Herbert Hoover didn’t cut spending

by Russ Roberts on June 3, 2011

in State of Macro, Stimulus

Brad DeLong critiques Arnold Kling’s view that the economy has a recalculation problem and says it’s all about aggregate demand:

…when it comes to business-cycles–to recessions and depressions and downturns–we don’t need to model 140 million workers, 10 million firms, and 20 million commodities: we only need to model two: (OK, four): currently-produced goods and services on the one hand, and (perhaps three types of) financial assets on the other. A business-cycle downturn comes when–for any of a number of possible reasons–there is an excess demand for financial assets and a corresponding deficient demand for currently-produced goods and services, which leads to rising inventories, falling sales, rising unemployment, falling incomes, and multiplies itself into general deficient demand for pretty much all currently-produced goods and services in the economy. The downturn comes to an end when incomes have fallen so far that households and businesses are so strapped that they cease trying to build up their stocks of financial assets, and the aggregate supply-aggregate demand balance comes to an end. The depressed state of the economy comes to an end when an excess supply of financial markets induces an excess demand for currently-produced goods and services that pushes inventories down, sales up, unemployment down, incomes up, and multiplies itself into general prosperity.

In the background the market system is trying as best as it can to find the best uses and production plans for 140 million workers, 10 million firms, and 20 million commodities given the state of aggregate demand. But that is not of the essence in understanding low capacity utilization and high unemployment. The aggregate demand shortfall is.

When you ask believers in “recalculation” what pattern of production and trade proved to be unsustainable in 2007, they answer: “building so many houses.” When you ask believers why the market economy has been unable to sort out this problem in three years, they answer with nothing–silence. When you say that OK, there were $300 billion of excess houses at the start of 2007 but now construction has been so depressed for so long that there are $1 trillion fewer of houses than trend and why isn’t the 2007 pattern of production and trade sustainable again, they answer once again with nothing–silence.

That annoys me.

It is possible to find in history economic catastrophes produced by the disruption of patterns of sustainable specialization and trade–the Bengal famine of 1942 comes immediately to mind. But there is literally no evidence at all that we have such a problem right now. Our problem right now is that demand is low because incomes are low, and incomes right now are low because demand is low, and demand is not rising because there is no excess supply of financial assets to goose people to spend more. If you want to argue that there is a disruption of patterns of sustainable specialization and trade, you need to point to such a disruption right now that is large enough to produce an 8% shortfall in spending. Nobody has. Nobody has because nobody can.

The other thing that annoys me is that this is presented as something new when it is actually something very old–and it is presented without acknowledgement of the arguments made against it in the 1930s and, indeed, in the 1840s when it was made before. Friedrich Hayek and Andrew Mellon claimed–and Mellon dragged Herbert Hoover along into policies of austerity, of tax increases and spending cuts during the Great Depression–that as a result of lax monetary policy in the 1920s the economy in 1930s had too much plant and equipment and too many workers employed making capital goods, and had to suffer from a “prolonged liquidation” in order to productively redeploy resources into the consumer goods industries where they really should be. Joseph Schumpeter cheered them on, claiming that without the boom-and-bust cycle the economy would die, for it was its “respiration.” But if Hayek were correct we should see depressions both when the economy is switching resources from capital to consumer goods and when the economy is switching resources form consumer to capital goods, and we don’t: while an economy making too little in the way of consumption goods is ripe for a downturn, an economy making too little in the way of capital goods is ripe for a boom.

There is a lot to write about here, but I want to focus on two issues raised by DeLong. The first:

When you ask believers in “recalculation” what pattern of production and trade proved to be unsustainable in 2007, they answer: “building so many houses.” When you ask believers why the market economy has been unable to sort out this problem in three years, they answer with nothing–silence. When you say that OK, there were $300 billion of excess houses at the start of 2007 but now construction has been so depressed for so long that there are $1 trillion fewer of houses than trend and why isn’t the 2007 pattern of production and trade sustainable again, they answer once again with nothing–silence.

Silence. Hmmm. (Arnold responds here.)

I’m not sure what exactly DeLong is saying with respect to Arnold’s recalculation argument. He appears to be saying that there was an excess supply of houses and that excess supply has gotten even larger. Presumably, he thinks that’s because of insufficient aggregate demand rather the challenges of creating a new pattern of sustainable specialization and trade. He presumes that Arnold has nothing to say in response. I doubt it. But let me take a shot at it. When there is excess supply of something, its price usually falls. And the price of housing has fallen since the peak. But it hasn’t fallen enough, probably, because the government has been very eager to stop the price of housing from falling. Interest rates have been kept close to zero and the government has worked very hard to keep the flow of credit going by nationalizing Fannie and Freddie and keeping them in business to provide liquidity to the housing market. That in turn has made sure that the excess supply of houses is not mopped up by eager buyers. And that means that new housing starts are going to be anemic. And that means that unemployed carpenters and electricians will remain unemployed. Some have been tempted to find a new occupation. Others are going to wait, hoping the housing market will recover. It should have recovered or at least be on the path to recovery but the government has stymied the adjustment process.

