-posted by Chris
As any follower of Keynesian economics knows, a fundamental linchpin argument for Keynesian fiscal policy goes something like this: Herbert Hoover made the critical mistake of slashing spending during his 1929-1933 term which in turn created the Great Depression. Therefore, in the face of recession governments should increase spending and under no circumstances reduce their budgets lest they usher in a major depression. Indeed, millions of supporters of the 2009 American Recovery and Reinvestment Act (aka. the $787 billion stimulus spending package) and readers of columnists such as Paul Krugman have simply parroted the Hoover argument countless times in simpler form. Some written examples I’ve seen include “Didn’t you know Hoover cut spending in the 30’s and caused the Great Depression? Go read a history book,” and “Hoover’s budget cuts really worked out great in 1929 didn’t they?”
I’ve already addressed the bankruptcy of this argument here by doing what to date no mainstream Keynesian columnist seems willing to do so far: publish the actual federal government spending numbers from FY1929 to FY1933. So just to review, from Calvin Coolidge’s last budget year (FY29 which he drafted in 1928) to Hoover’s last budget year of FY33, nominal federal spending was:
FY29 – $3.1 billion
FY30 – $3.3 billion
FY31 – $3.6 billion
FY32 – $4.7 billion
FY33 – $4.6 billion
(source: White House Office of Management and Budget, page 21)
…an increase of 48% or 10.4% compounded annually over the four year period (end of FY29 to end of FY33).
However, since the American economy was shrinking during the same period and the dollar was simultaneously strengthening due to a major deflation, the more meaningful statistics denoting federal spending as a % of GDP were (including Calvin Coolidge’s final budget in FY29):
FY29 – 3.68%
FY30 – 4.34%
FY31 – 5.37%
FY32 – 7.27%
FY33 – 9.05%
(source: usgovernmentspending.com custom chart)
…a stunning increase of 146% in four years or 25.2% compounded annually, the most rapid explosion of federal spending as a percentage of the economy in American peacetime history!
Even in the fabled FY33 budget, when Keynesians argue Hoover made his greatest fiscal budget-slashing mistake (and incidentally also raised the top income tax rate from 25% to 63%, something they don’t like to mention) nominal spending only fell by 2% (from $4.7B to $4.6B), but as a percentage of the economy federal spending still rose by over 24.5% (from 7.27% of GDP to 9.05%)! Thus by any measure, even the cherry-picked single year that provides Keynesians their most generous statistics, none of the data qualify anywhere close to being a major cut in spending, and by the most important measure FY33 was yet another year of profligacy.
Disappointingly, mainstream media outlets have been completely unaware and/or unwilling to scrutinize the Keynesian claims of Hooverian budget cuts and many have simply repeated the line as well as the consequently fallacious macroeconomic lesson: that cutting government spending in a slump creates Great Depressions. It has been left to lesser-read free market and libertarian outlets such as CATO and the Ludwig von Mises Institute to correct the record (aka. tell the truth), but they reach only a tiny fraction of the eyes and ears commanded by the mainstream media.
In a small exception to this rule, Megan McArdle published in The Atlantic Magazine a 2011 article spotlighting the fallacy and even included Hoover’s nominal spending numbers (“Hoover Was No Budget Cutter”). McArdle correctly argued that federal spending in the Hoover years was not only not cut, it actually rose rapidly.
Given their meager record of providing actual data to back up their historical claims so far, it’s no surprise that Keynesian economists and columnists were quiet on McArdle’s column and didn’t bother to refute it—preferring to let it conveniently fade from view. And why shouldn’t they ignore it? They get the bullhorn at major media outlets like The New York Times, CNN, and NBC to go on reciting the Hoover-as-budget-slasher fairy tale for as long as they want, and they have legions of loyal readers and viewers who uncritically absorb all of the fiction and then repeat it to their friends and families as fact.
Well to one Keynesian’s credit, former Clinton Assistant Treasury Secretary and distinguished Berkeley economics professor J. Bradford DeLong did in fact respond to McArdle’s column in his rather oddly-titled blog “Grasping Reality with Both Invisible Hands: A Semi-Daily Journal.” His retort of McArdle’s argument and of the actual budget figures is right here and worth the read given its possibly one-of-a-kind status: A prominent Keynesian actually addressing real Hoover spending numbers.
However, despite DeLong’s commendable willingness to step up to the plate and actually deal with the neglected facts, his defense is amazingly—I should say stupefyingly—weak. So weak in fact, that he would have fared much better remaining silent like his fellow Keynesian colleagues.
