Herbert Hoover Myths?

If you believe this video, then Herbert Hoover was a quite serious interventionist, whose government interventions allegedly exacerbated the Great Depression.




I have gone though the major issues raised in these Austrian charges against Hoover before in these posts:

“That ‘Liquidationism’ Passage in Hoover’s Memoirs,” April 9, 2013.

“Herbert Hoover Rejected Keynesianism,” April 9, 2013.

“Steven Horwitz on Herbert Hoover: Mostly Misleading,” February 20, 2012.

“What Hoover Should have Done in 1931,” January 26, 2012.

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.

“Smoot Hawley and the US Contraction of 1929–1933,” February 26, 2011.

But I can review the important points below.

(1) It is indeed true that Hoover was not a liquidationist. Hoover is unfairly caricatured as an advocate of the extreme liquidationist solution to the Great Depression, a solution which was actually recommended by Andrew Mellon (US Treasury Secretary from 1921–1931). Hoover rejected extreme liquidationism, and attempted to fight the onset of the Great Depression with a number of limited interventions, including increased government spending.

Hoover described the situation in his memoirs:

“Two schools of thought quickly developed within our administration discussions.

First was the ‘leave it alone liquidationists’ headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:

‘Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.’ He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: ‘It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.’ He often used the expression, ‘There is a mighty lot of real estate lying around the United States which does not know who owns it,’ referring to excessive mortgages.

....

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.” (Hoover 1953: 29–30).

But Hoover’s interventions were mostly designed to “cushion the situation” and “mitigate the privation among the unemployed” – not to rapidly end the depression with the necessary level of fiscal stimulus in the way a Keynesian would advocate.

In fact, Hoover said explicitly that he rejected Keynesianism:

“During my four years powerful groups thundered at the White House with these same ideas [i.e., the ideas of Roosevelt’s New Deal – LK]. Some were honest, some promising votes, most of them threatening reprisals, and all of them yelling ‘reactionary’ at us.

I rejected the notion of great trade monopolies and price-fixing through codes. That could only stifle the little businessman by regimenting him under the big brother. That idea was born of certain American Big Business and grew up to be the NRA [National Recovery Act].

I rejected the scheme of ‘economic planning’ to regiment and coerce the farmer. That was born of a Roman despot fourteen hundred years ago and grew up into the AAA [Agricultural Adjustment Act].

I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.

I defeated other plans to invade State rights, to centralize power in Washington. Those ideas were born of American radicals.

I stopped attempts at currency inflation and repudiation of government obligation. That was robbery of insurance-policy holders, savings-banks depositors and wage earners. That was born of the early Brain Trusters.”
http://newdeal.feri.org/court/hoover02.htm

A look at the fiscal details of his administration confirms that he was not lying.

(2) Regarding Smoot Hawley, while it undoubtedly hurt foreign export-led growth nations dependent on the US market, it was not a major factor in the US contraction from 1929–1933, as Peter Temin has argued:

“A tariff, like a devaluation, is an expansionary policy. It diverts demand from foreign to home producers. It may thereby create inefficiencies, but this is a second-order effect. The Smoot-Hawley tariff also may have hurt countries that exported to the United States. The popular argument, however, is that the tariff caused the American Depression. The argument has to be that the tariff reduced the demand for American exports by inducing retaliatory foreign tariffs … Exports were 7 percent of GNP in 1929. They fell by 1.5 percent of 1929 GNP in the next two years. Given the fall in world demand in these years from the causes described here, not all of this fall can be ascribed to retaliation from the Smoot-Hawley tariff. Even if it is, real GNP fell over 15 percent in these same years. With any reasonable multiplier, the fall in export demand can only be a small part of the story. And it needs to be offset by the rise in domestic demand from the tariff. Any net contractionary effect of the tariff was small” (Temin 1989: 46).

(3) Regarding Hoover’s idea of maintaining high wages, he was not simply forcing this policy on huge numbers of unwilling corporate leaders: first, it was mostly a voluntary policy and, secondly, the idea had permeated the corporatist thinking of many business people in the 1920s.

Many influential industrialists actually supported it; Hoover was basically articulating an influential opinion they already held, and whatever harm it did as prices fell, one must blame the private sector just as much as Hoover.

