Paul Krugman has an op-ed in the New York Times (reproduced in the AFR this morning) on the failure of austerity.
Specifically, in early 2010 austerity economics — the insistence that governments should slash spending even in the face of high unemployment — became all the rage in European capitals. The doctrine asserted that the direct negative effects of spending cuts on employment would be offset by changes in “confidence,” that savage spending cuts would lead to a surge in consumer and business spending, while nations failing to make such cuts would see capital flight and soaring interest rates. If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.
Unfortunately, the historical record is somewhat different to what Krugman claims. Steve Horwitz explains in this Cato Briefing Paper.
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. In nominal terms, he 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. 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. It is hard to reconcile those data with the claim that Hoover was a defender of “austerity” and “budget cutting” in the name of laissez faire.
…
Hoover also quickly proposed an expansion of public-works projects as a way to address unemployment—an idea that he had not only championed throughout the 1920s, but that was, contrary to perception, agreed upon as worthwhile by a majority of economists at the time, well before John Maynard Keynes’s The General Theory was published in 1936.
So Hoover did not follow an austerity program as Krugman reports. As Don Boudreaux writes in a letter to the NYT.
Mr. Krugman’s unfamiliarity with history is disturbing.
(HT: Steve Horwitz)
Krugman may well be familiar with history, but thinks he can rewrite it to suit his purpose. A common postmodern conceit.
Mother Hubbard's Dog
21 Feb 12 at 12:38 pm
Krugman’s unfamiliarity with history isn’t disturbing at all – it’s normal for the political left which then results in their, all too familiar, rewriting of history, since as they can’t remember it, replace it with what they thought happened.
And “we” are described delusional…..
Louis Hissink
21 Feb 12 at 12:52 pm
good gosh.
His first budget at the start of the depression was certainly austerity based as was his last.
This is why he raised income tax!
You should know those measures of a budget deficit are meaningless.
I am surprised anyone would actually use them
On your Marx
21 Feb 12 at 1:33 pm
Perhaps I’ve missed it, but I’d like to see some forecasts of when growth will return to Greece. I do not dispute that government spending crowds out the private sector, but unless wages fall and Greek industry becomes competitive, I don’t see how austerity by itself will make much difference.
A real difference would require defaulting and leaving the Euro zone, I would have thought.
DavidLeyonhjelm
21 Feb 12 at 1:46 pm
The Whitehouse historical tables have both 1929 and 1930 as budget surpluses and 1931 as a small deficit.
Why is there a discrepancy between Steve Horowitz’s numbers and the Whitehouse records?
AndrewL
21 Feb 12 at 1:49 pm
Defaulting, yes. Leaving the Eurozone, no. The last thing you need during a default is an unstable currency.
Driftforge
21 Feb 12 at 1:51 pm
So how does Greece become competitive? Labour costs are quite inflexible and there’s no stomach for fixing that. Devaluation of the Drachma would do the job just as well.
DavidLeyonhjelm
21 Feb 12 at 2:01 pm
David – One way or another, that is what has to be fixed. Whether it is by devaluation or by decree, it doesn’t matter.
A massive cutting back of government will go a long way towards fixing that too. I suspect that if you took away the government restrictions that exist to make labour pricing inflexible, there would be more movement there too. Needs must.
Driftforge
21 Feb 12 at 2:09 pm
But I would contend that an across the board wage decrease would be a far better solution than a devaluation. The wage decrease happens once, and a fixed amount. Put Greece back on the drachma again and they will just go back to de-zeroing their currency every 20 years.
Default and slash. But retain a stable international currency.
Driftforge
21 Feb 12 at 2:12 pm
I’m looking at page 21 of the Whitehouse records and the figures are the same as Horwitz reports (to one decimal place). Maybe you’re confusing outlays with deficits?
Sinclair Davidson
21 Feb 12 at 2:20 pm
in 1931 there was a small surplus. This is the year that is affected by the onset of the great Depression.
In his last budget he cuts spending and increases taxes. It is a strange way to provide a stimulus!
And the most significant expenditure item during Hoover’s presidency could not be vetoed because of the votes in congress.
On your Marx
21 Feb 12 at 2:27 pm
DavidL
Indirect labor costs in Greece are very high. They could keep within the spending/deficit constraints set up by the EZ by say eliminating those indirect costs and raising the VAT. I think Steve Hanke made that suggesting a little while ago.
That would effect an internal devaluation I believe.
Jc
21 Feb 12 at 2:29 pm
“in 1931 there was a small surplus.”
As AndrewL above says “The Whitehouse historical tables have both 1929 and 1930 as budget surpluses and 1931 as a small deficit.”
Capitalist Pig
21 Feb 12 at 2:51 pm
Driftforge, it was my understanding that the Greek Parliament has already voted for a 20% across the board pay cut.
Of course, this is less than is necessary. Greek wages rose 60 something per cent in real terms from 2002, while over the same period German wages rose 15 per cent.
Mother Hubbard's Dog
21 Feb 12 at 3:42 pm
The difficulty with Greece is they are used to operating under the assumption of a default / devaluation every 20 years. Living with a solid currency will take a generation or two to get used to.
Time to push the reset button and let the economy find its way again.
Driftforge
21 Feb 12 at 4:14 pm
What matters is the budget balance.
The deficit in 1932 was 4.0% and 4.5% in 1933. NGDP fell 45% between 1929 and 1933.
A big F for Horowitz.
sdfc
21 Feb 12 at 7:51 pm
sdfc, what matters is that there were no “savage spending cuts” during the Hoover years.
A big F for Krugman.
Capitalist Piggy
22 Feb 12 at 8:34 am
Capitalist Piggy Hoover cut spending in nominal terms in his last year.
A Big F for you.
The budget during Hoover’s time was
29+0.5% of GDP,30 +1.0% of GDP, 31-0.2% of GDP,32 -2.8% of GDP, 33 -3.3% of GDP.
Just recall GDP FELL in each year from 1929 as SDFC points out. This means the ratios are highly exaggerated.
You have to be scratching to get a large increase in the CAB from this.
You only have to look at 1933.
Hoover cuts spending and increases income tax but the deficit increases!
On your Marx
22 Feb 12 at 9:10 am
That’s just standard supply side economics with regards to raising taxes, Homer.
Are you going to give Wanninski, Mundell or Laffer any credit?
.
22 Feb 12 at 9:15 am
Actually tax revenues rose they didn’t fall so you are wrong again.
It rose from 4.5 to 5.8% of GDP. Remarkable in itself given that GDP was declining at the time.
On your Marx
22 Feb 12 at 9:22 am
“Capitalist Piggy Hoover cut spending in nominal terms in his last year.”
Yes he did, by 1.2%. But Krugman reckons that was a “savage cut.” If you adjust for deflation, it probably wasn’t a cut at all, maybe even a real increase.
I note that you have focussed on a meagre 1.2% cut in spending in one year, yet blithely ignore the 49% increase in spending that occurred during the previous three years.
Capitalist Piggy
22 Feb 12 at 10:05 am
Ergo they didn’t cut hard enough.
.
22 Feb 12 at 10:12 am
Quoting tax revenues as a proportion of a declining GDP can’t tell you anything about whether they rose or fell, OYM. F for you as well.
Mother Hubbard's Dog
22 Feb 12 at 10:30 am
CP
Horowitz makes the claim that “big spending” Hoover prolonged the depression. Given the meagre size of Hoover’s deficits any economist who writes such rubbish should be ashamed of themselves.
He also doesn’t seem to be aware that nominal wages fell during the 1929-33 period.
sdfc
22 Feb 12 at 9:40 pm