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DeLong on Hoover: It’s All About Words (Not Deeds)

-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: 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).

Santa Claus, Peter Pan, and European Austerity

-posted by Chris

As the Euro crisis rages through its third year and nears its fourth, the outlook appears bleaker than ever for periphery E.U. nations. Unemployment has reached unimaginable levels in Spain and Greece, and civil unrest stirs in the former while anti-austerity riots and civil destruction seem to be the new normal—a near weekly ritual—in the latter. The remaining PIIGS, as well and French and British economies, struggle to keep a pulse with recession looming the horizon for any or all.

And above all of these troubled states hangs the spectre of ever growing sovereign debt loads that could trigger Greece or Spain-like crises the moment credit markets decide any European government is no longer a worthy lending risk. Indeed, only massive ECB debt purchases, in a concerted effort to artificially drive down interest rates, have stood between many indebted E.U. governments and more full blown crises.

Yet the entire tragedy—we are told by mainstream (mostly Keynesian) economists, politicians, media pundits, and their followers—was neither necessary nor unavoidable. If only at the onset of the financial crisis European nations had resisted the temptation to rein in their budget deficits with poisonous austerity measures things would be different. The overwhelming problems they face today—faltering growth, chronic unemployment, and of course sovereign debt crises—would not exist had governments not enacted draconian budget cuts or slashed spending. In fact, had European governments instead spent and borrowed more, the stimulative effects on aggregate demand would have held off today’s problems and even resolved the debt situation since economic growth would have boosted tax revenues.

As we’re told:

“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… …Now the results are in — and they’re exactly what three generations’ worth of economic analysis and all the lessons of history should have told you would happen… …none of the countries slashing spending have seen the predicted private-sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.”

- Nobel Prize winning (Keynesian) economist Paul Krugman, New York Times

“The answer, even though they [European governments] see over and over again that austerity leads to collapse of the economy, the answer over and over [from politicians] is more austerity… …It reminds me of medieval medicine. It is like blood-letting, where you took blood out of a patient because the theory was that there were bad humours.”

- Nobel Prize winning (Keynesian) economist Joseph Stigitz

“This should put to rest the notion of ‘expansionary austerity’ — that is, that budget cuts can spur growth by giving businesses increased confidence. It has been an epic, epic failure with interest rates at zero. The more a country has cut, the more unemployment it has. Greece, Spain, Portugal and Ireland have all had markets (and Germany) force them to radically reduce deficits amidst already deep slumps. The result has been even deeper slumps. Joblessness has jumped to levels not seen in advanced countries since the 1930s.”

- Matthew O’Brien, from “Austerity is a Disaster” (The Atlantic magazine)

There are endless more examples and not enough space to quote them all, but the conventional Keynesian argument goes: Governments must step in and borrow and spend to fill in consumer and business spending shortfalls until the economy regains its footing. It sounds good to many observers on paper, particularly intellectuals who are drawn to the sophistication of its counterintuitive paradoxes, or to liberals who find appeal in the notion that big economic problems can be solved by even bigger government. But shortsighted, tightfisted European governments aren’t doing it, and the mainstream media, particularly newspapers and business magazines, have picked up the narrative and run it through their own presses as if European austerity is a self-evident, foregone conclusion.

But there’s just one problem. European governments have not been slashing spending. In fact, contrary to the presumptive claims by Keynesians and establishment media, nearly all of the troubled European governments have been on spending binges since the worldwide recession began in late 2007.

Put another way, in order to prove that spending cuts are anti-growth, there actually have to be spending cuts in the first place. Yet despite all the claims of massive spending cuts, have Paul Krugman or Jospeh Stiglitz or any of the other austerity opponents actually produced any budget numbers from the last five years?