BIBLIOGRAPHY
Hoover, Herbert. 1953. The Memoirs of Herbert Hoover. The Great Depression, 1929–1941 (vol. 3). Hollis and Carter, London.

Temin, P. 1989. Lessons from the Great Depression. MIT Press, Cambridge, Mass.

Herbert Hoover Rejected Keynesianism

And he tells us explicitly that he did so in a speech in October 1936, when describing his time as president, recently cited by Daniel Kuehn in a really excellent post here.

I cite the full quotation below:

“During my four years powerful groups thundered at the White House with these same ideas [i.e., the ideas of Roosevelt’s New Deal – LK]. Some were honest, some promising votes, most of them threatening reprisals, and all of them yelling ‘reactionary’ at us.

I rejected the notion of great trade monopolies and price-fixing through codes. That could only stifle the little businessman by regimenting him under the big brother. That idea was born of certain American Big Business and grew up to be the NRA [National Recovery Act].

I rejected the scheme of ‘economic planning’ to regiment and coerce the farmer. That was born of a Roman despot fourteen hundred years ago and grew up into the AAA [Agricultural Adjustment Act].

I refused national plans to put the government into business in competition with its citizens. That was born of Karl Marx. I vetoed the idea of recovery through stupendous spending to prime the pump. That was born of a British professor. I threw out attempts to centralize relief in Washington for politics and social experimentation.

I defeated other plans to invade State rights, to centralize power in Washington. Those ideas were born of American radicals.

I stopped attempts at currency inflation and repudiation of government obligation. That was robbery of insurance-policy holders, savings-banks depositors and wage earners. That was born of the early Brain Trusters.” (Hofstadter 1968: 259–260).
http://newdeal.feri.org/court/hoover02.htm

So there you have it.

Even though Hoover in his autobiography said that he had rejected the “hard liquidationism” of Andrew Mellon, he was also adamant that he “vetoed the idea of recovery through stupendous spending to prime the pump.”

And he was not lying as I have demonstrated again and again:

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011.

“What Hoover Should have Done in 1931,” January 26, 2012.

“Steven Horwitz on Herbert Hoover: Mostly Misleading,” February 20, 2012.

BIBLIOGRAPHY
Hofstadter, Richard. 1968. Ten Major Issues in American Politics. Oxford University Press, New York.

Steven Horwitz on Herbert Hoover: Mostly Misleading

Steve Horwitz presents an Austrian view of the economic history of Herbert Hoover’s administration here:

Steve Horwitz, “Ol’ Kruggie is at It Again,” Coordination Problem, February 20, 2012.

However, I think it is ultimately more misleading than illuminating.

First, credit where credit is due: Horwitz is perfectly correct that Hoover was not a liquidationist. Hoover is unfairly caricatured as an advocate of the extreme liquidationist solution to the Great Depression, a solution which was actually recommended by Andrew Mellon (US Treasury Secretary from 1921–1931). In truth, Hoover rejected extreme liquidationism, and attempted to fight the onset of the Great Depression with a number of limited interventions, including increased government spending. On this, Krugman is wrong to suggest that Hoover was a true liquidationist or that he advocated “savage spending cuts.” Horwitz gets this right, but the rest of his post is poor history without proper context.

Let us review the points Horwitz makes:

(1) First, some background. In the US, the fiscal year before 1976 ran from July 1 to June 30 in the next year. So in the relevant years the actual fiscal years were as follows:

Fiscal 1929: July 1, 1928 – June 30, 1929
Hoover inaugurated March 4, 1929
Fiscal 1930: July 1, 1929 – June 30, 1930
Fiscal 1931: July 1, 1930 – June 30, 1931
Fiscal 1932: July 1, 1931 – June 30, 1932
Fiscal 1933: July 1, 1932 – June 30, 1933
Roosevelt inaugurated March 4, 1933.

The figures for federal government spending and the surplus/deficit:

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.

I quote Horwitz’s comments below and then reply to them:

“The 1929 budget was $3.1 billion, and Hoover’s first budget in 1930 had $3.3 billion in spending, followed by $3.6 billion, $4.7 billion, and $4.6 billion over the following three years.”

