Tuesday, April 9, 2013

Hoover on Keynes, in 1936

"I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor."

- Herbert Hoover, "Challenge to Liberty", October 30th, 1936


Hoover had some good things going for him and some less good things.

A lot of the "Challenge to Liberty" speech is about the constitutional abuses of the New Deal programs. On a lot of these, I think Hoover has a point. The New Deal is kind of an amorphous blob of a lot of different ideas and programs. There were some very good public investments. But there was also a lot of bad tinkering and price fixing. Much of that got struck down. Overall it wasn't particularly impressive as fiscal policy. The general sense of economists is that fiscal policy didn't really get much of a chance until WWII. Monetary policy made a difference earlier in the thirties. On the margin some spending helped people. There is an interesting literature on the impact that Roosevelt had on expectations. But little was done in the way of proper macroeconomic policy. As far as the tinkering goes, Hoover spoke out adamantly against it. That was probably a good thing.

Hoover was perfectly happy to make the public investments that Roosevelt continued and expanded upon, through the RFC for example. He suggested such things earlier in 1920-1921 (although his recommendations came a little too late - we were already on the upswing when they reached Harding's desk). This is a good side of Hoover too.

His philosophy of "associationalism" is nice too. It's an early version of action through what we now call "civil society".

But - in his own words - he "vetoed the idea of recovery through stupendous spending to prime the pump". In other words, Hoover was an austerity guy. He was fine with smart public investments, he was not fine with fiscal policy as a means to achieve full employment.

Aside from this sin of omission, he was also confused and counter-productive on a few things. The wage conferences are a great example (although research suggests it didn't do all that much), same with the tariff and the tax increases (there are doubts about how much damage the tariff really did too).

He was an austerity president. He was also a sympathetic president. He was not a libertarian. He was not a Keynesian. He was generally a fan of markets, liberalism, and the Constitution.

Ultimately, he just got dealt a really shitty hand. In another time I think he would have done well.


  1. If you were in Hoover's situation, what policies would you enacted and how would you have structured the New Deal programs?

    1. I would have lured Goddard away from Clark University and started NASA.

      And built the interstate highway system.

  2. Perhaps I'm missing something huge here, what exactly constitutes an "austerity president", as it doesn't look like it has much to do with spending in Hoover's case?

    1. I don't think you're missing anything - it's a fuzzy term and if people come in to dispute the application I think everyone needs to agree it's a fuzzy term (that doesn't mean abandoning arguments one way or another - just an awareness of how contingent its application is).

      It has a lot to do with spending.

      The spending for WWII was a benchmark. Vernon estimates that closed something like half of the output gap (earlier monetary policy closed the other half). Hoover and the early Roosevelt did nothing like that - it didn't even approach those magnitudes. They were more in line with Harding and Coolidge. When you're facing a depression, that's "austerity" IMO. If you want to disagree, then I'd obviously concede that it's a little fuzzy, there are no hard lines, and I'd try to explain my logic (like I just did).

    2. Fine, fine. He would also be equally an "opulence president" (or whathaveyou) as well by such fuzzy standards.

      And, if after WWZ where spending has seen an even higher benchmark, do prior "oppulence presidents" get reclassified as austere?

    3. I'd contend that the case that he is an "opulence president" would be a shoddy case.

      Noting that a word is fuzzy is not the same as saying it's a free for all, KP. You still have to have a sensible argument.

    4. Of course, but the sensible case for the "opulent" Hoover had been made extensively already.

      I'd go further and say that those who argue and defend said argument would in turn say that Hoover the "austere president" is the actual shoddy case.

    5. And I've discussed extensively why I don't think it's very sensible.

      If you are just letting me know there's a disagreement, I assure you I'm aware.

      You said "he would also be equally an 'opulence president'...by such fuzzy standards". That just seems wrong. But the standards I laid out (which admittedly are fuzzy, but not unintelligible) you would be hard pressed to conclude he was an opulence president.

      I'd think that would be obvious, since the people that disagree with me on this most decidedly do not use my standards for judging!

    6. I think hypothetically arguing under such lines for his "opulence" would be quite easy. Perhaps said fuzzy standards look even fuzzier to me though.

  3. Oh, this is a great post and the actual Hoover quote is a phenomenal find.

    Good work all around.

  4. Linked to you on my blog.

  5. "Oh, this is a great post and the actual Hoover quote is a phenomenal find."--LK

    added by Bob: "Now we can stop quoting a line that Hoover explicitly renounced! This is so much less awkward."

    1. Disagree.

      If we stop quoting that line we'll cover up some of the internal tensions in the Hoover administration and that stuff is interesting and good to get a full sense of who Hoover was.

      So let's do both.

    2. >same with the tariff and the tax increases (there are doubts about how much damage the tariff really did too).

      Semi-layman here. I've always been under the impression that closed economies in depressions have higher fiscal multipliers than open economies in depressions.

      Actually, here's a source: http://www.nber.org/digest/mar11/w16479.html

      There's also the fact that the impossible trinity implies that capital mobility undermines the effectiveness of monetary policy, and that imports create revenue/employment in countries that we are unable to tax and gain federal revenue from.

      Now can someone please explain why economists view tariffs during a depression as a *negative* thing?

      Don't get me started on lowering taxes during a depression; I don't see why more liquidity in the private sector is helpful during a liquidity trap.

    3. Sorry, I meant to make my comment a top-level comment.

    4. IMO if you're citing NBER working papers you are a little more than a "layman" (although perhaps that's why you added "semi-").

