Nevertheless, a Hoover analogy is perfect for our situation on the eve of the economic stupidity that is the sequester. As many have been frantically exclaiming, there's not a lot of budget cutting if your reference point is spending in the recent past. All cuts are relative to a baseline. So like Hoover we're not cutting per se but we're imposing substantial austerity on the economy just when it's starting to look fragile. Why? Because in our case government spending is being pushed well below trend growth. I'm not sure what trend growth in Hoover's case looked like (I do know his budgets came in under Harding's - so I'm not sure why Tom Woods loves Harding so much but mocks Hoover), but they were definitely below the level that would be consistent with full employment.
I have Hoover's spending increases below. The early 1930s was a period of monetary and fiscal austerity. Congress is making the same mistake today. Who cares if spending ticks up a little bit relative to last year? Look at what it's doing relative to some counterfactual that actually matters in an economic sense rather than a political talking point sense.
Posts
Sequestration is my new favorite word. :)
ReplyDeleteCato had a nice discussion recently about how the military can easily avoid most of what it claims will be harmful: http://www.cato.org/multimedia/daily-podcast/military-sequestration-fear-versus-fact
It looks like spending was going down at the beginning of the 20s (presumably the legacy of Wilson & WW1), then stayed flat for a while, then went up under Hoover. Unless we accuse Coolidge of practicing austerity during the famously Roaring 20s, it doesn't make much sense to lay that at Hoover's feet. Hoover pointed out that no administration in U.S history had responded as strongly to a downturn, and he was right. That's why FDR campaigned against him on a platform of balancing the budget!
ReplyDeleteCoolidge, Hoover, and the early Roosevelt were all relatively austere.
DeleteWe can at least say of Coolidge's austerity that he did not have a major aggregate demand shortage on his hand. The idea that Hoover was a big spender is nonsense. If you want to argue that he increased spending, well yes obviously he did. The federal government is increasing spending now, but it's still relatively austere.
Relatively austere in comparison to what exactly? This seems like a claim about counter-factuals and counter-factuals are basically science fiction. Sometimes you can actually have an idea about them (since sometimes the historical record leaves the possible futures people have in mind) - what a campaign against Japan without nuclear weapons to end is a good example of such a thing - but here, well, I don't think there is any evidence to suggest why anyone would contemplate a eight or ten fold increase in the federal budget in 1933 or 1929 or even 1938 or 1940.
DeleteAnd according to your chart there "early Roosevelt" looks like almost the entirety of his administration. You'd be better off saying "the bulk of the Roosevelt administration" instead; that is far more accurate.
Compared to a position that would not be deemed "austere".
Deletere: "This seems like a claim about counter-factuals and counter-factuals are basically science fiction."
Science runs on counter-factuals. You're fundamentally misunderstanding the scientific enterprise.
Well, this is history, not science.
DeleteWhat? Your WWII example or macro?
DeleteLook, we study hostile interactions among other animals all the time. There's no reason you couldn't study military activity scientifically - and many do. Some study it less scientifically.
Anyway, I think you're being a contrarian without even thinking about what you're saying. Comparison to counterfactuals is the point of science.
Yes, we do study such things; but we don't and can't really study such things amongst say dinosaurs.
DeleteThat may be, nevertheless counterfactuals are mostly about question begging when it comes to history.
Anyway, I'm pretty skeptical of all these efforts to look at the 1920s or 1930s as a means to demonstrate the folly (or wisdom) of current policy. None of these efforts are convincing and they look like the cherry picking exercises one would expect them to be.
"Anyway, I think you're being a contrarian without even thinking about what you're saying."
DeleteAnd I must say that not only is this statement wrong it is frankly rather conceited.
Why - because I don't take your assertion that counterfactuals are science fiction seriously? Sorry - you deserve respect from me, not me taking anything you choose to write seriously. I don't think it's really disrespectful to suggest you're being contrarian. Some people revel in that role. If you expect me to take a claim like that seriously you're out of luck.
DeleteYou write, "Congress is making the same mistake today."
ReplyDeleteHaving carefully considered the question, this statement is plainly wrong. As M. Pettis has written, Keynes was very emphatic that deficits will do no good for a country with a substantial current account deficit, like the US, GB, Spain, Italy, etc., today
This remains the core misunderstanding that you and everyone else have about Keynes. In the 1930s, Keynes advocated that the United States run deficits, as it had current account surpluses.
He did not advocate deficits for GB or Europe
We have been running a 6 year experiment proving Keynes was right. Zillions in new debt but the problems remain the same. What is it that they say about insanity?
The Country that should be running deficits now is China.
The United States is not going to have any real meaningful recovery, any middle class prosperity, blah, blah, blah, until it ends its current account deficit.