Yet Horwitz leaves out the following crucial points:

(i) In fiscal year 1930 (July 1, 1929 – June 30, 1930), as the depression became a very serious contraction indeed, Herbert Hoover actually ran a federal budget surplus, not a deficit. The net effect of federal fiscal policy on its own was contractionary, not expanionary. Hoover’s first deficit was in fiscal year 1931, when the US economy had already begun contracting severely.

(ii) The Federal Reserve raised the discount rate in 1931.

(iii) Hoover also cut spending in fiscal year 1933, and the net effect of federal fiscal policy in fiscal 1933 was contractionary against 1932. This was made worse by the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years (a measure which, curiously, Horwitz later mentions, but fails to understand properly). These were highly contractionary measures, and these two policies are the very antithesis of Keynesianism!

(iv) This leaves us with fiscal years 1931 and 1932. In both years it has long been known that federal fiscal policy was mildly expanionary, but not large relative to the GNP collapse. In 1931, for example, fiscal expansion included the Veterans’ Bonus Bill, but this was passed over Hoover’s objections. Hoover does not look like a big spending Keynesian on this score.

Now the budget may have expanded demand by 2% of GNP in 1931 more than the 1929 budget, but this was not large relative to the collapse of GNP, which is the key (Temin 1989: 27–28). In 1931, GNP collapsed by 16.11% relative to its level in 1930, from $91.2 billion to $76.5 billion. That is to say, in 1931, US GDP collapsed by $14.7 billion dollars, in a debt deflationary spiral with bank failures and a collapse in consumption, employment and investment. If we assume a multiplier of 4 (which is very high), then Hoover’s federal spending increase of $257 million dollars in fiscal year 1931 might have generated at most $1.028 billion of GDP in fiscal year 1931 (the effect of state and local fiscal policy reduced this, however). But GDP fell by $14.7 billion dollars, and it is the height of idiocy to seriously argue that Hoover’s increase in spending in fiscal year 1931 could have prevented the depression, to offset such a catastrophic fall in GDP. It could never have done any such thing.

Much the same applies to fiscal year 1932. In 1932, US GDP collapsed by $17.8 billion dollars. If we assume a multiplier of 4 again, in theory Hoover’s federal spending increase of $1.082 billion dollars might have generated $4.32 billion of GDP in fiscal year 1932 (in practice, state and local austerity, however, counteracted the effect of federal fiscal policy). But that was not even remotely enough to stop a collapse in GDP of $17.8 billion dollars.

(2) Horwitz continues:

“In nominal terms, [sc. Hoover] … increased spending 48 percent over the last budget of the previous administration. However, this period was one of significant deflation, so if we adjust for the approximately 10 percent per year fall in prices over that period, the real size of government spending in 1933 was almost double that of 1929.”

There is a crucial point Horwitz leaves out: in 1929, total federal spending was only about 2.5% of GNP (Stein 1966: 189–223). Government spending as a percentage of GNP rose in 1929–1933 mostly because GNP collapsed, not because Hoover radically increased government spending. Look at the actual annual increases in federal spending here:

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).

Total spending was cut in 1933. If we look at the federal spending increases in the 1920s, 6–7% increases in fiscal 1930 and 1931 were not really much larger than the annual increases that had happened in the 1920s. There was nothing spectacular about Hoover’s spending increases in fiscal 1930 and 1931. In fiscal 1930, Hoover actually ran a budget surplus and drained money and contracted demand in America’s economy.

The only year that does stand out is fiscal 1932, where there was a 30.25% rise over fiscal 1931. But even here we are talking about an increase of only $1.08 billion in a year when GNP fell by $17.8 billion dollars. Hoover’s increase in fiscal 1932 was feeble and ridiculously small compared to the scale of the GNP decline.

(3) Horwitz:

“The budget deficits of 1931 and 1932 represented 52.5 percent and 43.3 percent of total federal expenditures. No year between 1933 and 1941 under Roosevelt had a deficit that large.”

I am not sure how the first figure was calculated. In fiscal 1931 the federal budget was $3.577 billion and the deficit was $0.5 billion. I calculate that the deficit was merely 13.97% of total federal expenditures in fiscal 1931. In fiscal 1932, the deficit was 57.9% of total federal expenditures. But this figure is grossly misleading without further context. The deficit was not large relative to the size of the GNP collapse.