The answer is a resounding “no,” they’ve only made repeated assertions of slashed budgets but I have yet to find a single example of them pointing to budget figures that confirm those assertions. So let’s help them disclose what they are having so much difficulty saying. Veronique de Rugy of George Mason University actually charted spending by three PIIGS nations (plus England and France) over the last decade and helpfully clarified the Eurostat numbers with the important adjustment for inflation/deflation in each country. As you can see through 2011…

…not only have the troubled European nations not enacted vicious budget cuts, their governments have actually hiked spending every year consistently from 2007 to 2011—in fact every year for the last decade. And not on a nominal basis which can mislead based on inflation or deflation, but on a real basis.

A detailed chart from Great Britain reveals their supposed “austerity” trend even more closely (on a nominal basis).

The red columns indicate ambitious goals for restraining spending in the future, but England and other E.U. nations have pushed those red columns out year after year under pressure from angry protesters, so holding one’s breath for the red columns to actually come true is not a good idea.

What’s the lesson here? First of all, Krugman, Stiglitz, and their adoring journalist masses either have no idea what they are talking about (possible), or they are intentionally telling the opposite of the truth in a classic Keynesian case of “when you’re a hammer, everything looks like a nail” (probable since they’ve fingered every recession in world history on either “insufficient aggregate demand” or “liquidity traps”)–I’ll let you decide which. Either way, it’s astonishing that award winning economists can travel the world spreading such unbelievable claims, and equally incredible that the press has not picked up on the magnitude of their errors but instead simply repeated and amplified them. But the second, economic lesson to be learned from the evidence is once again precisely the opposite of what the Keynesians preach. That in fact, spending cuts have not been the driver of Europe’s recessionary woes, since they’ve never existed, but rather the enormous growth of government spending in face of the slump has transformed garden-variety recessions into five year (and still counting) once-in-a-lifetime crises.

Now two items to be fair: First, in the most recent year (2012) Greece is reported to have finally enacted some small but real cuts in spending under pressure from Germany for bailout loans. After a decade of profligacy, it would not be dishonest for the Krugmans and Stiglitzes of the world to claim that Greece alone has engaged in one year of spending cuts. However, Greek spending levels are still far above 2007 levels, and Krugman & Stiglitz Inc. have been preaching “austerity is a failure” for years now–certainly long before 2012. And Greece’s recent nod towards token fiscal discipline can’t explain the problems in at least half-a-dozen other struggling nations.

Second, Joseph Stiglitz technically uses the word “austerity” far more than “spending,” and austerity can be interpreted as either spending cuts or tax increases, although the Keynesians have reserved nearly all their reproach for the spending cuts while making virtually no mention of tax increases. And it is true that virtually all of the European governments in question have in fact initially proposed a combination of tax increases and spending cuts to close the deficit gap going all the way back to 2009. So rhetorically, they have at least started down the path of austerity.

However, in a pattern that has played out year after year, once the proposals become public they have consistently been met with resistance by angry and often violent masses of protesters, particularly the spending cuts. We’ve all seen government employees, retirees, and recipients of generous welfare spending take to the streets and chant the government is robbing them and making life impossible, and predictably every single year the same European governments have buckled under public pressure, backed down from the spending cut proposals, and instead enacted spending increases–as the charts reflect. But the tax increase components of austerity have passed immediately. For example, the UK has increased its top income tax rate to 50%, hiked its capital gains rate from 18% to 28%, and raised its VAT tax from 17.5% to 20%. Greece, Spain, and Italy have all enacted a series of tax increases as well, Portugal just recently passed the “largest tax increase in living memory,” and France is famously hiking its top rate to 75%.

Meanwhile the notable exceptions—Germany, Austria, and the Baltics—have actually imposed spending cuts or at minimum refused to engage in stimulus spending, and their economies are notably absent from the news because they are dramatically outperforming their dysfunctional, headline generating, profligate neighbors. In fact, Germany’s success has flown directly in the face of Keynesian predictions of doom as I’ve noted in my column here.

