Current writes in one of the previous posts on Hoover: "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."
To a certain extent, sure. Do Austrians consider Bill Clinton to be a fellow traveler because he stopped running deficits?
People are focusing on rates with Hoover, and the rate of growth was large - but from a small base. Levels matter too. My position is fairly straightforward, and I'm amazed at how much acrimony it inspires. Did he raise spending? Of course he did. The data is right in front of our faces. How might we characterize the administration's fiscal policy? Austere. Hoover's biggest spending year had a lower spending level than the 1921 federal budget. I have been told ad nauseum that 1921 was a year of fiscal austerity. If that's austerity, then so is 1932. Period.
Here's the thing - the federal government was a fiscally austere institution until WWII. That was just the nature of government at that time. People did "Keynesian" things with monetary policy before WWII. Wars and megalomaniacal leaders provided sporadic opportunities to do "Keynesian" things with fiscal policy. But for the most part, in a normal, democratic, peace-time context it was just austere by nature. And for that time, that was probably just fine. I think we can afford to do a little more now.
And I don't hold it against Hoover. Like the early Roosevelt, he was groping towards a new world order. Good for him! But if his budget looks more or less like Coolidge's budget, and Harding's budget, and peace-time Wilson's budget and the budgets before them, let's just call it what it is - it's fiscal austerity. Levels and rates both matter.
I have been told ad nauseum that 1921 was a year of fiscal austerity. If that's austerity, then so is 1932.
ReplyDeleteDoes that work in modern times too? Like, if I can find Krugman criticizing reckless government budgets under George W. Bush, and then I can find an Obama budget that is higher in absolute levels, then you agree a Keynesian must think that the latter is recklessly high?
Well, let's look at what Krugman said about 1921. Krugman has agreed with me that Harding's budgets are not particularly relevant to the recovery because we did not have an aggregate demand problem - we had a case of the Fed lancing a very rapid rise in prices. Chairman Strong = Chairman Volcker. Harding was "austere" that's fair enough. That didn't have negative consequences given the circumstances of 1921.
DeleteHoover had a different macroeconomic context. The fiscal position was about the same but the circumstances called for something different. But if Harding's budget was "austere" than surely Hoover's - which came at a time when we did have an aggregate demand problem - was certainly also "austere".
That's a long way of saying - context matters. By all means compare Bush an Obama's spending, but the context seems relevant for evaluating them. Was Bush's budget bigger or smaller than circumstances called for? Bigger. Was Obama's budget bigger or smaller than circumstances called for? Smaller.
The thing about the Harding budget is that I hear it all the time that he was austere. If Harding was austere, then Hoover has to be considered at least as austere as Harding.
Also, I haven't adjusted this at all for population change, GDP change, etc. - so everyone should know that this is just a raw comparison. Presumably after ten years, though, the adjustment would make the point even stronger (Hoover was dealing with a bigger base for both GDP and population than Harding).
DeleteIn this discussion we have a matrix of possibilities. A government can raise, maintain or cut spending, and it can raise maintain or cut the tax take.
ReplyDeleteAs I understand it Keynesians see a fairly direct relationship between GDP and the total capital wealth of a society. They also see a fairly direct relationship between deficit spending and GDP. I know that's simplifying and if you think that characterisation isn't accurate for this then criticise me on it.
From what I've read the believe the following is "expansionary" relative to previous policy:
* Maintaining spending and cutting the tax take.
* Raising spending and maintaining the tax take.
* Raising spending and cutting the tax take.
* Raising spending and raising the tax take, if the rise in the tax take is much smaller than the spending rise.
* Cutting spending and cutting the tax take, if the cut in the tax take is much greater than the spending cut.
As I understand it because of the balanced budget multiplier if spending is raised and the tax take is raised to correspond then that's still expansionary to a degree.
And the following is "contractionary" relative to previous policy:
* Maintaining spending and raising the tax take.
* Cutting spending and maintaining the tax take.
* Cutting spending and raising the tax take.
* Cutting spending and cutting the tax take, if the spending cut is greater than the tax take cut.
* Raising spending and raising the tax take, if the rise in the tax take is much larger than the rise in spending.
Again, because of the balance budget multiplier if spending is cut and taxes are cut to correspond that that's contractionary.
From this point of view I don't see why everyone has so much trouble seeing Hoover as a Keynesian. "Lord Keynes" presents the following data on his blog, I have checked it:
"Fiscal Year | Federal Budget
Fiscal 1929 | $3.127 billion (5.60% increase on 1928)
Hoover (March 4, 1929–March 4, 1933)
Fiscal 1930 | $3.320 billion (6.17% increase on 1929)
Fiscal 1931 | $3.577 billion (7.74% rise on 1930)
Fiscal 1932 | $4.659 billion (30.25% rise on 1931)
Fiscal 1933 | $4.598 billion (1.31% fall on 1932).