(4) Horwitz lists a number of interventions Hoover introduced in 1931, such as the Reconstruction Finance Corporation, Home Loan Bank, Hoover’s executive order on immigration, enforcement of anti­trust laws, and so on. A number of them have nothing to do with Keynesian fiscal stimulus, and even those that do (e.g., Public Works Administration, direct loans to state governments) were done on a scale far too small to stop the Great Depression.

(5) Horwitz:

“On top of those spending proposals, … Hoover proposed, and Congress approved, the largest peacetime tax increase in American history. The Revenue Act of 1932 increased personal income taxes dramatically, but also brought back a variety of ex­cise taxes that had been used during World War I. The higher income taxes involved an increase of the standard rate from a range of 1.5–5 percent to the 4–8 percent range. On top of that increase, the act placed a large surtax on higher-income earners, leading to a total tax rate of anywhere from 25 to 63 percent. The act also raised the corporate income tax along with several taxes on other forms of income and wealth.”

It is most extraordinary that this is presented as if it is evidence that Hoover was a Keynesian. Raising taxes like this in a depression is contractionary fiscal policy. If anything, a true Keynesian would have passed large tax cuts in 1932, not raised taxes. Hoover on this policy action was no Keynesian.

(6) Finally, Horwitz notes that some of the measures of the New Deal were already introduced by Hoover. Yet a number of the elements of the New Deal had nothing to do with Keynesian economics, and indeed Keynes himself denounced the National Industrial Recovery Act (NIRA). The New Deal was created by a hodgepodge of conflicting groups of ideologues and its programs were not all constructive from the modern Keynesian perspective at all.

(7) Finally, it is fascinating that Austrians like Horwitz never seem to look outside the United States at depression history. Those nations that recovered from the Great Depression or its aftermath rapidly and successfully – New Zealand, Japan and Germany – used large-scale fiscal stimulus:

“Keynesian Stimulus in New Zealand: 1936–1938,” September 23, 2011.

“Takahashi Korekiyo and Fiscal Stimulus in Japan in the 1930s,” August 27, 2011.

“Fiscal Stimulus in Germany 1933–1936,” September 3, 2011.

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For more on Hoover and the New Deal and Austrian nonsense about these subjects, see my posts here:

“Keynes on the New Deal in 1933,” September 2, 2011.

“Herbert Hoover’s Budget Deficits: A Drop in the Ocean,” May 24, 2011

“What Hoover Should have Done in 1931,” January 26, 2012.

BIBLIOGRAPHY

Stein, H. 1966. “Pre-Revolutionary Fiscal Policy: The Regime of Herbert Hoover,” Journal of Law and Economics 9: 189–223.

Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.

What Hoover Should have Done in 1931

The tired and idiotic meme that Hoover tried a properly designed Keynesian stimulus in 1931 and 1932, and that this allegedly should have stopped the Great Depression continues to permeate the minds of various Austrians.

Robert P. Murphy quotes from his book The Politically Incorrect Guide to the Great Depression and the New Deal (2009) in a recent blog post:

“As with the evaluation of Hoover’s high-wages policy, his high-federal-budget policy can be usefully contrasted with the depression occurring at the end of Woodrow Wilson’s watch. With the conclusion of World War I, the U.S. government slashed its budget from $18.5 billion in FY 1919 down to $6.4 billion one year later. As the U.S. economy entered a depression at the turn of the decade, receipts fell. The Wilson Administration responded by cutting spending even more, down to $5.0 billion in FY 1921 and then following with a single-year slash of 34 percent, down to $3.3 billion in FY 1922. (Because of the fiscal/calendar year mismatch, it is debatable whether Wilson or Harding should be associated with the FY 1922 budget.)

So how do the two strategies stack up? We already know that Hoover faced 20+ percent unemployment after the second full year of his Keynesian stimulus policies. Wilson/Harding, on the other hand, was Krugman’s worst nightmare, taking the axe to federal spending in a way that would have given even Ron Paul the willies, and during a depression to boot! Yet as we already know, unemployment peaked at 11.7 percent in 1921, then began falling sharply. The depression was over for Harding, at the corresponding point when a desperate Hoover had decided to (try to) rein in his massive budget deficits” (Murphy 2009: 49).