Then there is this:

Friedrich Hayek and Andrew Mellon claimed–and Mellon dragged Herbert Hoover along into policies of austerity, of tax increases and spending cuts during the Great Depression–that as a result of lax monetary policy in the 1920s the economy in 1930s had too much plant and equipment and too many workers employed making capital goods, and had to suffer from a “prolonged liquidation” in order to productively redeploy resources into the consumer goods industries where they really should be.

I don’t know anything about Mellon’s influence on Hoover. Or Hayek’s. But whatever it was, it didn’t yield spending cuts. Here are the levels of federal government spending (from here, Series Y 457-465) between 1924 and 1934 in billions of dollars

1924 $2.9
1925 $2.9
1926 $2.9
1927 $2.9
1928 $3.0
1929 $3.1
1930 $3.3
1931 $3.6
1932 $4.7
1933 $4.6

Hoover took office in March of 1929. FDR took office in March of 1933. The data on spending are fiscal years, that ended in June 30 for this period. So Hoover’s budgets are roughly 1930 through 1933. Of course you have to correct for inflation. Or deflation as the case may be. In those years it was deflation. Prices of government purchases of goods and services (from here, Table 41) fell between 1930 and 1933 by roughly 10%. So Hoover actually increased spending by over 50% in real terms.

Maybe I am misinterpreting the data. If so, I look forward to hearing from DeLong about the correct source for his claim that Hoover cut spending during the Great Depression. I would hate to be answered with silence.

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Sam Grove June 3, 2011 at 3:25 pm

When you ask believers in aggregation why there is insufficient aggregate demand, they answer with nothing.

Insufficient aggregate demand seems to me to be a symptom, not a cause.
Of course symptoms do cause discomfort, but they are not the root problem.

Daniel Kuehn June 3, 2011 at 3:48 pm

re: “When you ask believers in aggregation why there is insufficient aggregate demand, they answer with nothing.”

Who are you talking to?!?!?!

And what does “believers in aggregation” mean anyway? Are you under the impression that an aggregate is a unicorn or something?

re: “Insufficient aggregate demand seems to me to be a symptom, not a cause.”

To a certain extent. Insufficient aggregate demand is a symptom of a financial crisis and a cause of a depression.

Justin P June 3, 2011 at 4:20 pm

“When you ask believers in aggregation why there is insufficient aggregate demand, they answer with nothing.”

Who are you talking to?!?!?!

I hope you put the same comment on DeLong’s thread.

Sam Grove June 4, 2011 at 12:52 am

You’ve got me going in circles.

Every time Pingry points to insufficient aggregate demand as the (apparent) cause of recession, I ask: “Why is there insufficient aggregate demand?”, I get no further response.

As for the “”believers in aggregation” bit, that’s merely the holding up a mirror to DeLong’s reference to “believers”.

What do you suppose his point is in referring to some people as “believers”?

Randy June 4, 2011 at 4:04 am

DK,

Unicorn is not the right word. Better would be myth – a myth being a common belief with no supporting evidence.

What the evidence shows is that the idea of “aggregates” is a rationalization for the political class to do exactly as the political class wishes to do, i.e., tax and spend.

De Long says that “we don’t need to model 140 million workers, 10 million firms, and 20 million commodities”. Not true. For those who truly wish to understand the situation that is exactly what is “needed” – difficult though it may be. He just doesn’t “want” to because doing so wouldn’t so readily support the tax and spend policies that he favors.

Russell Nelson June 4, 2011 at 10:57 am

I suppose there’s no point in expecting wisdom from an idiot, but … what causes the financial crisis that causes insufficient aggregate demand that causes the depression?

vikingvista June 4, 2011 at 11:38 am

You’re asking a question that an economist would be interested in, not a propagandist.

Sam Grove June 4, 2011 at 6:51 pm

DK isn’t dumb, he’s stuck and is not able to see it.

Ken June 3, 2011 at 3:42 pm

Russ,

You must be lying. We all know that taxing and spending is the way to end a recession. Anyone who says different is a liar. Since the 1929 recession didn’t end during Hoover’s presidency he didn’t raise taxes or increase spending. QED.

Everyone knows about the vast right-wing conspiracy to cook the federal books to make it look like Hoover increased spending, when in fact he did not.

Regards,
Ken

W.E. Heasley June 3, 2011 at 3:43 pm

Dr. Roberts:

Re: DeLong and Hoover.

You are exactly right and DeLong is exactly wrong. Hoover did increase spending. Matter-of-fact, a rather detailed account exists which can be found in the book FDR’s Folly, Jim Powell, 2003, Three Rivers Press.
Pay particular attention to chapter three, What Did FDR Borrow From Hoover.

Mesa Econoguy June 3, 2011 at 7:57 pm

Excellent book, as is New Deal or Raw Deal, Burton Folsom Jr.

Dan June 4, 2011 at 6:54 pm

New Deal or Raw Deal is excellent.