DeLong’s counterargument is to fetch several quotes from Hoover’s presidential speeches regarding the federal budget—speeches in which Hoover expresses caution about ballooning federal spending. A few passages include:
-“This is not a time when we can afford to embark upon any new or enlarged
ventures of Government.”
-“In framing this Budget, I have proceeded on the basis that the estimates for
1933 should ask for only the minimum amounts which are absolutely
essential for the operation of the Government under existing law, after
making due allowance for continuing appropriations.”
-“To those individuals or groups who normally would importune the Congress
to enact measures in which they are interested, I wish to say that the most
patriotic duty which they can perform at this time is to themselves refrain and
to discourage others from seeking any increase in the drain upon public
DeLong then concludes these quotes are proof that McArdle is wrong: Hoover was a budget slasher who created the Great Depression, and the Keynesian mantra is still right because…
-“That is not a man who wants to open up the taps. That is not a man who
thinks that he is opening up the taps.” (DeLong)
And there, according to DeLong, is the coup de grace: Hoover talked like a budget balancer and therefore McArdle is wrong to absolve him of budget cutting.
The obvious problem with this line of reasoning is that regardless of what Hoover may have said in political speeches, the Hoover budgets-—which he signed into law—haven’t changed. They persist in showing rapid spending increases regardless of his rhetoric. But according to DeLong it’s only Hoover’s words that matter, ignore the deeds. Or “see as he says, not as he does.”
Which leads us to a very simple Logic 101 question: When analyzing whether or not someone does X, which serves as the more reliable evidence?
1) Someone actually did X.
2) Someone said he did not want to do X (before doing it anyway).
Here we have DeLong openly talking about numbers that show spending rose rapidly under Hoover, and then arguing that spending did not rise rapidly because Hoover said he didn’t want to do it—before he turned around and did it. That kind of logic is akin to arguing that a mountain of overwhelming physical evidence proving a murder is invalid, because the murderer said several times that he didn’t want to kill the victim in the hours leading up to the crime. And never mind the dozen witnesses to the crime, the gun with his fingerprints all over it, the videotape of the killing, the audio recording of his 911 call where he said “I am a murderer and I just killed this victim,” and the post-arrest confession (Hoover defended his enormous expansion of government in his 1932 Presidential nomination speech).
Some other purportedly valid assertions that could extend from such logic include:
-George H. W. Bush’s tax increases did not make the 1990-91 recession
longer because he famously said “Read my lips, no new taxes” at the 1988
Republican National Convention.
-No central bank has ever gone off the gold standard because they have
always made statements reassuring the public they will never go off the gold
standard…days before going off the gold standard.
-Adolf Hitler was not the warlike butcher and genocidal murderer we read in
history books because he repeatedly professed a love for peace right up to
his invasions of Poland, France, and the Soviet Union.
Nevertheless, as Gore-Tex is to water, some Keynesians and almost all of their followers are highly resistant to reality absorption, and the comments on his blog entry are unanimously accepting and overwhelmingly supportive of DeLong—effectively high-fiving him for his slamdunk refutation of that completely fallacious and inept columnist McArdle. Some examples include:
-“What’s going on here is classic McMegan–Fail to do her homework through
a combination of laziness and foregone conclusion.”
-“Thank you for setting the record straight on this, Brad.”
-“MM’s politically useful faux history is now considered fact by many or even
most conservatives. Repetition works!”
-“McCardle’s stupid knows no bounds”
Add up the behavior to date of Keynesians on the Hoover spending issue—asserting budget cuts that never really happened, ignoring any presentation of actual budget numbers that contradict their story (DeLong’s blog aside), in one case finally retorting actual budget numbers with speeches by a politician who rhetorically resisted higher spending before actual signing onto it, and the collective euphoria of a lopsided Keynesian “victory party” afterwards—and the outlook for debating this economic school rationally is not good. The same symptoms appear in the constant Keynesian parroting of “European austerity” and “draconian EU budget cuts” creating depression conditions overseas even as most EU members have been consistently raising spending every single year for over a decade (France, Cyprus, Spain, Italy, the non-EU UK) or spending far more today than they were on the eve of the financial crisis (all of them).
As much respect as I have for the academic rigors all economists must endure in order to become economists, the consistent rewriting of history and then willful ignoring of unyielding realities convinces me more and more that many modern-day Keynesians have simply constructed an intricate economic fantasy world to live inside, and they refuse to let any rude facet of reality disturb the bliss of their Wonderland existence. Case in point: Hoover slashed spending, so look at his words (and ignore his deeds).