Some basic facts should be stated first:

(1) In fiscal year 1930, Hoover actually ran a federal budget surplus, not a deficit. Federal policy was contractionary in this fiscal year.

(2) The Federal Reserve raised the discount rate in 1931.

(3) In fiscal year 1933, total federal spending was cut in relation to fiscal year 1932. Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years. These were contractionary measures, and these two policies are the very antithesis of Keynesianism stimulus.

Murphy declares that Hoover engaged in “Keynesian stimulus policies.” If by this he means that the effect of federal government fiscal policy was weakly expansionary in 1931 and 1932 relative to the collapse of GNP, this is true enough. In 1931, for example, it is well known that fiscal policy was expansionary: one of the stimulative measures (passed over Hoover’s objections, however) included the Veterans’ Bonus Bill. The budget may have expanded demand by 2% of GNP in 1931 more than the 1929 budget, but this was not large relative to the collapse of GNP, which is the key (Temin 1989: 27–28). In 1931, GNP collapsed by 16.11% relative to its level in 1930, from $91.2 billion to $76.5 billion.

If by these words he means that Hoover engaged in the type of proper stimulative Keynesian fiscal expansion designed to halt the depression to restore growth, he is wrong, and contemptibly wrong.

In fiscal years 1931 and 1932, Hoover did indeed raise federal spending (especially in 1932), but it was woefully inadequate. In no sense do these miserable increases compared to the scale of the GDP collapse contradict Keynesian economics. Once you factor in state and local austerity and surpluses total federal spending increases was reduced.

In order to stimulate an economy back to its growth path and potential GDP, one has to do the following:

(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.

In 1931, US GDP collapsed by $14.7 billion dollars, in a debt deflationary spiral with bank failures and a collapse in consumption, employment and investment. If we assume a multiplier of 4 (which is very high), then Hoover’s federal spending increase of $257 million dollars in fiscal year 1931 might have generated at most $1.028 billion of GDP in fiscal year 1931 (the effect of state and local fiscal policy reduced this, however).

But GDP fell by $14.7 billion dollars, and it is the height of idiocy to seriously argue that Hoover’s increase in spending in fiscal year 1931 could have prevented the depression, to offset such a catastrophic fall in GDP. It could never have done any such thing.

To stop the downturn, Hoover needed to do the following:

(1) spend an additional $3.675 billion in fiscal year 1931 in stimulus;

(2) Hoover needed to at least stop fiscal contraction by states and local government, so some bailout of them was necessary to make (1) work.

He did no such thing. Not even close. $257 million dollars is not $3.675 billion. Hoover’s federal fiscal expansion was 6.9% of the sum required.

Of course, if Hoover had quickly stabilised the banking system in 1931, the GNP collapse would have been significantly reduced as well, and the scale of the needed stimulus would have been reduced too.

There is an easy empirical way to demonstrate that a Keynesian stimulus failed and that, moreover, something is wrong with Keynesian theory:

(1) in an economy experiencing a recession, calculate potential GDP, estimate the Keynesian multiplier and
(2) design fiscal policy to expand demand by tax cuts and/or appropriate level of discretionary spending increases to hit potential GDP via the multiplier, and if
(3) the stimulus is implemented and
(4) GNP continues to collapse, then you have empirical evidence that your stimulus failed, and that there are problems with your theory.

If in 1931, Hoover had designed a fiscal policy that stimulated the economy by an additional $3.675 billion, and US GNP had simply continued to collapse, then this would have been a failed stimulus. It would provide strong empirical evidence against Keynesian theory.

However, no such thing was ever done. Keynesianism did not fail, because Hoover never tried a proper Keynesian stimulus. Hoover’s fiscal policy in 1931 and 1932 was weak and feeble fiscal expansion, woefully inadequate.


BIBLIOGRAPHY

Murphy, Robert. P. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery Publishing, Inc. Washington, DC.

Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.

Some Miscellaneous Links

I’ll post below some interesting links I’ve seen recently:

(1) Marshall Auerback, “Worse than Hoover,” New Economic Perspectives, July 25, 2011.
This is a great little essay by Marshall Auerback on Herbert Hoover’s corporatism and limited, but woefully inadequate, government interventions from 1929–1933, and how Obama has never really been any sort of progressive on economics.