So the lesson here is pretty clear. Increasing spending and increasing taxes kills depressed economies and racks up fatal amounts of debt that produce the sorts of crises we have already seen in Greece and Spain. Simply calling it “austerity” in hopes of duping the public into blaming Europe’s problems on imaginary deep spending cuts changes neither the evidence nor the verdict for objective observers. In fact American history has already provided us mountains of proof—such profligate spending and tax hikes were precisely the course that Herbert Hoover and Franklin Roosevelt followed from 1929 to 1946. The resulting seventeen year Great Depression should have taught economists something about the dangers of tax-and-spend stimulus, but instead many have just rewritten history so that they can make the same mistakes intentionally and the myth continues that Herbert Hoover was some sort of laissez-faire budget slasher (Hint: he wasn’t but his former boss Warren Harding was, and when he slashed the budget the Depression of 1920-21 ended in just 18 months).

Furthermore, Keynesian economists and their adherents seem once again intent on reversing the narrative of European economic policy and blaming the fallout on Santa Claus, Peter Pan, and “austerity.” Paul Krugman tours the world declaring that Europe has settled the debate, that austerity and slashing government spending have been decisively proven a failure–as if Europe has decisively seen any spending cuts at all. But to those who have read my column on Keynesian fairy tales about Herbert Hoover’s alleged austerity, it should be no surprise that Paul Krugman would add to his own European austerity fantasy the bonus fable that:

“If this ["savage spending cuts"] sounds to you like something Herbert Hoover might have said, you’re right: It does and he did.”

At least Krugman is consistent in telling every story perfectly backwards–past and present.

Meanwhile, for a more realistic assessment of what has been happening in Europe and how real (not imaginary) budget cuts would offer short-term pain in exchange for long-term health, check out Dan Mitchell’s excellent non-fiction CATO column.

Also, Veronique de Rugy explains her austerity research findings in detail in this Reason interview:

Why the Euro? And What Went Wrong?

-Posted by Chris

As the Euro crisis rages on, many people wonder why the member states ever agreed to a common currency in the first place, and why they didn’t see the risks that have befallen them today.

Robert Murphy does a great job of answering:

1) Why did European governments view a common currency as desirable? (4:28)

2) What risks did Euro architects foresee and what checks did they put in place to mitigate them? (6:49)

3) Who benefited most, and in what way, from a common currency? (15:10)

4) How did Greece’s problems stay under the radar for so long? (24:49)  

Strangely, the video title ("How the Private Bankers are Using the Financial Crisis to Reshape World Government"), which has very little to do with the presentation, sounds more like conspiracy theory than a seminar. Fortunately Murphy clarifies right at the start that his talk is mostly about the history and theory of the Euro plus a few examples of PIIGS nations that are now being governed by former investment bankers.

Refreshing too is his refutation of Nobel Laureate Paul Krugman's latest absurd assertion: that the Euro regime is really a pseudo-gold gold standard (8:54) when the Euro, which has been completely designed by technocrats and does not even have a historic link to gold, is the most fiat-based major currency ever created. And Murphy also brings the focus back to the root problem that Krugman and the Keynesians work tirelessly to distract the public into forgetting: That multiple European governments wrecklessly ran up huge debts that they now can't pay back----in many cases believing deficit spending would once again boost the ever "insufficient aggregate demand" required to deliver Keynes' "perpetual quasi-boom."

Did Bank Bailouts Really Sink Ireland’s Fiscal Health?

-Posted by Chris

It may be old news, but the accepted conventional wisdom that Ireland’s fiscal position was undone by bank bailouts is worth reviewing—and correcting.

When Ireland experienced a banking crisis in late 2010 and the Irish government responded with recapitalization-for-equity rescues and even nationalizations, the Western media, which up to then had reported little on Ireland’s fiscal condition, quickly flooded the papers, webpages, and airwaves with “budget-busting bank bailouts” headlines for weeks.

