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Thursday, July 02, 2009

Krugman and the 50 Hoovers

UPDATE: Krugman keeps piling on the verifiable historical falsehoods. It may interest you to note that I prepared a version of this chart the day before his most recent column, that's how predictably wrong he is:

All of this is depressingly familiar to anyone who has studied economic policy in the 1930s. Once again a Democratic president has pushed through job-creation policies that will mitigate the slump but aren’t aggressive enough to produce a full recovery. Once again much of the stimulus at the federal level is being undone by budget retrenchment at the state and local level.

Where, one wonders, is this "budget retrenchment" of which he speaks. It was only Federal spending that declined in 1937 and 1938, as Krugman even notes in describing 1937 as "the year that F.D.R. gave in to the deficit and inflation hawks",so to point the finger at the state and local governments who were doing precisely the opposite of that Democratic president is bizarre. Krugman is playing a dishonest game, implicitly referencing the two-year decline in local spending with regards to events three years later. And state spending never declined, so Krugman's 50 Hoovers theme is not only demonstrably wrong on two levels, as can be seen in the three charts below.

Now, it must be admitted that Krugman could, theoretically, have made a case by utilizing spending as a percent of GDP. However, he doesn't dare because that would show Herbert Hoover to have been significantly more aggressive in his use of expansionary fiscal policy than FDR and that would explode far more than Krugman's argument for a third fiscal stimulus package in three years.



Our favorite Nobel prizewinner wrote the following back in December:

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.

Very well, let's look at the action of Herbert Hoover and compare his four years in office to the previous four years using constant 2000 dollars in order to correct for inflation/deflation. I don't know about you, but I sure don't see any spending being slashed.



While the deflation of what Milton Friedman called The Great Contraction often confuses the economic analysis of those who fail to account for it, Krugman doesn't even have that excuse as a potential fall-back position. Federal spending not only increased in real terms and as a percentage of GDP, but increased in nominal terms as well.



Now, Krugman may well be right in that the state governments will be forced to slash spending as the economy continues to contract. However, this does not change the fact that this was not the historical behavior of either Herbert Hoover or the state governments, and likely has nothing to do with economic ideology. It is nothing more than the deficit-spending of the recent past limiting their range of options.

1 Comments:

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