(2) Bill Mitchell, “3 Million Americans or so May Find out the Truth,” Billy Blog, July 26, 2011.

Bill Mitchell, “When Might That Be?” Billy Blog, July 21, 2011.
Some great links from Bill Mitchell on the debt ceiling fiasco.

(3) Paul Davidson, “Making Dollars and Sense Out Of The U.S. Government Debt,” Journal of Post Keynesian Economics 32 (2010).
Some much needed balance on the public debt and its significance from a leading Post Keynesian called Paul Davidson.

(4) James Galbraith, On Deficit Hysteria, Left Business Observer, July 23, 2011.
A good audio interview with James Galbraith on Doug Henwood’s Left Business Observer website (scroll down for various other formats of the interview).

(5) L. Randall Wray on the Debt Ceiling, 14 July 2011.
This is a short interview with Randall Wray on Russia Today, with some curious references to Ron Paul, the Fed’s toxic assets, and the limitations of monetary policy.

Herbert Hoover’s Budget Deficits: A Drop in the Ocean

The meme that Herbert Hoover was some type of big spending Keynesian seems to be an especial favourite of Austrians, and some examples of this idea can be seen here:

Stefan Karlsson, “Again Herbert Hoover Was No Deficit-Cutter,” Thursday, March 11, 2010.

Robert P. Murphy, “Did Hoover Really Slash Spending?” Mises Daily, May 31, 2010.

Typically, once such claims are examined they collapse like a house of cards.

It is of course true that Hoover often gets unfairly blamed as an advocate of the extreme liquidationist solution to the Great Depression, a solution which was actually recommended by Andrew Mellon (US Treasury Secretary from 1921–1931). In truth, Hoover rejected extreme liquidationism, and attempted to fight the onset of Great Depression with a number of limited interventions, including increased government spending.

But the idea that Herbert Hoover’s small budget deficits could ever have stopped the Great Depression remains absurd, and Herbert Hoover ran a federal budget surplus in fiscal year 1930, the first year of the devastating contraction that occurred from 1929–1933. A significant cause of his budget deficits in fiscal years 1931, 1932, and 1933 was the collapse in tax revenues, and his stimulative discretionary spending increases in the budget in fiscal years 1931 and 1932 were a stone in the ocean compared to the massive collapse in US GDP.

Far from disproving Keynesian economics, Hoover’s policies reinforce the basics of Keynesian deficit spending, and also show how financial crises and bank collapses need to be prevented, if one wants to arrest an economic spiral into depression.

In particular, Austrians and other libertarians refuse to properly understand basic Keynesian concepts, such as:

(1) Potential GDP,
(2) the Keynesian multiplier and
(3) the appropriate level of discretionary spending increases that actually bring about Keynesian stimulus and positive GDP growth.

To begin with, we need to understand some basic facts about the US budget, the fiscal year and Depression history:

(1) In the US, the fiscal year before 1976 ran from July 1 to June 30 in the next year. So in the relevant years the actual fiscal years were as follows:

Fiscal 1929: July 1, 1928 – June 30, 1929
Hoover inaugurated March 4, 1929
Fiscal 1930: July 1, 1929 – June 30, 1930
Fiscal 1931: July 1, 1930 – June 30, 1931
Fiscal 1932: July 1, 1931 – June 30, 1932
Fiscal 1933: July 1, 1932 – June 30, 1933
Roosevelt inaugurated March 4, 1933.

(2) Since Hoover did not become president until March 4, 1929 he was not essentially responsible for the budget in fiscal year 1929. Hoover was responsible for fiscal years 1930, 1931, 1932, 1933. Roosevelt was not responsible for fiscal year 1933, even though was inaugurated in March 1933.

(3) In fiscal year 1930, tax receipts were $4.1 billion. By fiscal year 1933, tax receipts had fallen to $2 billion. In other words, government tax revenue fell by 51.21%. The budget deficits that emerged were the result, to a very great extent, of the collapse in tax revenue, not because of huge increases in spending.

(4) The first contractionary phase of the Great Depression in America ran from August 1929 to March 1933. Thus, when Roosevelt came into office, a recovery was just starting to happen. The aftermath of the severe contraction from 1929 to 1933 was what neoclassicals would call a suboptimal equilibrium with high involuntary unemployment.