“Irish Bank Bailout Would Send Debt/GDP to 111%” -Reuters

“Irelands’s Bailout Mounts, Swelling Deficit” -New York Times

“Irish Budget Deficit Soars After New Bank Bailout” -The Week (UK)

Shortly afterwards stories chronicling the plight of Ireland’s poor and salt-of-the-earth working class—victims of budget cuts while funds went to recapitalize big banks—began to run in earnest. And along with them, hard news, analysis, and opinion pieces began presumptively broadcasting—as an established axiom—that Ireland’s sovereign debt crisis and demotion to PIIGS status was due to bank bailouts, as if it was self-evident that Ireland’s fiscal health was pristine until irresponsible banks sank the government’s balance sheet with emergency recapitalizations.

In fact, the reporting at the time seemed a little too monolithic to me, with no mention whatsoever of Ireland’s fiscal situation before the banking crisis—leaving it to readers to fill in the gaping holes with implied acceptance that everything in Ireland was just swell until the banks got in trouble. This almost perfectly synchronized reporting—every source making precisely the same omissions—seemed suspicious enough to warrant digging up the actual Irish budget numbers. And I found them, from the Irish government itself no less:

Now it’s a 104-page document, but everything you need to know is in the summary chart on page 6, and notes on page 7 (chart below).

1)  Note how in the four years prior to the banking crisis (2006 to 2009 +  2010 which had almost ended by the time the crisis hit) government spending skyrocketed as a percentage of GDP even as revenues stayed flat to slightly down. In those four years government spending rose from 34% of GDP to a whopping 47% of GDP due to another textbook Keynesian anti-recessionary response of stimulus borrowing and spending. As a percentage of the economy that’s a 38% spending explosion during a recession. The deficits even reached 12% of GDP in the two worst years—all before the first bank cried for help.

2)  Also in the footnotes of page 7:

“The estimates of General Government Debt contained in this Plan do not take account of any additional support to the banking system that may be part of a negotiated programme of external assistance.” 

Which simply confirms what by now we see are the true facts: The Irish government was ratcheting up enormous deficits with increased spending even without bank bailouts.

3)  And if there was any doubt remaining, also near the bottom of page 7:

“General Government Gross Debt is expected to be 95% of GDP by the end of 2010″

Or in summary, the Irish government had long gone overboard spending money it didn’t have without any help from a banking crisis. The late 2010 bailouts were excluded from these numbers, and yet they still reveal Ireland was already on course to reach a PIIGS-qualifying public debt exceeding 100% by 2011.

Now this says nothing about the causes of the crisis itself which lie in artificial credit expansion by the European Central Bank and the Irish government’s approval and encouragement of inherently unstable and inflationary fractional reserve lending (just as in America). Nor am I defending the bailouts themselves as a good thing either. It is morally indignant to saddle the children of Irish taxpayers with a huge bill tomorrow in order to rescue bubble-blowing banks today—the one aspect of the bailouts that the media is willing to report on extensively.

And the bailouts are turning out to be expensive, and the economic and moral rationales for bailouts are just as dubious there as they were in the USA. The government’s cost of buying ownership stakes and recapitalizing Irish banks reached 32% of GDP by late 2011, although as the banks ever slowly regain health some fraction of that money will flow back to the Irish government through a combination of interest/dividend payments and unwinding equity positions.

But the larger point is the media’s news blackout of any aspect of Irish fiscal profligacy prior to the banking crisis—at which point they decided Irish debt could actually became a story—a big story—and that the roots of its debt burden would lie exclusively with the banks, not the government. The reality is Ireland was already drowning in red ink before troubled banks presented yet another major expense, but the Western media had already predetermined who would wear the white hats and black hats in this story. Since profligate, freespending European governments never wear black hats, their fiscal irresponsibility would go unreported. And since banks always wear black hats—particularly since the 2008 world financial crisis—the prior, greater sins of the Irish government would rest on their shoulders as well when Ireland’s crisis came.