Daniel Kuehn June 3, 2011 at 3:46 pm

OMB numbers are comparable to yours. He’s wrong to say he “cut spending”, but he did run surpluses until 1931 (and the deficit was small until 1932). So yes, an institution which is not as good at spending our money as we are is taking our money and spending it for us, when it should be borrowing our money and spending it.

Martin Brock June 3, 2011 at 5:18 pm

Why would borrowing and spending, by an institution which is not as good at spending our money, be more effective? Rather than a few hundred central planners in D.C. borrowing and spending money, why not a few hundred thousand entrepreneurs attracted by lowered risk, not only lower interest rates but also lower liability to bankruptcy through incorporation? Why must the increased aggregate demand come from central planners guaranteeing yields to bondholders by promising to raise future taxes when their “investments” come to nothing?

vikingvista June 3, 2011 at 6:10 pm

It’s the same answer to, “Why does a mugger take your money?”

Or, “Why does a mugger’s bookie, drug dealer, or loan shark turn a blind eye?”

Or, “Why did plantation owners justify slaves?”

Or, “Why did pirates sail the high seas?”

Thievery pays. And this particular thievery pays economists.

indianajim June 3, 2011 at 7:53 pm

“…this particular thievery pays economists.”

Wrong: Error of over-aggregation. There are “economists” and economists. Many of us are, in fact, hard at work trying to stop the thieving “economists.”

vikingvista June 3, 2011 at 8:14 pm

Two are sufficient for the pleural.

But your point is very well taken.

Sandre June 3, 2011 at 6:40 pm

I don’t see your comment on JBdL’s blog correcting him on “cut in spending”. Why aren’t you splitting hairs with JBdL. Is it because JBdL agrees with your biases?

Daniel Kuehn June 4, 2011 at 8:48 am

It’s because the distinction really doesn’t matter to the content of the post. The important thing is Hoover was running surpluses.

I’ve criticized him before on actual substantive stuff. I actually got into a few back and forth posts with him and Nick Rowe over actual substantive disagreements. I’ve also criticized him before for misrepresenting Hayek. This criticism is unsubstantial and I’m not going to comment just because you want me to.

Russell Nelson June 4, 2011 at 11:05 am

An insubstantial criticism would be “Hoover didn’t cut as much” or “Hoover didn’t spend as much”. A substantial criticism is “Hoover spent rather than cutting.” But then again, you’re just trying to gain favor with your hero, muirgeo.

brotio June 4, 2011 at 2:30 pm

:D

Campbell F June 6, 2011 at 10:49 am

Why can’t we just constantly run a higher and higher deficit each year, that way we will never have a recession? Charles Ponzi had the right idea…

Russ Wood June 3, 2011 at 4:04 pm

Mellon had great influence over Hoover early on as he encouraged Hoover to continue the post-war tax cuts begun under Harding. As far as I can tell, Mellon did not, as DeLong implies, encourage Hoover to raise taxes. Mellon was the original supply-sider, who repeatedly argued that tax cuts to spur growth were the best approach to deficits.

LAD June 3, 2011 at 4:24 pm

DeLong’s error is that he focuses on aggregate demand — which tells us very little. He needs to focus on the components of aggregate demand to understand what we’re seeing. The recession was caused when, in a very short period of time, people decided they no longer wanted to buy houses, furniture, landscape design services, mortgage broker services or anything else related to housing. As a result, most of the people employed in the housing related sectors of the economy had to migrate into non-housing related sectors. That takes time. If there is a business friendly climate that minimizes the costs faced by new and existing businesses the transition time will be short. If new and existing businesses face high taxes, burdensome regulation and uncertainty then the transition time will be long.

When you properly analyze the recession, it’s easy to see why temporary make-work jobs like those promoted by Obama don’t work. When workers transition out of the housing sector and into temporary government supported make-work jobs, they don’t spend their earnings because they know another rainy day is ahead. Only permanent jobs supported by consumer demand give workers the confidence to spend the way DeLong would like.

Chucklehead June 4, 2011 at 1:37 am

You get a Gold Star

Paul June 4, 2011 at 2:58 am

I’m one of those home construction workers, and you are correct that workers are reluctant to undertake any debt. Even in the best of times, savings are little, and usually plowed into paying off the house, now frightfully devalued. So, many having seen others lose homes with years of labor equity, or have theirs valued underwater, their trucks repossessed, are risk adverse. Gas, heating oil, electricity, food, local taxes have gone up. Wages are depressed for those working. The lower working class, those workers just above their actually more secure welfare class ( housing, food, utilities, medical care,_)..have been beaten up, lost equity, and are barely getting by and buying like old Yankees, only when something is worn out and can’t be repaired and must be used. If not, it can wait.

SpotCash June 3, 2011 at 4:32 pm

No citation or proof needed. After all, “everyone knows” that Hoover reduced govt spending in the Great Depression. It was, everyone knows, the principle cause of the deepening of the Depression.

And no one every checks his/her data.

Yes, I am being verbally ironic in the first paragraph

J Cortez June 3, 2011 at 4:48 pm

I expect silence from DeLong on this issue.