(5) The size of US government spending in 1929 was very small. As Herbert Stein notes:

“In 1929 total federal expenditures were about 2.5 per cent of the gross national product (GNP), federal purchases of goods and services about 1.3 per cent and federal construction less than .2 per cent. In 1965, for comparison, these figures were 18 per cent, 10 per cent and 1 per cent” (Stein 1966: 189–223).

Thus Hoover’s increase in federal spending of 30.25% in fiscal year 1932 is deeply misleading, because total federal spending as a percentage of GDP was very small in these years, and just 2.5% of GDP in 1929.

(6) We can the list the state of the US budget and federal spending, including Hoover’s budget deficits, below:

Government Spending
Coolidge (August 2, 1923–March 4, 1929)
Fiscal 1927: July 1, 1926 – June 30, 1927 – $2.857 billion
Fiscal 1928: July 1, 1927 – June 30, 1928 – $2.961 billion (3.64% increase on 1927)
Fiscal 1929: July 1, 1928 – June 30, 1929 – $3.127 billion (5.60% increase on 1928)
Hoover (March 4, 1929–March 4, 1933)
Fiscal 1930: July 1, 1929 – June 30, 1930 – $3.320 billion (6.17% increase on 1929)
Fiscal 1931: July 1, 1930 – June 30, 1931 – $3.577 billion (7.74% rise on 1930)
Fiscal 1932: July 1, 1931 – June 30, 1932 – $4.659 billion (30.25% rise on 1931)
Fiscal 1933: July 1, 1932 – June 30, 1933 – $4.598 billion (1.31% fall on 1932)

Budget 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

As noted above, Roosevelt was not inaugurated until March 1933, so Hoover was responsible for the budget in fiscal year 1933 as well.

Hoover actually ran a budget surplus in the fiscal year 1930, not a deficit. Hoover’s first deficit was in fiscal year 1931, when the US economy had already begun contracting severely. He also cut spending in fiscal year 1933, and introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years. These were highly contractionary measures, and these two policies are the very antithesis of Keynesianism!

An antidote to the conservative nonsense about Hoover can be found in Bruce Bartlett, “The Real Lesson of the New Deal,” Forbes.com, 2.13.09.

In order to understand whether deficit spending is truly stimulative, we need to understand the following terms: the output gap, potential GDP, actual GDP, and the Keynesian multiplier.

Bartlett shows that once the output gap is calculated and we have a rough estimate of the multiplier in the 1930s (possibly as high as 4) it can be shown that Hoover’s budget deficits and discretionary spending were woefully inadequate. Far from disproving that Keynesian stimulus doesn’t work, Hoover’s spending demonstrates that too little spending in the face of an economic catastrophe is a recipe for disaster.

US GDP was $103.6 billion in 1929. It can be estimated that potential GDP during the first years of the 1930s was about $100 billion.

For the moment, let’s ignore the impact of state and local budgets (though, as we will see below, that is in fact an important factor). In 1931, US GDP collapsed by $14.7 billion dollars, in a debt deflationary spiral with bank failures and a collapse in employment and investment. If we assume a multiplier of 4 (which is very high), then Hoover’s spending increase of $257 million dollars might have generated at most $1.028 billion of GDP in fiscal year 1931. But GDP fell by $14.7 billion dollars! Only an complete idiot or ignoramus would seriously argue that Hoover’s increase in spending in fiscal year 1931 could have prevented the depression, by effective stimulus to offset such a catastrophic fall in GDP.

In 1932, US GDP collapsed by $17.8 billion dollars. If we assume a multiplier of 4 again, Hoover’s spending increase of $1.082 billion dollars might have generated $4.32 billion of GDP in fiscal year 1932. But that was not even remotely enough to stop a collapse in GDP of $17.8 billion dollars. In 1933, Hoover cut spending, a very clear contractionary and anti-Keynesian policy.

Now the figures above are based on federal spending. Does anything change if we look at total (local, state, and federal) government spending in these years? Indeed it does. In fact, total US government spending gives us an even more accurate picture of fiscal policy. The figures for total government spending (federal, state and local) can be found here:

US Government Spending Fiscal Years 1910 to 1960.