Or to put it more succinctly as a friend of mine commented after seeing the pre-crisis Irish budget numbers: “Holy crap, NPR just shoved the bank bailout line as the source of Irish woes this morning. They DID NOT EVEN mention the Irish budget. All the banks fault. Poor people losing things to save big companies.”

An Austrian at the New York Fed

-Posted by Chris

Robert Wenzel, Austrian economist and editor of, received a surprise invitation to speak at the New York Federal Reserve Bank in April. Meeting organizers realized their mistake too late and Wenzel was allowed to make his case against the Fed–from within the Fed–and he didn’t hold back as you can see from his remarks here. And his remarks were superb. In a very short amount of time he argued forcefully that the Fed is grossly wrong in its belief that:

-It can quantify the human action and individual decisions of hundreds of millions of economic participants, and draft subsequential monetary policy–all with a math formula as if it was a physical science.

-Demand drives the economy and not production.

-”Free markets” have shown they cannot self adjust to price and wage equilibrium–even as the federal government has interfered with that adjustment process by forcing wages higher, prices lower, and paying people not to work–going all the way back to 1929.

He also levels the following criticisms about the Fed’s century-long track record:

-Prices at the consumer level have risen 2,241%. This is due to the Fed increasing the money supply by 12,230% (by contrast in the 138 years prior to the Federal Reserve’s establishment prices actually fell by about 40%).

-Despite its claim to promote economic stability, the USA has experienced 18 recessions including the Great Depression, the current Great Recession, multiple stock market crashes, and countless tens of million of unemployed (and I would add also the Stagflation Era of the 1970′s, three major residential real estate bubbles, four major stock market bubbles, one commercial real estate bubble, and four major financial crises), all under the Fed’s omniscient watch and dexterous guidance.

Almost as amazing as an Austrian infiltrating the Fed to level such criticisms is that he made it out in one piece. Actually according to Wenzel’s post-speech Q&A notes, it sounds as if a few of the attendees were good sports about the criticism. However Fed member questions about “constant increases in the money supply” and MV=PT comments (which are tenets of Monetarism, not the Austrian School) were pretty incredulous coming from professional economists. Still one has to give them credit for at least asking.

Those questions and comments bolster Wenzel’s argument that there is not only a rejection of Austrian principles within the Fed (or any central bank by its very nature), but also a profound lack of knowledge or understanding of Austrian economics at all. One highly notable exception who has long since left is former Fed Chairman Paul Volcker who not only recently showed at least a basic understanding of Austrian Business Cycle Theory, but even acknowledged its validity (video).

Krugman, Germany, and Moving Goalposts

-posted by Chris

Anyone who follows the Eurozone debt crisis has heard repeatedly about Germany’s enviable status as the Union’s most stable (fiscally and economically) major player, and PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain) as well as France continuously pressuring German Chancellor Angela Merkel’s government to offer more effective bailout goodies to its indebted neighbors at the expense of German banks and German citizens.

What isn’t as well publicized is the position of most Keynesian economists and policymakers just three years ago. A diverse cast of players from Paul Krugman to Larry Summers to President Obama himself criticized Merkel for refusing to add Germany to the list of G20 nations adopting massive government deficit spending policies to usher in economic recovery. Indeed, Merkel’s steadfast insistence on fiscal conservatism and anti-Keynesian remarks led to heated frictions between Washington and Berlin for several months.

New York Times columnist and Nobel laureate Paul Krugman went further, slamming Merkel’s Christian Democrats’ “know nothing” government, calling Germany’s finance minister “boneheaded,” and intimated (using another economist’s words) that

“Germany will soon be facing its worst economic crisis since the 1940′s”

Indeed, Germany became ground zero for the countercyclical debate over deficit stimulus spending. Would Germany regret its decision not to follow a Keynesian prescription and worsen its downturn while its freespending neighbors enjoyed robust recoveries?

Well two years later (and counting), Germany was not only not suffering through an economic crisis, it was and still is prospering. German unemployment was (and still is) at its lowest level in over 20 years. It’s growth rates—not to mention its low debt-to-GDP burden—are the envy of the continent.