Fiscal Year | Surplus or Deficit
Fiscal 1930 | $0.7 billion surplus
Fiscal 1931 | $0.5 billion deficit
Fiscal 1932 | $2.7 billion deficit
Fiscal 1933 | $2.6 billion deficit."
So, for 1929 it can be argued that Hoover's policy was "austerity" because he ran a budget surplus. But how can that argument be maintained for any subsequent year? In each 1930, 1931 and 1932 there was a deficit and spending rose. How can that not be expansionary? In 1933 spending fell, but only by a small amount and the deficit was still large. I suppose it can be argued that 1933 was very slightly contractionary relative to 1932. I don't understand why LK thinks it's significant that tax rates were increased in 1932.
You may all say that none of these deficits were sufficient, I see that as a separate argument. If it's true that Hoover wasn't a proto-Keynesian then he would not have run any deficits at all.
While asking that we take into account the context of the situation seems to be asking that we all become Keynesians to a degree. That is, you seem to be saying the "normal" thing to do would be to run a deficit in a recession. But, to be a Keynesian one must run a large deficit. I don't buy that, counter-cyclical fiscal policy of any sort is Keynesianism it can hardly be called "austerity".
(1) In fiscal year 1930 (July 1, 1929 – June 30, 1930) Hoover ran a federal budget surplus. that was contractionary. Note how the fiscal year extends right into the middle of the calendar year 1930. The opposite of Keynesian stimulus.
Delete(2) "But how can that argument be maintained for any subsequent year?"
Federal fiscal policy was expansionary in fiscal 1931 and 1932 over each previous fiscal year. Isn't that clear in what I wrote? In 1933 federal fiscal policy was contractionary.
(3) "I don't understand why LK thinks it's significant that tax rates were increased in 1932."
Because that is contractionary fiscal policy: tax revenues rose in fiscal 1933 over fiscal 1932. That is taking money out of people's hands when the economy desperately needed spending. Why do you think Keynesians cut taxes during recessions?
"But, to be a Keynesian one must run a large deficit. "
DeleteNo, to be a Keynesian and to properly stimulate an economy in recession/depression you must:
(1) calculate potential GDP and estimate how severely GDP is likely to collapse by,
(2) estimate the Keynesian multiplier and
(3) then design fiscal policy to expand demand by tax cuts and/or appropriate level of discretionary spending increases to hit potential GDP via the multiplier.
Just because you have a deficit does not mean that fiscal policy is necessarily expansionary: witness Ireland today, it has large budget deficit, but that deficit is NOT expansionary.
Herbert Hoover
DeleteFiscal Y | Receipts | Outlays | Budget Surplus/Deficit
1931 | 3.1 | 3.6 | -0.5
1932 | 1.9 | 4.7 | -2.7
1933 | 2.0 | 4.6 | -2.6
http://www.presidency.ucsb.edu/data/budget.php
In fiscal year 1933:
(1) receipts rose
(2) outlays fell
(3) budget deficit fell
All contractionary.
I understand the point, Current, but I have two problems with this line of reasoning. First, I see no reason at all to combine tax policy and spending policy into a single policy. These are very distinct policies that act in distinct ways. It seems much better to me to say "his spending increased, which was expansionary, but entirely inadequate" AND "much of the good that could have been done with the spending was counteracte with austerity in tax policy".
DeleteI'm not trying to bash Hoover. It was the nature of government back then. It was probably appropriate for quite a while, and transitions are always hard. He certainly could have been worse, but I don't see a Keynesian stimulus anywhere.
Let me put it this way, Current. Bernanke has been taking a few steps towards Fed transparency during his tenure. Now, because that's in the direction of what Ron Paul wants, would it be fair to say that Bernanke is an Austrian? Of course not. Why? The same reason I say Hoover wasn't a Keynesian - it may have been the right direction, but he didn't do nearly enough.
I'll split the difference with you, I'm a fair man.
DeleteLet's say Hoover wasn't a Keynesian, but neither did he follow a policy of "austerity", except in FY1929.
Correct me if I'm wrong, Current, but the surplus accounts for July 1930 to June 1931.
ReplyDeleteno, for fiscal year 1930 (July 1, 1929 – June 30, 1930).
DeleteThat's right Jonathan, I forgot that as LK says "In the US, the fiscal year before 1976 ran from July 1 to June 30 in the next year." So it's wrong to say that Hoover's policy was austerity during the calendar year 1929.
ReplyDelete