Tuesday, February 21, 2012

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.


  1. btw - I searched in vain for a solid estimate of the output gap in the depression.

    If anyone knows that, I think that would be a great addition to the graph above - to really highlight why it is that people call the early 1930s a period of fiscal austerity, and why it's NOT bullshit to call it that.

    1. I am not sure this is really a "solid" estimate of the output gap, but it is a starting point:


  2. Very good post, Daniel Kuehn.

    Sorry to be off-topic, but did you get to see my e-mail?

    1. Thanks!
      Ya - I saw it but I haven't gotten the chance to read anything. It looked interesting, though. It's doubtful I'll be able to add any extracurricular reading for a while.

  3. You're welcome Daniel. BTW, just for the record, I recently e-mailed Dr. Brady and he did say that he would be willing to work with you on a journal article.

  4. Daniel, I am going to take the time to go through and explain what happened in that thread, since you genuinely seem mystified. I really think you need to understand why things like that happen, so you don't go through life feeling victimized.

    First of all, those two guys shouldn't have been rude to you. Unfortunately, that doesn't seem to be a trait unique to Austrians, but to humans in general, at least ones with Internet access.

    In his post, Horwitz first quoted Krugman who wrote:

    Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.

    OK, so there's nothing in there about tax hikes. It's all about spending cuts, and although Krugman doesn't explicitly say it, the average NYT reader would certainly think that the Hoover years were characterized by sharp cuts in government spending, in response to the 1929 crash.

    So in response, Horwitz said that was a big pile of doodoo. Horwitz listed a bunch of facts showing Hoover increased spending. (Horwitz also listed facts showing deficits went up, that he hiked tax rates, and that he instituted a New Deal-lite.)

    Now I reproduce in full your first comment:

    My understanding is that the deficits were primarily caused by reduced tax revenue... that doesn't seem like an anti-austerity deficit to me.

    Also - you go on at length about raising taxes. Doesn't this buttress Krugman's point about austerity??? I really don't understand the argument on this one. How is Krugman giving us a big pile of bullshit if you turn around and then give us a whole paragraph describing Hoover's tax increases?

    As I've said in the past, this argument often boils down to people talking past each other, because everyone has their own counter-factual when they talk about "austerity". Hoover did far less then he should have done, which is why a lot of Keynesians speak ill of him, and more than you all think he should have done, which is why you speak ill of him.

    It's the same logic behind why Scott Sumner argues Bernanke has kept monetary policy tight. Sumner is exactly right, given the context of the statement. Opponents of Bernanke on the other side are right too, given their context. For this reason, I think we need to be careful about accusations.

    But I am genuinely confused on that taxes point. That seems to be making Krugman's case.

    Notice Daniel, you literally did not use the word "spending" and how you agreed with us. Right off the bat, you questioned whether the deficit figures that Horwitz offered were actually helping with Horwitz's case. Then you say the tax data buttress Krugman's case. In your next comment you are vague but the general implication is that Austrians are wrong for blaming Hoover about propping up wages, too.

    Now yes, in retrospect I can see where you thought you were making it crystal clear that you agreed with the spending point, when you wrote:

    Hoover did far less then he should have done, which is why a lot of Keynesians speak ill of him, and more than you all think he should have done, which is why you speak ill of him.

    From that one sentence, we were supposed to realize that you endorsed our stats on spending going up? People shouldn't have to go to your blog and skim to see if you've talked about spending cuts under Hoover. You totally made it sound like you were siding with Krugman against Horwitz, which could only make sense if you doubted Horwitz's data on spending.

    1. re: "OK, so there's nothing in there about tax hikes. It's all about spending cuts"

      Jerry said this too, and it's just wrong Bob. The paragraph you quoted was all about spending cuts. Elsewhere in the post Steve spent an entire paragraph talking about tax increases, which seems to buttress the claim that the Hoover administration was a period that could be characterized as "fiscal austerity".

      Why do you and Jerry act as if I have to respond to this one paragraph out of Steve's entire post?

      re: "From that one sentence, we were supposed to realize that you endorsed our stats on spending going up?"

      From not criticizing your claims about spending at all, were you supposed to think that I had problems with spending?