You can see the collapse in GDP for every year from 1930 to 1933 above, and the increases in government spending. The only real difference is the total US government spending did increase in fiscal 1930 and 1933, but by small amounts, not even remotely large enough (even with a multiplier of 4) to arrest the collapse in GDP. What is also apparent in the figures above is that state and local austerity counteracted Hoover’s spending increases in 1931 and 1932. In particular, what looks like a large increase in federal spending of $1.082 billion dollars in fiscal year 1932 was reduced to just $0.26 billion by state and local austerity. What is also noticeable is that total government spending was significantly increased in fiscal years 1935 and 1936 under Roosevelt, and these were years of strong GDP growth.

The myth that Hoover attempted a Keynesian countercyclical policy designed to reverse the collapse in 1929–1933 is one of the most stupid things spouted by Austrians and libertarians.

Murphy on “Did Hoover Really Slash Spending?”: A Critique

Over at Mises.org, we have a perfect example of type of absurdity I point to above:

Murphy, R. P. “Did Hoover Really Slash Spending?” Mises Daily, May 31, 2010

Murphy is of course perfectly correct that Hoover increased spending in 1930, 1931, 1932, but in no sense does that refute Keynesian economics, as he claims at the end of his essay.

Let’s examine some of worst statements in his essay below:

“But the point is that the Fed had implemented record ‘easy’ policies from November 1929 through September 1931, some 22 months after the onset of the Great Depression.”

Murphy makes a great deal of the fact that the Fed lowered the discount rate from 1929 to 1931, which is true. He seems blissfully unaware that Keynesian economics tells us that monetary policy in times of severe economic contraction and depression will be ineffective. The old Keynesian dismissal of monetary policy in these times was summed up in the expression “pushing on a string”, which means that cheap money and low interest rates just don’t create significant aggregate demand when the economy is shocked. It is not remotely surprising that monetary policy did nothing to counteract the depression.

“Today’s Keynesians love to point to history to ‘prove’ the efficacy of their remedies. In particular, they adore Hoover’s budget cuts of 1932, and the Fed’s rate hikes of October 1931, as proof positive that ignorant conservatism caused the Great Depression. But prior to these turnarounds in policy, the federal government and central bank operated in a Keynesian fashion”

This is perfectly absurd. The aim of a Keynesian policy in a downturn is stimulate the economy so that GDP contraction is reversed and positive growth returns. If we assume a multiplier of 3 in 1930, to counteract the Great Depression, the US government would have had to increase spending by $4.13 billion in fiscal year 1930. Instead, the total government spending (local, state and federal) increase in 1930 was a miserable $240 million.

Again, if we assume a multiplier of 3 in 1931, to counteract the contraction that year, the US government would have had to increase spending by $4.9 billion in fiscal year 1931. Instead, the total government spending increase in 1931 was a feeble $260 million.

“If the Keynesians were right, the economy should have been in a tepid recovery by mid-1931, and yet it was in fact still freefalling.”

Murphy is perfect ignoramus. He hasn’t a clue about basic Keynesian concepts and how to apply them. The idea that the tiny spending increases in 1930 and 1931 could have stopped the depression is pure madness.

And even Hoover’s larger increase in 1932 was counteracted by state and local austerity, as we have seen above.


BIBLIOGRAPHY

Barber, W. J. 1985. From New Era to New Deal: Herbert Hoover, the Economists, and American Economic Policy, 1921–1933, Cambridge University Press, Cambridge and New York.

Bartlett, B. 2009. “The Real Lesson of the New Deal, Revisiting the 1930s,” Forbes.com,
http://www.forbes.com/2009/02/12/stimulus-depression-deficits-opinions-columnists_0213_bruce_bartlett.html

Cary Brown, E. 1956. “Fiscal Policy in the 'Thirties: A Reappraisal,” American Economic Review 46.5: 857–879.

Karlsson, S. 2010. “Again Herbert Hoover Was No Deficit-Cutter,” Thursday, March 11, 2010.

Murphy, R. P. “Did Hoover Really Slash Spending?” Mises Daily, May 31, 2010.

Stein, H. 1966. “Pre-Revolutionary Fiscal Policy: The Regime of Herbert Hoover,” Journal of Law and Economics 9: 189–223.

Stein, H. 1969. The Fiscal Revolution in America, University of Chicago Press, Chicago.

Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.