelt was spending about as much as Wilson was in 1920. Let me repeat that. The federal budget in 1935 was less than one percentage point higher than the federal budget fifteen years earlier under the progressive Woodrow Wilson, and this was higher than anything under Hoover.

That brings us up to the recession within a depression, and about mid-decade.

How would I characterize the early 1930s? How do I think any reasonable person should characterize the early 1930s? Since so many people seem so willing to impute views to me, let me lay this out explicitly. You can quote me on this:

The early 1930s was a period of fiscal austerity. Tax rates were raised precisely when they should have been maintained or probably lowered. It's quite true that Hoover did not slash spending - he increased it. Indeed, he increased it through programs like the Reconstruction Finance Corporation that laudably generated important institutional infrastructure, which would serve the country well during the New Deal and the second world war. But the Hoover administration and the early Roosevelt administration spent at a level that was consistent with the post-WWI spending of the Wilson administration, the Harding administration, and the Coolidge administration. That was fine for the 1920-1921 depression and the 1920s, but it was not an appropriate fiscal policy response to the early 1930s. It was far too austere. While the Hoover administration and the early Roosevelt administration both increased spending levels, there was no practical difference from a macroeconomic stabilization perspective between their spending policy and that of the Coolidge administration. Both men did a lot of bad things and both men also did some good things, but the real regime change in fiscal policy did not come until the late 1930s and early 1940s.

That's what I think. I think it's a very reasonable assertion, and I hope that graphic highlights why it's reasonable.

Of course, Krugman is wrong about Hoover's spending record. I've said this several times now in this most recent discussion, and I know I've said this in the past too. But I think Krugman's characterization of the Hoover administration is more accurate than the characterization offered by Steve Horwitz.

Note - this is not to say that I think Steve's points are a "pile of bullshit" (what he accused Krugman of offering), or "propaganda" (another accusation against Krugman). I just think he's missing some of the salient points and has some problems with his interpretation. I wish we could say that without making all these nasty comments about other bloggers and economists.