      I'm not clear on what the point is. Do I have to make a table of every point made in a blog post with two columns: "Agree" and "Disagree", and check off where I fall on each point that is made? I'm obviously not shy about coming out and saying that I disagree with something.

      re: "You totally made it sound like you were siding with Krugman against Horwitz, which could only make sense if you doubted Horwitz's data on spending."

      I'm still confused about what I said that implies that I think Hoover cut spending. I've reread my comment several times now. I never said that. Are you suggesting that if one says that (1.) a big part of a deficit is caused by reduced revenue, and (2.) there were tax increases that that implies spending was cut? I don't see the logical chain there.

      Anyway - what was even more annoying about the whole thing is that the post got off Hoover because a handful of people demanded I defend a claim I never made.

      Which is my point in this post, to make two things very clear:

      1. Hoover raised spending.
      2. The Hoover administration can be fairly characterized as "fiscal austerity"

      I stand firmly by both of those, just as I always have.

    2. re: "People shouldn't have to go to your blog and skim to see if you've talked about spending cuts under Hoover."

      I don't expect them too, I was just pointing them out.

      Now if I don't expect them to browse my blog to find my opinions, I think it's fair that they shouldn't invent opinions for me.

      Don't you think that's fair?

    3. "In your next comment you are vague but the general implication is that Austrians are wrong for blaming Hoover about propping up wages, too.

      The Austrian obsession with flexible wages is just another version of the Walrasian fable that there is a unique price vector that clears all markets, including the labour market. That requires the mythical Walrasian auctioneer who adjusts prices to clear all markets, amongst other unrealistic assumptions.

      In fact, even with perfectly flexible wages and prices you can still have involuntary unemployment, as Keynes showed long ago.

      Moreover, cutting wages in the context of a deep private debt crisis (as in 1929-1933) just causes the catastrophe of debt deflation, as Irving Fisher long ago pointed out.

      And cutting wages wouldn't have stopped the banking collapses in 1929-1933, a major source of the collapse in aggregate demand.

    4. Actually lord keynes, the wage rigidity was a major cause of the banking panics. Stiff wages lead to large losses in major firms, reducing the equity values of the banks that held their securities (bonds stocks etc). With less equity, more banks moved from the illiquid to the insolvent category. People panicked. See vedder and galloway on this.

    5. Your explanation of the banking panics is nonsense.

      Early wage rigidity, if anything, allowed debtors to continue servicing debts, which helped the financial sector. When wage cuts really did hit from 1931, was the depression reversed?

      Wage cuts drove both debtors and creditors into bankrupcy

      And the collapse in equity values was caused by distress selling, a familiar part of Fisher's debt deflationary theory.

    6. And anyway the stock market and equity crash began before Hoover tried to convince certain industrialists to maintain wages.

    7. I'm not saying the sm crash was caused by wage rigidity, but that later declines in stocks and bank panics were caused by massive business losses and their inability to cut costs and liquidate. Real wages rose after wages were cut because they declined sluggish and they were less than process declines. Best in mind most loans were consumer based. And I'm talking about business stocks and bonds that make up a banks equity

  5. I cannot understand any economic theory that explains depressions as a result of too much/too little spending. The entire devil is in the details (spending on what, why, by whom etc).

    You're making Keynesianism appear very crude in this article.

    1. "The entire devil is in the details (spending on what, why, by whom etc)."

      Spending in accordance with the utility preferences of private agents who receive an income from government stimulus or extra spending power through tax cuts??

      Socially and economically useful public investment?

  6. Daniel, considering Krugman's definition of 'austerity economics' didn't mention tax increases, how could evidence of tax increases "buttress Krugman's point about austerity"?

  7. Nice, reasonable post. I've been following a bit of the anti-Krugman blogging, and I've noticed that most is focused just on data. I think it's important to ask whether the data tells the whole story of Hoover. I'm definitely NOT a historian of the era, but it's my understanding of the Hoover years that Congress generally was responsible for the spending, while Hoover remained a fan of austerity. While this wasn't true in every instance, the tendency played out in the election that followed, when Hoover was successfully painted by Roosevelt as being cold and uncaring. If there is truth to my understanding, then pundits may correctly call Hoover an "austerian," even while spending ticked up a bit.


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