      Yes, you're right on the multipliers point - it's simply a demand leakages argument. This has good theoretical and empirical backing as far as I know. I'm not sure I'd say that makes tariffs good during a recession. They are also just a tax, and a tax is going to reduce demand. There's still such a thing as a balanced budget multiplier (since we can think of the government's MPC/MPI as 1), but it seems better just to not impose the tax in the first place.

      Anyway, this is all part of why people think the tariff wasn't as disastrous as a lot of people used to say it was. Trade collapsed because the world was in a depression and would have collapsed anyway. I'm sure tariff wars contributed (that's another reason not to like them - for every tariff we put on our imports someone else is likely to put them on their exports), but they weren't the deciding factor.

      Krugman always makes the distinction between the efficiency and the output effects of free trade. Freeing trade isn't going to give you some huge boost in output. What it does is make your economy more efficient.

      So I wouldn't say tariffs are uniquely bad during a depression (in fact for the reasons you state they might be less bad during recessions than during growth years). But I still feel pretty comfortable putting that in the "bad idea" column for Hoover. It just wasn't a good idea in general. That it was somewhat less bad because it came during a depression is not all that redeeming IMO.

    5. I appreciate the reply, but it still seems apparent that the increase in demand caused by an increase in consumed U.S. goods should outweigh the decrease in demand caused by the tariff taking money out of people's pockets. After all, taxes have smaller multipliers than paying people to dig ditches, do they not?

      As an electrical engineer who occasionally enjoys physics, I'm a fan of thought experiments. Here's one: Suppose that the government mandated that in order to get an alarm clock, customers would have to either: 1) help an unemployed person get a job by paying 1% of his/her proposed salary, or 2) help pay down government debt by paying a small tax on that alarm clock.

      That's essentially what a tariff is: forcing people to either 1) Buy American, and increase demand with a multiplier greater than 1, or 2) Help pay down the government debt, which will eventually help in the long run. The alternative is to allow customers to buy foreign goods which carry a multiplier of 0.00, and allow American workers to gain a comparative advantage in *being unemployed*.

      With respect to the "retaliation" argument, I figure that in worldwide depressions (where export-led recoveries are unlikely), it would actually be better if every country closed down their borders and worked on getting their economy back to full employment. In fact, one thought experiment that I did led me to believe that a worldwide depression would end if each and every household closed off their "imports" (i.e. stopped going to the supermarket), grew their own food, made their own Flintstone-level technology using sticks and stones in their backyard, and essentially stopped all specialization and exchange. In that regard, depressions can be seen as a "reset button" that reverses the level of specialization-and-exchange; once the full reversal is complete, then it can be increased again.

      This actually explains why there is an "output gap" between GDP trends before a depression and after a depression, and that the "output gap" remains relatively constant over time if yo extrapolate the trends. The right end of this graph is what I'm talking about: http://1.bp.blogspot.com/-fLxqUhQ69Yo/TwJ027ftuiI/AAAAAAAACaU/KU_vigCmL0o/s1600/Output+Gap+Barcap.bmp

      Anyways, I suppose I went off on a long rant, and I have no mathematics to support my models. But I still think that there is strong evidence to show that tariffs during a depression should be considered as positive.

      Oh, also, I expect this post to do well on reddit.com/r/economics: http://www.reddit.com/r/Economics/comments/1c0adh/i_vetoed_the_idea_of_recovery_through_stupendous/.

  6. If we stop quoting that line we'll cover up some of the internal tensions in the Hoover administration...

    Ahh, so Krugman produced that quote, to show his readers the internal tensions in the Hoover Administration?

    OK, *now* I promise I'll leave you alone on this...

    1. re: "Ahh, so Krugman produced that quote, to show his readers the internal tensions in the Hoover Administration?"

      I don't think so. Did you get that?

      I thought he used it to show a particularly colorful example of austerianism in the thirties.

    2. oh, by the way, he (Murphy) was being sarcastic.

    3. Thanks for that Narrator. I was a ship adrift before you came along to let me know.

    4. hey, wait a minute, now you'e the one being sarcastic.

      (btw, if you'd wanted to re-enact the Simpsons scene accurately you should have said 'well, duh' (because that's what Marge said in response to Homer))

  7. "Bob MurphyApril 9, 2013 at 2:29 PM
    Now we can stop quoting a line that Hoover explicitly renounced! This is so much less awkward."

    Not at all.

    In fact, you ought to read the true meaning of that Hoover quote:


  8. I don't think this quote shows that that Hoover was an austerity president. I think an austerity president is one who is focused on balancing the budget in the short term. (I guess Obama might be called an austerity president) But that is a far cry from merely rejecting Keynesianism. Even if you don't want to prime the pump, you might still be partial to deficit spending to take advantage of record-low interest rates, or merely as a humanitarian effort. (Longer unemployment for instance)

  9. "The spending for WWII was a benchmark. Vernon estimates that closed something like half of the output gap (earlier monetary policy closed the other half)."
    OMG. How can he possibly know this? or estimate it even? I'm sure he has his models and what not, but truly, do you know how incredibly complex an economy is? And this guy just goes around making statements like this. and other people quote him seemingly approvingly.

    Hayek weeps uncontrollably.

    1. a decimal point... that's the only thing that's missing from a statement like this. If this guy got a decimal point somewhere in his 'estimates' he'd be unbeatable. (indirect h/t Russ Roberts)

    2. Yeap. He made some estimates and he's probably off by some or maybe by a lot and maybe he even has the sign wrong. All of which means that if you think his model is bunk or his data is bunk, you'll think he is wrong. And if you think his model is plausible, you'll think his estimate is probably better than the output of randint. It turns out in the real world, science is really messy. It's not the clean-cut thing they teach you in HS.


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