Of course, you could ask DeLong the question in the comments section of his blog, but he’d probably delete you.

Ben June 3, 2011 at 9:50 pm

“I expect silence from DeLong on this issue.”

Silence would be preferable to the same age-old myths regarding Hoover’s fiscal policy. I doubt we’re that fortunate.

Jonathan M. F. Catalán June 3, 2011 at 11:16 pm

DeLong’s response: The Fiscal Policy of Herbert Hoover.

vikingvista June 3, 2011 at 5:04 pm

Let me paraphrase the great keynesiac De Long:

“The reason the economy is bad, is because the economy is bad. The solution is to manipulate the statistics that we use to measure the economy.”

When mankind emerges from the current dark age of economic thought, De Long will appropriately be remembered by no one, unless as a classroom example to suspend disbelief in naive economics students.

Kevin June 3, 2011 at 5:12 pm

Russ why can’t you just let the good professor demean our language while appealing to prejudice and folklore in peace?

SweetLiberty June 3, 2011 at 6:16 pm

Here’s a De Long white paper on the subject from 1996. Perhaps it will shed some light on his reasoning…

http://www.j-bradford-delong.net/pdf_files/Defining_Moment_Draft.pdf

carlsoane June 3, 2011 at 7:30 pm

His reasoning doesn’t seem too reasonable. On the one hand, he thinks Buchanan and Wagner’s fear is well founded that we will “undermine the polity’s immune system that prevented the emergence of borrow-and-spend as a standard operating procedure of political parties.” He also says that we haven’t had any recessions since WWII that were long enough for government counter-cyclical fiscal policy to be an effective stabilizer. Yet, his conclusion is that we are much better off since WWII because we have adopted Keynesian borrow and spend policies.

It’s sort of like recommending continued morphine usage to a patient who has become addicted because the morphine might have helped with pain management while the patient was becoming addicted if the pain had ever actually lasted long enough to justify his morphine use.

Mesa Econoguy June 3, 2011 at 11:02 pm

My thoughts as well. The debt ceiling argument is same.

I’m still looking for the appropriate analogy to:

Overweight patient’s high BP is lowered by candy stimulant, but the very same stimulant is causing his obesity and high BP.

Stupid medical education…

SweetLiberty June 3, 2011 at 6:22 pm

I also found this to be helpful regarding Hoover…

http://www.mackinac.org/4013

Craig June 3, 2011 at 7:32 pm

“But if Hayek were correct we should see depressions both when the economy is switching resources from capital to consumer goods and when the economy is switching resources form consumer to capital goods, and we don’t”

Boy, I read this nugget over and over from DeLong et. al.. Can it truly be that they are so unfamiliar with Austrian theory as to make such a foolish assertion?

It isn’t the “switching of resources” that causes the depression, the “switching” is a result of the depression as businesses attempt to rebalance their capital. During the boom phase, of course, spending on consumer goods does not fall, so the competition between capital goods producers and consumer goods manufacturers for those resources only results in higher prices and eventually shortages.

When the prices become high enough to affect profitability and resources scarce enough to prevent the completion of economically dodgy projects, the recession begins.

It’s a beautifully elegant theory. Such a surprise that DeLong (and Krugman) just can’t seem to wrap their massive brains around it.

vikingvista June 3, 2011 at 7:44 pm

It isn’t the size of their brains, but the level of their interest. If they were interested in economics, then they would be interested in learning the theory before commenting on it. That they routinely misrepresent the theory–to the point that only people who are utterly unfamiliar with it would believe them–is consistent with their actual interest, which is merely to push statist propaganda.

kyle8 June 4, 2011 at 7:11 am

You nailed it. Especially in the case of Krugman, there is no reason to give the man any respect whatsoever since he has completely turned against his former economic principles which he had back in the time that he won his Nobel Prize.

He is nothing at all anymore but a hack and a shill for the Obama administration.

Mesa Econoguy June 3, 2011 at 7:51 pm

“…and Mellon dragged Herbert Hoover along into policies of austerity, of tax increases and spending cuts during the Great Depression…”

Russ tested the veracity of the spending portion of DeLong’s assertion here, but the taxation side deserves scrutiny as well (apologies for fragmentation):

Individual federal income tax rates -

Until 1932, the top federal individual rate (which applied to all non-corporate entity taxpayers) was capped at 25%, stepped at 1% increments starting from 1.5%) at various income intervals from $0 – $100,000. In 1932, the top rate jumped to 63% (at $1,000,000 and up) and lower tiers incremented at 1% between $10,000 – $100,000.

[Source: http://www.taxfoundation.org/taxdata/show/151.html ]

Pretty large increase in top-level rates, but only in 1932, which FDR apparently kept, btw.

Corporate tax rates –

Year Rate Brackets or Exemptions (Percent)

1926-1927 $2,000 exemption 14
1928 $3,000 exemption 12
1929 $3,000 exemption 11
1930-1931 $3,000 exemption 12
1932-1935 None 14

[Source: http://www.taxfoundation.org/taxdata/show/2140.html ]

Not much there.