And meanwhile a long list of other Eurozone member nations who listened to Paul Krugman have seen their credit run out, their economies implode, and most telling of all they are lining up for bailouts from the one country that refused to take his advice—Germany.

This should be a black eye for Krugman and the Keynesians—and it is—for once again they got it about as wrong as anyone could. Once again they predicted the exact opposite of what unfolded. So should we hold our breath for Krugman’s mea culpa? Or would we expect Krugman to resort to a more customary silence?

Well in fact Krugman did uncharacteristically address the Germany success story 18 months later, although not with the same fanfare as his doomsday prediction (his 2009 condemnation of German policies appeared in his widely read op-ed column, whereas his reaction to the German un-implosion was placed on his much less viewed blogsite). But still, we should credit him for at least speaking out and addressing what looks like egg on his face.

So what is Krugman’s opinion? He takes two somewhat contradictory positions. The first is that it hasn’t been long enough. “Germany’s austerity policies have not yet begun” to kick in and do their predicted damage. So by summer of 2010 Krugman was arguing “just give it time.”

But second, and more interestingly, Krugman credits special traits of the German economy that made it resistant to a major slump. Namely:

1) Germany did not have a housing bubble.

2) Germany has a strong export sector.

Now just one sentence prior Krugman was arguing the end of the world was just months away for Germany, so it seems strange that he would lay out Germany’s strengths afterwards, as if he was preparing excuses for why Germany’s economy will continue to hold up.

Yet another 18 months later (and almost three years since the German austerity debate began), unemployment continues to set new lows even as exports and GDP climb. And most of Germany’s neighbors, deficit spent into virtual default, line up at the border begging for bailouts.

So with this news, what is Krugman’s latest response? After all, he got another year and a half for that austerity monster to run Germany’s economy through the meat grinder and it still hasn’t happened. So Krugman moved the goalposts waaaay out into the stands with a criticism about bond yields.

Noting that austere nations like Austria (which he calls a “very successful economy”) alongside Germany had just experienced slight increases in their borrowing rates—with France and Austria approaching 3% and Germany flirting with 2%–Krugman argues: 

“one thing is clear: fiscal rectitude — which the Austrians have displayed even more than the Germans — is no protection.”

How low his bar has fallen. This is his slam dunk that Austria and Germany got it wrong? They are enjoying record low unemployment, healthy output and GDP growth, a low debt burden, and PIIGS nations are begging them for help. But according to Krugman, the yield on their 10-year bonds is approaching 2% so they should have taken his advice.

Is he kidding? That’s the “worst economic crisis since the 1940′s” we were promised was coming? Evidently–that is if you agree with Krugman’s apparent newfound definition of success: a shrinking economy with high unemployment and a huge and growing debt burden, but which can borrow at 1%.

So here we have Krugman falling back on moving goalposts–and he’s all over the map. Three years ago Germany was headed for disaster, but since the disaster hasn’t happened he changes the definition of disaster to 2% bond yields. But at the same time he also reels off Germanic strengths that somehow immunized its economy from what would otherwise been certain Armageddon–no housing bubble and strong exports.

And while we’re on those excuses (and he is making excuses), everyone knew Germany had no housing bubble in 2009. Germany had a strong export sector in 2009, and had significantly higher unemployment in 2009. And most importantly, Krugman knew all of these things in 2009 (I would hope so, he’s a Nobel Prize winning economist, shouldn’t he know?), and yet he still predicted Germany would crash and burn for not swallowing his deficit stimulus prescription. The same problem applies to other recent arguments by Krugman’s followers that Germany is very generous with its method of counting employment, or that Germany encourages companies to reduce work hours instead of releasing workers. Both were true when Krugman made his prediction, and as a famous economist he knew about them both. Yet Germany continues to thrive and their unemployment rate has steadily fallen. So why does the fact that Germany had no bubble, exports a lot, and counts unemployment differently excuse his busted call? Obviously it doesn’t.