Daniel, if I am wrong, Why do we coming back to currency wars?
This is interesting - can you point me to where he discusses this?
DeleteDaniel,
Deleteat least at the following links.
http://www.mpettis.com/2008/11/16/would-a-trade-war-help-solve-the-problem-of-excess-capacity/
http://www.mpettis.com/2008/11/20/rising-unemployment-increases-the-pressure-for-misguided-trade-policies/
Here is exactly why Obama's deficits didn't work:
A massive fiscal expansion by the US would certainly boost global demand, but it would do so at the expense of increasing US indebtedness by far more than it increases demand for US goods (much of the expansion in demand would simply be exported to countries that continue to suffer from overcapacity) and of course it would not solve the global overcapacity problem.
I do not recall if there are others
A most interesting paragraph is this one, at the second link.
If Keynes were around today he would probably make the same point he did over 60 years ago. Demand must be created by the current account surplus countries, which have, to date, relied on net exports to protect themselves from the consequence of their overcapacity. They must force demand up quickly in order to close the gap, and since expecting private consumption to rise quickly enough is unrealistic, it has to be public consumption – a large fiscal deficit
As for going forward:
I can’t help thinking that there is an important lesson in here for us. In the 1930s it was noteworthy that the current account surplus countries like the US and the net exporters in Latin America suffered more deeply from the crisis than did current account deficit countries, especially, it seems, once barriers to trade were imposed. The extreme case of the latter was Germany. As I understand it Germany imposed trade restrictions early, in which German imports were largely paid for in export credits, so that Germany more or less ran a balanced trade account after many years of large deficits. It was the first country to emerge from the Great Depression – in fact I don’t really think there was a depression in Germany to speak of – in part, I think, because its low savings and high trade barriers permitted the investment multiplier to work very effectively.
There is nothing new under the sun when it comes to economics. The line is very straight from Smith to Hamilton to Keynes.
A.H.
a further link
Deletehttp://www.economonitor.com/blog/2008/11/can-china-adjust-to-the-us-adjustment/
A.H.
Daniel wrote: "I'm not sure what trend growth in Hoover's case looked like (I do know his budgets came in under Harding's - so I'm not sure why Tom Woods loves Harding so much but mocks Hoover), but they were definitely below the level that would be consistent with full employment"
ReplyDeleteHow the hell would you know?
Truly.
how the hell would you know. how.
Daniel wrote: "there's not a lot of budget cutting if your reference point is spending in the recent past. All cuts are relative to a baseline."
ReplyDeleteBut what if the baseline consists of 'really big growth expectations/promises'? Would then a mere 'reasonably big growth' be a form of austerity?
This is not a rhetorical question or a trap or anything. I'm just trying to understand what you mean/have in mind here.
"I'm not sure what trend growth in Hoover's case looked like (I do know his budgets came in under Harding's - so I'm not sure why Tom Woods loves Harding so much but mocks Hoover),"
ReplyDeleteyes, this is a very good question.
There is a trend rate of growth in government spending that is consistent with full employment? Or did I read that paragraph wrong?
ReplyDeleteDaniel Kuehn: Haven't you argued before that Herbert Hoover was no "proto-Keynesian" in his response to the Great Depression?
ReplyDeleteI remember you giving a qualified defence of Hoover somewhere on this blog, and I believe you later did the same thing in one of the issues of the Quarterly Journal of Austrian Economics.
That stated, is it really appropriate for one to describe Hoover as enacting policy, from an "objective" stand-point?
Wouldn't a more appropriate description of Hoover's policy response be "ineffectual" and "confused"?
Yes, when you assume Keynesianism is true and that government spending is the solution to unemployment, then by that tautological "counterfactual", ANY amount of government spending during a period of unemployment is " below the level that would be consistent with full employment.".
ReplyDeleteBut if you think the Keynesian model is nonsense and has been falsified multiple times throughout history in serious ways (1921, 1946, Britain in the 1930s, Canada in the 1990s, etc, etc), then this fantastical appeal to imaginary "baselines" appears as little more the asserting dubious Keynesian assumptions as if they're science and nothing more.
Daniel, you recently posted a graph of NGDP charted against government expenditures. There was very little correlation between the two. NGDP growth clearly has, can and likely will continue (provided the Fed doesn't F it up) immaterial of what government spending does.
And since most government spending is a value-destroying waste that centralizes power, society will be better off by ANY reduction in that.
Papola, you don't what Keynes thought.
DeleteMoreover, you write total nonsense when you say that events in certain years falsified his ideas.
Last, since most gov't payments are transfer payments, where is the waste in such. Beyond that, you wholly disregard what gov't spending does for the asset side of the equation.