If somebody has the tax rev as % GDP numbers handy, might be interesting to see.

DeLong has a very small point using individual rates, but is pretty careless in his overall assertion, as usual.

Jonathan M. F. Catalán June 3, 2011 at 8:06 pm

The good news is, though, that for the most part all sides seem to be converging on “the truth” (and I mean “Keynesians” and “Austrians” alike). One side is beginning to accept the fact that Herbert Hoover was not a “liquidationist”, nor did he cut government spending, and the other side is beginning to realize that whatever spending did occur under Herbert Hoover was not enough to really be categorized as an appropriate fiscal stimulus for the conditions involved.

Herbert Hoover, like Obama, was a “middle-of-the-road” politician (maybe like most politicians, admittedly), and the fiscal policies under his administration reflected this attitude. I would say the same of Roosevelt, even if Roosevelt’s policies were slightly more radical than Hoover’s, only because even Roosevelt was limited in what he was able to “accomplish” between 1933 and 1936 (thanks to the Supreme Court, mostly) and because Roosevelt also had to play the “politics” game.

Maybe one day we can go back to arguing actual economic theory, instead of trying to disprove each other with ambiguous historical facts that don’t actually illustrate any of the underlying arguments involved in the debate!

Mesa Econoguy June 3, 2011 at 10:49 pm

Sorry, Obamalini is not “middle of the road.”

Undermining/contravening 300 years of bankruptcy and contract law is not “moderate” by any standard.

Please pay better attention. Thanks.

Jonathan M. F. Catalán June 3, 2011 at 10:59 pm

Practically (politically) speaking, the extreme doesn’t begin at abolishing government. It begins at cutting government spending and reducing the national debt. The end extreme is the “Keynesian solution”, which involves both heavy monetary expansion and fiscal stimulus many times larger than that which has already taken place. Within the context of these “practical extremes” Obama is middle-of-the-road.

Also, for what it is worth, “middle-of-the-road” and “moderate” are not necessarily the same thing.

Mesa Econoguy June 3, 2011 at 11:08 pm

Politically speaking, no one can “abolish government” so not sure what you’re referring to there.

Actual extremism is the systematic undermining of institutional foundations of this country, which Obamalini most certainly has done, e.g. Gm, Chrysler bailouts.

This is undisputed, and is a fulcrum of political acceptability pending recovery in the 2012 election.

Jonathan M. F. Catalán June 3, 2011 at 11:15 pm

In your ideological fervor, you are missing the point. Obama’s policies do not reflect the Keynesian extreme. The Keynesian “solution” is well beyond any policy Obama has pursued to date.

Mesa Econoguy June 4, 2011 at 1:07 am

And which “ferver” do you refer to there?

Apparently, you misunderstand the fundamentals of US economic legal and contractual structure.

http://www.nationalaffairs.com/publications/detail/the-auto-bailout-and-the-rule-of-law

Please come back and comment when you understand the actual problem.

Jonathan M. F. Catalán June 4, 2011 at 11:55 am

I don’t know what “the fundamentals of US economic legal and contractual structure” have anything to do with what I wrote.

Mesa Econoguy June 6, 2011 at 7:33 pm

Here is a list of Obamalini’s “moderate” accomplishments:

-Neo-fascist “bailout” of GM, Chrysler (see above, and here

http://online.wsj.com/article/SB10001424052702303745304576361663907855834.html?mod=WSJ_hp_mostpop_read)

resulting in enormous damage to bankruptcy law, and creating future precedent for increased federal action.

-Continuation of largest postwar stimulus, resulting in unprecedented (and unsustainable) deficits and spending projections.

-Largest and most intrusive expansion of federal power, and use of Commerce Clause in US history (Obamascare).

-Largest and most intrusive expansion of financial regulation since the 1930s.

I could go on.

There is practically zero evidence to support the assertion that Obamalini is “middle of the road” in any common understanding of that term.

WhiskeyJim June 5, 2011 at 10:34 am

Perhaps I’m mistaken. I’m under the impression the Obama stimulus was the largest stimulus as a percent of GDP in the history of the world. If that is moderate, then wow. Just wow.

Regardless of where it falls in the long line of Keynesian stimulus policies, I do not understand how any Keynesian can call it anything like a success. There has not even been a tiny blip in any meaningful graphs. Surely trillions in spending should result in SOME positive significant variation, even if it was not the bone crushing debt destroying Keynesian stimulus that the gurus wanted.

kyle8 June 4, 2011 at 7:16 am

Well you cannot argue actual economic theory if you cannot agree on historical facts. Keynesians only really have one data point in all of human history where it appears the government was able to induce enough fiscal stimulus to actually force a climb into prosperity. Even that disappears when you look at it more closely.

But you are correct to a point, we spend far too much time arguing about the 1930′s and 1940′s and do not point out the copious evidence of the failure of Keynesian stimulus since that time. Including the 1970′s in this country and Europe, the 1990′s in Japan, and our most recent stimulus fiasco.