On the other hand, had Germany actually adopted big deficit spending solutions and the economy was doing well today, do you think Krugman and the Keynesians would be arguing “well, it’s only because Germany didn’t have a housing bubble/is a big exporter/counts unemployment differently etc…”? I think everyone knows the answer—it rhymes with “no.” Krugman would instead declare “this proves that deficit stimulus spending is a success—that Keynes was right.”

Having it both ways. Moving the goalposts. Now that’s something Krugman does get right consistently.

Hoover was a Keynesian

- posted by Chris

It seems at every turn Keynesians are picking on Herbert Hoover. Day in and day out they point fingers at him, for according to them Hoover provides the ultimate lesson that slashing government budgets during an economic downturn creates Great Depressions:

“…the insistence that governments should slash spending even in the face of high unemployment… …If this sounds to you like something Herbert Hoover might have said, you’re right: It does and he did”

-Paul Krugman, New York Times

“The old story is still true: you cut expenditures and the economy goes down. We have lots of experiments which show this, thanks to Herbert Hoover.”

-Joseph Stiglitz, The Independent

“When Herbert Hoover had to face a financial crisis and then unemployment, his strategy was to balance the budget and cut spending, and that made things worse.”

 -John B Judis, The New Republic

“If governments stop spending at the same time that consumers do, the economy can enter a vicious cycle, as it did in Hoover’s day.”  

-David Leonhardt, New York Times

(Incidentally Leonhardt even quotes Hoover’s Treasury Secretary Andrew Mellon’s famous counsel to “liquidate labor, liquidate stocks…” but fails to mention that Hoover’s own memoirs recount only three lines down that others in his cabinet “believed with me that we should use the powers of government to cushion the situation” and that he rejected Mellon’s advice. And this guy gets a Pulitzer Prize?)

I could easily find dozens more quotes. For the modern day Keynesians accept Hoover’s savage spending cuts as an open-and-shut case.

But what if, in fact, Hoover didn’t really slash the budget at all, but rather ballooned government spending? Not only would this stop the preeminent historical Keynesian argument against spending cuts in its tracks, but wouldn’t it reverse the argument on its heels by demonstrating that government spending hikes made things a lot worse in the 1930′s? What if the Keynesians are absolutely right to point fingers at Hoover, but precisely because he was a Keynesian?

Well as it turns out the story that Hoover was a budget slasher is not only a myth, it’s the exact opposite of what really happened. Which is why Keynesians always make the assertion, but never produce the actual budget numbers for scrutiny. Well here they are in the White House historical budget tables (page 25), or see the short version below.

FY29 – $3.1 billion (Coolidge)
FY30 – $3.3 billion (Hoover)
FY31 – $3.6 billion (Hoover)
FY32 – $4.7 billion (Hoover)
FY33 – $4.6 billion (Hoover)

So from Calvin Coolidge’s last budget year (FY29 which he drafted in 1928) to Hoover’s last budget year of FY33, nominal federal spending increased 48% or 10.4% compounded annually over the four year period (end of FY29 to end of FY33).

That is no small increase. 10.4% per year over four years is not exactly nitpicking over a point increase here or there. And note, the key phrase here is spending increase, not spending cuts.

But that only tells the lesser half of the fiscal story. Since the economy was shrinking and the dollar undergoing its famous deflation during Hoover’s term, the infinitely more meaningful number is federal spending as a percent of the economy which is available here and here (or see the short version below).

FY29 – 3.68% (Coolidge)
FY30 – 4.34% (Hoover)
FY31 – 5.37% (Hoover)
FY32 – 7.27% (Hoover)
FY33 – 9.05% (Hoover)

Measuring outlays as a percentage of GDP, Hoover ballooned government spending by a mindboggling 146% or 25.2% compounded annually!! Imagine that, exploding the government to 2-1/2 times its original size in just one term. America was undergoing a Keynesian fiscal revolution that should have prevented a depression, who knew? He also took Calvin Coolidge’s final budget’s surplus of 0.8% of GDP and transformed it into a 6% of GDP deficit by the time he left office–more JMK orthodoxy.