Look merely at the Gov'ts recent research into drones and electrical optics. For less than $200 million we have in hand, now, a system to turn off all outdoor night lights, saving us 1/3 of our annual energy costs.
What is funny is that the gov't is going to have to mandate that you use the necessary light bulbs and pay taxes to operate the system, again disproving wacko-libertarianism.
Your world view is so distorted you have no vision of the future.
While I wouldn't be as harsh as Alexander Hamilton has been, I'm afraid I'm going to have to side with him, Mr. Papola.
DeleteFor one thing, you cite the 1920-1921 contraction in the United States. Hasn't Mr. Daniel Peter Kuehn critiqued three scholars with libertarian affiliations on their accounts of this incident in economic history in an article in the Review of Austrian Economics?
http://link.springer.com/article/10.1007%2Fs11138-010-0131-3
You may have some truth in what you say with regard to D.P. Kuehn's use of data (the correlation between growth of nominal GDP and government expenditures). However - while I can't cite any peer-reviewed journal study on this - public investment in fact complements private investment. The overall volume of investment in an economy is composed of both public AND private expenditure.
Are you saying that the private sector can replace a huge portion (if not all) of government expenditure into investment? Well, even if it somehow managed to do so, getting people to do that won't be easy.
Ever heard of the Ellsberg paradox, Mr. Papola? It's an experiment in the decision theory literature that is a major critique of the axioms of Subjective Expected Utility decision theory - standard in academic economics, and a brainchild of three mathematicians: Bruno de Finetti, Frank P. Ramsey, and Leonard J. Savage. Daniel Ellsberg's article on it was published in the Quarterly Journal of Economics in 1961 and his findings expanded upon in a doctoral dissertation completed in 1962, but only published in 2001.
http://qje.oxfordjournals.org/content/77/2/327.extract
http://www.amazon.com/Risk-Ambiguity-Decision-Studies-Philosophy/dp/0815340222/
As far as I can tell, no Austrian School disciple has extensively engaged with Daniel Ellsberg's critique of S.E.U. or even the axioms S.E.U. decision theory itself. But the Ellsberg Paradox itself - even though it's a simplified experiment involving differently coloured balls in a few urns - can be used to explain the effect that Ellsbergian ambiguity/Keynesian uncertainty has upon investment.
In other words, the volatility of investment itself is due to expectations of the future based upon an incomplete knowledge base in which decision makers have to sort through conflicting information and partial knowledge. Ergo, most people in the private sector would be reluctant to put money into investments, or they would not have the willingness to invest because of the low prospect of a return.
If anything, Daniel Ellsberg's findings in decision theory can be applied to macroeconomics itself. Daniel Ellsberg in fact has stated that he believes that the fiscal stimulus package enacted early in the first term of President Obama was "too small", and that the most pressing economic matter right now for the United States is "unemployment". Practicing austerity doesn't help severe downturns, it tends to make them worse.
http://sebastopol.towns.pressdemocrat.com/2012/01/news/daniel-ellsberg-comes-to-sebastopol/
Furthermore, Mr. Papola, even Adam Smith stated that public expenditure into investment was important. He recommended the government establish publicly-financed educational institutions. Also, both Adam Smith and John Maynard Keynes were aware of the potentially destabilizing impact that speculation had on economies.
http://www.amazon.com/review/R3SYHVKESKHER1
For a more scholarly treatment on comparing Adam Smith and John Maynard Keynes's views on speculation, please see the following link, Mr. Papola.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225
Blue Aurora
DeleteYou are a saint, but he will never read what you have posted. Such a low information troll needs to have his vote taken away.
'
BTW, there are theories of knowledge, well beyond current economic thinking, that likely explain years like '20/21 and '46.
Take WII and the post WWII experience.
For the United States, WWII was not so such much a war as it was a publicly-financed education for 30/40 million Americans.
Consider, By how much did the experience of WWII increase the productivity of the American people between 1940 and 1945? I am talking about more than the knowledge imbedded in factories and transportation. I am talking about the increased knowledge of everyone. It would be staggering. Consider just knowledge about construction and mechanical knowledge, to say nothing of organization or finance. If one adds the knowledge imbedded in factories and transportation, while we had a large GDP/Debt ratio, our total assets, as they do now, exceeded our debts by factors of several fold.
In 1946 that "unconsidered" or "hidden" productivity was unleashed.
A good way to see such productivity in action is to look at the Soviet Union, which suffered far more damage, but by the end of the war was capable of reverse engineering the B- 29
http://en.wikipedia.org/wiki/Tupolev_Tu-4
Such a similar increase in knowledge propelled the North post the Civil War.
Again, appreciate your work, but fear it will be wholly disregarded.