Jonathan M. F. Catalán June 4, 2011 at 11:57 am

Historical facts is completely independent of economic theory. You need to have economic theory to even interpret historical economic data. See: Mises’ Human Action and Theory and History.

kyle8 June 4, 2011 at 1:52 pm

Yes and we are taling about theory as well as facts, so what is your point?

vikingvista June 4, 2011 at 11:46 am

“Herbert Hoover, like Obama, was a “middle-of-the-road” politician”

Hoover’s response to his recession was as innovative as the consequences to his response. Since then, the same try-to-make-things-worse response to recessions has been pretty much the standard of care for government intervention. And it has a been one of statism’s greatest self-serving advancements.

Mesa Econoguy June 3, 2011 at 9:39 pm

[apologies for repetition, if so; please bring back edit button, etc. - wouldn't take tax foundation links to below data]

“…and Mellon dragged Herbert Hoover along into policies of austerity, of tax increases and spending cuts during the Great Depression…”

Russ tested the veracity of the spending portion of DeLong’s assertion here, but the taxation side deserves scrutiny as well (apologies for fragmentation):
Individual federal income tax rates -
Until 1932, the top federal individual rate (which applied to all non-corporate entity taxpayers) was capped at 25%, stepped at 1% increments starting from 1.5%) at various income intervals from $0 – $100,000. In 1932, the top rate jumped to 63% (at $1,000,000 and up) and lower tiers incremented at 1% between $10,000 – $100,000.

Pretty large increase in top-level rates, but only in 1932, which FDR apparently kept, btw.
Corporate tax rates –
Rate(a)
Year Rate Brackets or Exemptions (Percent)

1926-1927 $2,000 exemption 14
1928 $3,000 exemption 12
1929 $3,000 exemption 11
1930-1931 $3,000 exemption 12
1932-1935 None 14

Not much there.

If somebody has the tax rev as % GDP numbers handy, might be interesting to see.

DeLong is slightly correct individual rates, but is pretty careless in his overall assertion, as usual.

DG Lesvic June 3, 2011 at 10:47 pm

A declining money supply and falling prices, or “deflation,” is the Keynesians’ greatest fear. But, if the prices at which you bought were falling along with those at which you sold, your real wages, profits, and purchasing power would be the same. So, why wouldn’t commerce go on as before, at lower prices?

Because, Keynes argued, wages were “sticky.” Granted that, if they fell to the levels reflecting the new monetary reality, all would be well. But, in a money-mad capitalist society, the workers thought more in terms of money itself than what it would buy, and would hold out for their old wages even as they were unemployed and starving. And since they hadn’t the sense to save themselves, we had to save them, by keeping the money supply and realizable wage levels from falling.

That was his famous “money illusion” theory of unemployment, and the basis of the inflationist “demand management” or “monetary equilibrium” theory that has driven public policy in Western Europe and America over the last 75 years.

It was not actually a theory of economics but of psychology, and a denial of economics, which must presume that the market actors are not entirely mad.

The paternalistic credo must assume that they are, for, if you would force them to behave sensibly, you couldn’t admit that they could do so on their own. So the market had to be mad, running off cliffs without public officials to restrain it. And, however mad their own behavior, the market made them do it.

Keynesian was just another variant of this Madman Economics. The market cared more for money than the things it bought, would rather starve than live even better at lower nominal wages, and Keynesian Wise Men had to underwrite the madness in order to save the madmen from themselves.

From Macro Schmacro at http://econotrashtalk.org/#Macro_Schmacro_

Also see The Cause and the Cure of the Depression immediately following it.

Gil June 4, 2011 at 1:45 am

If it’s true that subtle inflation causes real wages to fall and thus allow businesses to keep more of their money to expand and grow especially during hard times then it would be more beneficial than waiting on people holding out against a pay cut or a new job with lower pay.

tkwelge June 4, 2011 at 2:19 am

But you are ignoring the actual effects of the way the federal reserve increases the money supply. In fact, any method of increasing the money supply will cause trouble almost immediately. The fact of the matter is that when you live in a society where an institution can pump money into large banks that then lend the money to huge businesses, you essentially have a counterfeiter, his main business partners, and a mass of slaves that must line up for the new paper.

If the solution to every recession is to make the workers poorer, it is no wonder that inequality has expanded since the money printing really took off! During the 1800′s, deflation was constant, and yet you had robust periods of economic growth. Deflation can drive economic growth by leaving extra money in people’s pockets to spend on new industries. Economies can grow during great inflation and great deflation, but long periods of great inflation have led to great problems.

Gil June 4, 2011 at 4:18 am

Don’t bore me with the “counterfeiting” crap.

Actually Austrians Economists do believe the solution is to make “worker poorer” because they say prices should fall during a recession (esp. wages) to allow businesses to have resources with which to rebuild what has been lost. After all, Austrians are the ones complaining that government intervention to keep wages high during the Great Depression (among other prices) was a big reason why there was glacially-slow recovery. If anything the general assertion atttributed to Keynesianism is to have workers with high wages so they have buying power and can create demand to businesses alive.