The skyrocketing government spending and deficits should have been the magic stimulus bullet that the Krugmans and Stiglitzes of the world preach would avoid a Great Depression, but instead the USA got… well, The Great Depression.

As for the “cutting spending” myth, it is true that Hoover cut spending by $100 million (or 2%) from FY32 to FY33. Granted, unlike 48% and 146% hikes, a 2% cut is a nitpicky number, but again as a share of the economy Hoover actually spent 24.5% more that year as well. In fact the government grew rapidly as a share of the economy in every single one of Hoover’s budget years. And besides, would Krugman have us believe that the margin between roaring recovery and out of control tailspin would be a 2% nominal budget cut–about 0.14% of GDP that year? Krugman’s own objection to the Obama stimulus was not that it was just 0.14% of GDP shy of perfect, but that it needed to be 4.5% of GDP bigger per year for at least two years. Anyway this is all academic because like we’ve seen Hoover actually spent 16% more as a percentage of GDP in that supposed tightfisted year so it’s a moot point.

Perhaps the more logical explanation, which today’s Keynesians never mention, is that the other half of that Hoover austerity package included the largest peacetime tax hike in American history with the Revenue Act of 1932. In a very un-Keynesian but very Krugman-esque prescription, taxes on ordinary and corporate incomes were hiked dramatically with the top rate jacked up a whopping 2-1/2 times its original level from 25% to 63% (see link below).

Yes there were crazy things happening on the monetary front too, but with such a mammoth hike in the tax burden during a recession, it’s no wonder the bottom of the economy fell out the following year and unemployment skyrocketed to nearly 25%.

By the way FDR raised the top rate again to 79% and hiked the capital gains rate by 22%–all in 1936–the year before the “Depression within a Depression” of 1937-1938.  Also, 18 months prior to that second depression FDR signed the Wagner Act and Social Security Act into law–the former arming unions with government power and raising the cost of labor dramatically at a time of double-digit unemployment. The second acting as yet another new tax on both employee and employer. But again the Keynesians consistently omit those factors and mention only FDR’s spending cuts as the cause of the 1937-38 slump.

So we continue hearing the myth repeated ad nauseum that Hoover slashed spending and he thereby caused the whole calamity, with no mention whatsoever of the other much larger factors let alone an admission that Hoover never slashed spending to start with.

So now that the truth is out, if the Krugmans of the world are willing to lay a huge portion of the Great Depression blame at the feet of Hoover’s fiscal decisions and downplay other factors such as the Fed, banking panics, gold sterilization… would they remain consistent that Hoover’s fiscal decisions deserve most of the blame given that he actually spent more–a lot more–not less? Or once refuted would they move the goalposts as they often do and suddenly dig up all those extenuating factors–arguing “Well, Hoover’s spending increases weren’t big enough to counteract the fall in money supply, Smoot Hawley, declining stock prices, etc…?” After all, those other factors didn’t exonerate Hoover when they said he was a budget slasher, so why should they exonerate him now that we know he was a big spender? And if Hoover’s alleged spending increases weren’t enough to stop the roaring tide of the collapsing money supply, why then would his alleged spending cuts be to blame?

If you Google “Krugman Hoover spending” you’ll find I’m hardly the first one to call out the Keynesians on their backwards history. There are articles all over the Internet (such as here, here, and here to cite just a few) calling out Krugman the Nobel Laureate for preaching such blatant falsehoods, but alas their correcting of the record is inconvenient to the New York Times so Krugman gets to keep the megaphone while the MSM ignores any and all pleas for historical accuracy.

Now if I can just find some way to keep those goalposts mounted down.