Monday, February 20, 2012

Krugman, Hoover, and all that

There's some disappointing discussion of Hoover going on - with substantial disappointments and nastiness on both sides. I don't have time to discuss my thoughts in detail now, but do have a question at the end of a brief summary of my thoughts:

1. A lot of the deficit increases under Hoover came from reduced revenue as a result of reduced incomes. That is not expansionary policy. Sorry.

2. Hoover raised taxes. That is austerity, plain and simple - there should be NO ARGUMENTS over this.

3. Hoover did increase spending, and I really wish guys like Krugman and DeLong would just come out and say this. The point is he didn't increase it nearly enough, which looks like austerity to those of us who think he didn't increase it enough.

4. Federal government ain't the only game in town. I'm not sure how state and local spending compared to federal spending (i.e. - whether declines swamped the federal increases), but it is very reasonable to note that the total government position was more austere than the federal position (just as is the case today).

My question: Does anyone have a defense of Krugman on #3? I haven't looked at this in detail, what I have seen is from people that really aren't fond of Krugman, but as far as I can tell there were modest spending increases. My response is that it clearly wasn't enough. That is clearly true - my question is whether these guys are representing the data correctly. As far as I can tell they are.

Also - my QJAE comment on the business conferences is relevant to this discussion.

12 comments:

  1. Have you read that seminal paper by E Carry Brown (1956)about how inadequate New Deal spending was in regards to part #4. Anyway everybody and their mother (particularly Christian Romer) cites that paper.

    I think a different way of thinking about #4 and #3 is that probably what really matters was the change in monetary regimes and the refusal to do that was really Hoovers failing not necessarily the inadequacy of his fiscal policy but the over all austerity regime of the gold standard which Hoover was a big proponent of (Temin "lessons from the great depression")

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  2. Oh and to answer your question more directly. I assume someone has brought up the increase in spending as a % of gdp. It was something ridiculously small, like, less than 1% of GDP.

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  3. Daniel, could you explain to me why raising taxes is an act of austerity? I'm not questioning it (yet), but I just want to get a concise explanation I can go off of when I do talk about the same topic.

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    1. Btw, now that I notice it, your blogfeed isn't updating links to ET.net because I moved the blog to economicthought.net/blog.

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    2. By austerity, we **presumably** mean anything that reduces aggregate demand.

      A tax rate hike reduces aggregate demand, and a tax rate reduction increased aggregate demand.

      It's intuitive, because an "austere life" involves living on less. A lower after-tax household income will force the household to reduce the real cash balances it holds and withdraw less funds from the savings account or fixed deposit.

      We consider WW2 to be a sort of austerity regime, because wages, rent, interest, and profits were severely cut, social spending was reduced, and consumer industrial output was rationed. This way, they could produce more for wartime purposes.

      (This is why people for small government shouldn't support austerity. The more money people take away from the government, the better. Does this not force government to compete even more with private households in obtaining goods for government purchases? But to allow the government to build a large surplus compared to private households will mean the government can more easily outbid private households and leave private households with less real resources.)

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    3. Thanks Prateek, that's the conventional explanation. I wanted to see if Daniel had another one -- that way I wouldn't be strawmanning anybody. I have a post on this topic coming out tomorrow.

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    4. I guess "reduces aggregate demand" works. I would have thought that the definition of austerity was simply cutting spending and raising taxes (in absolute terms or relative to some counterfactual), and the definition of anti-austerity was raising spending and cutting taxes.

      Tax cutting is hardly an austere public choice, right?

      Maybe I'm misunderstanding the question.

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  4. Oh also, DeLong's treatment of Hoover really bothered me too. The idea of taking a politician at their word is kind of absurd. Will J Bradford DeLong IV 100 years from now cull through the congressional record to prove that the republicans for the last 30 year have been staunch adherents to a philosophy of balanced budgets?

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  5. I'd disagree on two points.

    "1. A lot of the deficit increases under Hoover came from reduced revenue as a result of reduced incomes. That is not expansionary policy. Sorry."

    Why shouldn't that be expansionary policy? Even if that's more or less automatic, the gov't has to use debt to pay, which is expansionary.

    "2. Hoover raised taxes. That is austerity, plain and simple - there should be NO ARGUMENTS over this."

    Depends. It may be balanced Haavelmo expansion.

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  6. "There's some disappointing discussion of Hoover going on - with substantial disappointments and nastiness on both sides."

    Don't let it get you down. I saw the inane, idiotic comments on Coordinationproblem.org by some of the Austrian apologists.

    "Hoover did increase spending, and I really wish guys like Krugman and DeLong would just come out and say this. The point is he didn't increase it nearly enough, which looks like austerity to those of us who think he didn't increase it enough."

    Once you look at total federal spending (state, local and federal), the increases under Hoover are not very large at all. In fact, they are feeble:

    Year | GNP | Total Spending ($ billion)
    1924 | 86.947 | 9.98
    1925 | 90.6 | 10.37
    1926 | 96.949 | 10.78
    1927 | 95.544 | 11.22
    1928 | 97.4 | 11.44
    1929 | 103.6 | 11.68
    1930 | 91.2 | 11.92
    1931 | 76.5 | 12.18
    1932 | 58.7 | 12.44
    1933 | 56.4 | 12.62

    1934 | 66 | 12.81
    1935 | 73.3 | 14.78
    1936 | 83.8 | 16.76

    http://www.usgovernmentspending.com/downchart_gs.php?year=1910_1960&view=1&expand=&units=b&fy=fy12&chart=F0-total&bar=0&stack=1&size=m&title=US%20Government%20Spending%20As%20Percent%20Of%20GDP&state=US&color=c&local=s

    Compared to the GNP collapse 1929-1933, total spending barely moved. In fact, most of it looks entirely in line with the trend 1924-1930. The big increases came under Roosevelt in 1935 and 1936. Once Roosevelt's stabilization of the financial system, abandonment of the golf standard, and so on occurred, a natural recovery began that was obviously made more robust as fiscal policy become moderately expansionary by 1934.

    I replied to Horwitz here:

    http://socialdemocracy21stcentury.blogspot.com.au/2012/02/steven-horwitz-on-herbert-hoover-mostly.html

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  7. I suppose this sentence is what sums up the debate for me:

    "The point is he didn't increase it nearly enough, which looks like austerity to those of us who think he didn't increase it enough."

    It seem to me that to Keynesians a government must perform a large stimulus of some sort to be Keynesian by them. A simple increase spending isn't regarded as enough.

    What I don't understand though is why the Keynesians here don't consider tax-and-spend to be stimulative. That's not what traditional Keynesianism says. Old Keynesianism says the balance budget multiplier is 1. It says for every dollar the government tax from one party and spend elsewhere there will be one dollar of extra NGDP, and in a recession one dollar of extra RGDP.

    Or, is this all about judging if Hoover was a New Keynesian?

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