Captain Profit June 4, 2011 at 11:23 am

Don’t bore us with the “crap” crap, Gil.

Prices should fall or rise to reflect the value that purchasers place on the items in question. That’s the whole of Austrian economics. The rest is commentary.

Now you may go study the commentary.

Russell Nelson June 4, 2011 at 11:55 am

Okay, nobody bore Gil with real explanations. Instead, just make shit up like he does.

Jonathan M. F. Catalán June 4, 2011 at 11:58 am

Gil,

When the price of goods were allowed to fall during the last year of the Hoover administration real wages actually rose.

vikingvista June 4, 2011 at 12:13 pm

It is easy to tell if someone has mentally grasped the way inflation and fiat central banking works. If they reject the counterfeiting analogy, then they are completely clueless.

Gil June 4, 2011 at 12:43 pm

Many here think everything should be provided by the market esp. currency. I suppose many here think roads are counterfeit because they’re being made by the government and not the free market.

vikingvista June 4, 2011 at 1:02 pm

“I suppose many here think roads are counterfeit because they’re being made by the government and not the free market.”

Allow me translate from Gilspeak to English:

“Help! I’m utterly incapable of understanding inflation!”

tkwelge June 4, 2011 at 4:03 pm

I agree that real wages need to fall during a recession for certain individuals, and yes, propping up the DOLLAR wage rate is one method of doing that, but that is all besides the point. Forcing the majority of wage decreases upon those who are the laborers of society for the benefit of the well connected is probably the worst the way to achieve the goal of lower real wages.

Generally, the decrease in prices will leave everyone with savings and everyone that still has a job with more money to consume with.

Gil June 4, 2011 at 11:49 pm

If a worker were to prices stay the same while he gets a 5% pay cut then it’s the same as if prices rose 5% and his pay stayed the same. Apparently most Libertarians romance the day when people were paid $1 a day and a dollar meant something big.

WhiskeyJim June 5, 2011 at 10:40 am

@tkwelge

Well said. Compounding the issue with TARP that bails out the rich and delays the economy’s re-alignment only makes it worse.

We will have no recovery until all that debt and real estate is repriced, one way, or the other.

no one important June 4, 2011 at 10:34 am

Why expand and grow doing risky things like hiring workers or fighting bureaucracy to build plants when they could just gain by churning title around on margin to capture new money? Tax capital gains at 90% and give it to the poor? Well, huh, then you’re back to the middle class being mad they have to labor while the poor wait around for jobs that pay better than the dole and with profits being taxed away so there’s nobody with capital they’d want to risk to create those jobs. Okay, draft them and send them off to gain resources protectionist systems won’t allow markets to trade for sensibly. That’ll “work” until the nukes fly.

no one important June 4, 2011 at 10:39 am

Maybe sell the unemployed to the middle class as indentured servants?

How about letting markets work without political intervention, including encouraging “benign inflation”, for a while instead?

Gil June 5, 2011 at 2:11 am

If there was no government and thus no welfare payments the unemployed would be live-in servants to the middle class just like in India. Going hungry for a while will give people a new outlook on what work they won’t do or what pay is too low.

vikingvista June 4, 2011 at 12:09 pm

The “sticky wages” argument–if taken as a demand from workers–makes no sense in the setting of growing unemployment. Unemployed men in the depression were happy to find a job that paid much less than their former job. Lower income is preferable to zero income. “Sticky wages” only makes sense with unemployment subsidies, or as a protectionist scheme involving unions and their government benefactors, with a ready solution–don’t give unions special legal protections, and privatize unemployment insurance.

Two completely different kinds of events are both called “deflation”. One, that you mentioned, is an increase in the number of available goods relative to the money supply. This is a wonderful result of economic prosperity.

The other, is the rapid decrease in the money supply relative to the number of goods. If people are deciding that their financial interests are to reduce their personal or business debt, then this is an orderly process, and there isn’t a problem.

But if a central bank is forcefully pulling reserves out from under banks which have long term operating contracts to meet the debt needs of its customers, then solvent business are foreclosed on and people who were on a path to success are ruined.

Notice that this confusion is a result of the redefinition of “deflation” to mean “falling average prices”, instead of its literal meaning of “contracting money supply”.

Your typical keynesiac, deficient or devious in so many ways, is unable or unwilling to recognize the different causes of falling prices.

Seth June 3, 2011 at 11:43 pm

“He appears to be saying that there was an excess supply of houses and that excess supply has gotten even larger.”

Isn’t he saying that the excess supply should have gone away by now if we are $1 trillion behind ‘trend’?

And, I agree, I don’t think the answer to “why has it been depressed for so long” been silence. It’s been because government keeps meddling. Rowley had a great post about this the other day:
http://charlesrowley.wordpress.com/2011/06/02/u-s-governments-house-price-manipulations-choke-economic-recovery/

Scott Gustafson June 4, 2011 at 3:46 pm

The error is measuring housing in $ rather than units. We overbuilt houses (too many units) and those don’t go away just because the average price drops. The houses are still there.

