We are certainly used to the fallacious Keynesian "economics" that pours forth from most of Paul Krugman's New York Times columns. That's bad enough. But dishonesty too? What's the excuse for that? In a recent column called "Fifty Hebert Hoovers," Krugman expressed fear that the nation's governors would follow in the footsteps of Hoover, with devastating consequences for the economy. And what did Hoover do that has Krugman so concerned? He writes:
No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession....
But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession.... [Emphasis added.]
Krugman here leads his readers to believe that Hoover tried to balance the budget by slashing spending. In fact, Hoover did not reduce spending. On the contrary, he increased it. If he aimed at balancing the budget, it was through tax increases not spending cuts. For example, the top marginal income-tax rate jumped from 24 to 63 percent. Anyway, he actually ran large budget deficits. In this, as in many other areas, Hoover anticipated Franklin Roosevelt. (See my article, "Bad Deal," in The American Conservative, Jan. 12.)
Does anyone believe that Krugman is unaware of that fact?
Cross-posted at Anything Peaceful.
Hey there,
ReplyDeleteI'm a big fan of the Freeman. Good work. I'm not much of an economist myself, but I sent your "Bad Deal" article to a friend and this was his response:
"I've read variations of that critique in several places over the last ten years or so. A few things that seem pertinent:
(1) Hoover did indeed authorize spending, but my understanding is that his cabinet secretaries, who did not share his view, were rather niggardly in their release of the funds. So, in effect, it became a tax increase, but not corresponding spending.
(2) The second depression of '37 and '38, as liberal economists argue, was a result of FDR suspending Keynesian economics in favour of balanced budgets. Not surprising, then, that things backslid. (Krugman bitch-slapped George Will on tv on this one).
(3) For those who say the New Deal didn't end the Depression, WWII did, well, what the hell was WWII except massive govt intervention—deficit spending and wage and price controls. Rationing and other controls forced people to save their money (as well as invest it in bonds) so that, by the war's end, there was demand and liquidity to satisfy that demand. If the "WWII ended the Depression" crowd—and they're usually on the right—want to follow their argument all the way through, then they should be demanding wage and price controls and rationing.
(4) To compare the Great Depression to earlier depressions—that is, to say that if govt had just done as before, the pain would have been short—is a bit iffy if you ask me. It ignores that all of Europe was a complete basket case and a massive drought on the Plains that exacerbated matters."
Any response? I don't know nearly as much about this subject to make a response, but I'm sure you've got something you could say. I'd appreciate it--I've been working on his Keynesianism even though I'm not the cleverest when it comes to economics.
Hoover ran budget deficits, not surpluses, so his government must have been spending the money appropriated. There was big spending on farmers; public works; grants to the states; business, banks, and railroads through the Reconstruction Finance Corporation; and relief. Remember that FDR criticized Hoover's spendthrift ways and deficits during the campaign of 1932.
ReplyDeleteThe secondary depression is attributable to the Fed, with FDR's approval, increasing reserve requirements, thereby shrinking the money supply. Krugman maintains that bigger deficit spending than FDR engaged in would have brought recovery. But it wouldn't have done that because government spending merely withdraws resources from the private economy -- distorting prices, interest rates, and the structure of production -- and devotes them to political, not consumer, purposes. FDR may not have been as big a spender as Krugman would have liked. But he was a big spender -- and taxer.
The right is wrong. The war didn't end the depression either. See Robert Higgs's work on this in "Depression, War, and Cold War." Increasing GNP through military spending and lowering unemployment through conscription and war manufacturing do not constitute recovery of the civilian economy. (The GNP figures are misleading because the price system was so badly interfered with.) Rationing and deprivation endured; it's just that people figured it was war-related. Liquidity and investment would have emerged had the government stayed out of the way and out of the war. Let's not forget Bastiat's broken window fallacy.
No one can say how long the depression would have lasted had the government practiced laissez faire. But economic theory tells us that free markets are the best bet for getting things back on track. We know that government prolonged the depression in countless ways, not least of which was the uncertainty of not knowing what FDR's Brain Trust would come up with next after, say, its brilliant undistributed profits tax.
One more thing, your friend's first point implies that executive departments could defy Congress and not spend what was appropriated. I have it on good authority that this was not how the executive branch worked back then. (Does it work that way now? Nixon tried to impound funds, but I'm not sure it's happened since.) What is your friend's evidence for his claim?
ReplyDeleteThanks for the detailed reply! He bowed out since he's not very knowledgeable about economics and couldn't continue the discussion to your kind of depth, only saying that he remembered something about Hoover's grants or loans to the states carried onerous terms, making them not especially desirable, but unsure of the source on that.
ReplyDeleteI think I'm working on that Keynesianism, though! I came out of the Sweezy neo-Marxian school so Austrian economics is quite novel to me. I'm having to relearn everything I know!
It seems your friend has not bowed out without launching a parting shot re Hoover and the states. Again, where does your friend come up with this? I've never seen Krugman or his ilk make the charge. In fact, Hoover had long been an enthusiast for public works, and he was very helpful to the states in this regard. It is true that late in his administration he lost some of his enthusiasm for direct federal public-works spending because he did not see the effects he was looking for. But this did not happen until after a doubling of federal construction. What did Hoover do? He stepped up his grants to the states.
ReplyDeleteI don't think it was a parting shot or anything--he questioned his memory of it. I'm sure he's simply misremembering it. He's not an economist or economic historian either. I'll forward him your latest post about Krugman, however. Thanks again for the response.
ReplyDeletePeople on the right do not dig deep enough...Hoover was running a deficit not because he suddenly began massive spending,but rather because the collapse of the GDP and the corresponding drop in taxes. The problem was that he didn't spend fasteter. It is a pretty simple principle: If things deflate, then inflate. Increasing taxes as Hoover did caused defalation making the problem worse. Just a late comment to the worn out rewrite of Economic history by the Glenn Beck economists of the world.
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