A housing unit gets consumed when it is lived in, not when it is bought. Buying and selling a house merely changes who owns the inventory. Living in the home (as a homeowner, second home or renter) consumes the unit.

Erich June 4, 2011 at 11:52 am

“I would hate to be answered with silence.”

Zingggggg!!!

Sam Grove June 4, 2011 at 3:04 pm

I have a theory of Systematic Synchronizing Stimulation whereby induced monetary/credit expansion produces apparent profit signals across the entire economy.

The results are quite complex, but one effect is to obscure cautionary signals.

The economy is normally quite noisy, but with SSS in play, some portion of the noise can be harmonized into a crescendo, with the inevitable down side.

PrometheeFeu June 5, 2011 at 3:42 am

I have to say that what bothers me most about De Long’s blog is not the content but rather the tone. Ad hominem attacks and name calling are probably more frequent than rational arguments. I just cannot find any Keynsian blogs which aren’t long lists of insults against everyone else. Greg Mankiw is quite a reasonable fellow, but his blog is rarely thought provoking. More of a general mish mash of links. I would be happy to hear recommendations.

WhiskeyJim June 5, 2011 at 9:44 am

Mr. DeLong describes wonderfully how we save companies.

It is not necessary to know where our sales or aggregate demand is failing. We only need to know that sales are down and so there is extra capacity in our factories.

Then all we need to do is increase sales, and everything will be fine:)

IOW, that is why failing companies are always wrong to lay off workers, or re-assign them to new specialties as Kling implies. We merely stimulate demand for products through marketing and sales, re-negotiate debt on more favorable terms, and everything is great!

You folks who need to understand the details, like regional or product profitability, as if the world or a company is a great complex system that somehow must find productive ways to work together, are so anti-macro! Only a big picture economist really gets it.

Vance Armor June 6, 2011 at 3:05 am

It astonishes me how Progressive educators still “teach” high school students (and even college students) that Hoover was a “do-nothing laissez-faire” president and The Savior was elected in 1932. Hoover was a Big Government Progressive through and through. He headed up Wilson’s Food Industries Administration during Wilson’s War. At that time he dictated the daily menus for every housewife in America. Later, as Commerce Secretary, he pushed the legislation nationalizing the airwaves with the Radio Act, the forerunner to the Federal Communications Commission. Hoover signed onto higher personal income taxation as president, the awful Smoot-Hawley trade bill, the Reconstruction Administration plan of big giveaways to corporations, direct farm subsidies, and a whole host of statist measures. He was a pitiful old man after the New Dealers War (1941-1945). He would attend Republican conventions and his standard stump speech was “We need free enterprise in America. I did everything I could for America when I was president. I did not impose socialism on America. Socialism would be terrible for America. I really felt that the measures I took were necessary to save American free enterprise . . . ad nauseum.”

Vance Armor June 6, 2011 at 9:40 am

Jonathan M. F. Catalan — This is with regard to “extremism.” You argue that Obama is “middle of the road.” I think you are trying to say that he would be more authentically Keynesian if he accepted Krugman’s spend-spend-spend prescription. Today we have the Deadly Center of politics. The worst proposals come from the absolute center of the political spectrum. For example, Senator Joseph Lieberman is seen as being at the absolute center — a little bit Republican here, a little bit Democratic here — and he is the worst senator in the Senate. Lieberman wants to give the president a kill switch on the Internet. Those in the Center of the political spectrum support the wholly unconstitutional intervention in Libya, and they are most willing to cede authority for warmaking to the UN and NATO. Those in the Center of the political spectrum are responsible for turning Medicare into a gigantic redistribution transfer from the impoverished young to the more well-situated elderly — and even very well situated rent-seeking medical profession. Those in the Center of the political spectrum are most likely to repeat mantras about “outsourcing of jobs” to the Third World and defend trade protectionism. If the Center gets its way, billions of Indians, Indonesians, Brazilians, etc. will go back to $1/day sub-subsistence lives — replete with distended stomachs, cholera and mass starvation. If the Center gets its way, kiss the Fourth Amendment goodbye — crime control for the Healthy Center of the American electorate demands that cops should walk into any house without a warrant (of course, the Indiana Supreme Court has recently endorsed this view). If the Center gets its way, the Progressive Empire is on Maximum Death March. It is time for the “Far Left” — the Dennis Kucinich wing — and the “Far Right” — the Ron Paul wing — to gang up on the Deadly Center. Proudhon and Bastiat must come together again and defeat the ancien regime.

Mr. Econotarian June 7, 2011 at 7:03 pm

It is highly possible that the 1929 stock market bust was in part due to mal-investment, but I though most economists agreed that it was the calculated deflation of the money supply from 1929-1933 that really pushed the country into the Great Depression. Without that, there may have just been something more akin to the Dot-Com implosion.

During the Great Depression years in the US, there was “recalculation”, in that human labor on the farm was largely replaced with machines, thus the “OKies”.

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