Truth Is A Matter Of Opinion

We have a terrible dilemma. It seems that there is some confusion surrounding spending and taxation during recessions. James Fallows of The Atlantic reminds us that when private industry is not providing jobs the government must take up the slack or the recession will worsen.

In the early 1970s, when I was studying economics in graduate school in England, the ruinous Great Depression was nearly 40 years in the past. One big focus of attention in our courses was how it could have happened. That is, what combination of moneyed interests, conventionally minded "thought leaders" in politics and the media, and destructive adherence to shibboleths like the Gold Standard and the moral evils of deficit spending allowed leaders in France, England, and America to turn a problem into a disaster. It was in exasperation at the needlessness of it all -- the folly of contractionary government policies even as businesses were failing because of too little demand -- that John Maynard Keynes had written The General Theory. Liaquat Ahamed recently re-told that story in his justly celebrated Lords of Finance. (For how the Chinese have absorbed this history in responding to the post-2008 slowdown, see this account.)

Those days of the 1970s are now nearly 40 years in the past. And this morning's jobs report makes me wonder whether, as a political system, we ever learn anything. Even this basic thing: That when tens of millions of people cannot find work because of an overall "failure of demand" -- not enough paychecks going to not enough people who can not make enough payments to create jobs for enough other people -- the main problem facing the nation is not "runaway government spending." Any more than it was when Herbert Hoover tightened up on spending as markets crashed, in the wave of folly that Keynes and Ahamed in their different ways chronicled. A lot has changed since the 1930s, and the 1970s. But not this basic principle.

Mrs. Megan McArdle disagrees.

I'm not quite sure what passages in Keynes and Ahmed [Fallows] is referring to, but the evidence is not ambiguous: Hoover did not tighten up on spending. According to the historical tables of the Office of Management and Budget, spending in 1929 was $3.1 billion, up from $2.9 billion the year before. In 1930 it was $3.3 billion. In 1931, Hoover raised spending to $3.6 billion. And in 1932, he opened the taps to $4.7 billion, where it basically stayed into 1933 (most of which was a Hoover budget). As a percentage of GDP, spending rose from 3.4% in 1930 to 8% in 1933--an increase larger than the increase under FDR, though of course thankfully under FDR, the denominator (GDP) had stopped shrinking.

This spending represented a substantial increase over the Coolidge years (outlays had been steady between $2.85 billion and $2.95 billion since 1924). And in real terms they represented a very substantial increase, since both nominal and real GDP were falling.

Hoover did raise taxes on high earners quite a bit in 1932, and perhaps this is what my colleague is thinking of--though as this did not produce any immediately noticeable increase in tax revenue, it's hard to say how much of a fiscal contraction this actually represented. (Even if it were, outside of the odd Cato paper, Hoover's name is never invoked to warn against the mortal dangers of what he actually did: raised taxes on rich people in the middle of a recession.)

Commenters helpfully add some facts to McArdle's assessment but they are only a few out of dozens who discuss in loving detail how they (and McArdle) are right and all the liberal professors and liberal writers and liberal history books and liberal facts are wrong.

Brad DeLong has a response.

So what is going on here?

I think that Megan McArdle's major problem is that she is looking at one table--Table 1.1 in OMB's Historical Tables. She is not reading Hoover's Budget Messages or any other documents from the Hoover administration, not reading histories of the Hoover administration, not identifying how what congress finally enacted and what Hoover signed differed from what Hoover had originally proposed--or indeed, at how as the Great Depression deepened Hoover decided at the very start of calendar year 1932--halfway through fiscal year 1932--to push for measures (Reconstruction Finance Corporation, Home Loan Bank, direct loans to fund state Depression relief programs) that increased spending--but did so alongside the Revenue Act of 1932 that increased taxes.

After he decided that he was President and that the Treasury Secretary Andrew Mellon whom he had inherited from Coolidge worked for him and that Mellon should go off to be Ambassador to the Court of St. James, Hoover did decide to do something to fight the Great Depression. Tax increases to try to balance the budget in order to call down the confidence fairy made up the biggest part of his plan. But Hoover also sought to fund state relief. And he sought to set up GSE's (RTC, HLB) to restart broken capital markets.

But to say that "Hoover was no budget-cutter" misses most of the story. Hoover would have been a budget-cutter in normal times. Hoover was a budget-balancer. Hoover held the line against powerful political forces that sought to increase government spending in the Great Depression for fully 2 1/2 years before endorsing what seem to us to be half-measures.

Selective editing is one of McArdle's specialties; she can't acknowledge context because she argues by cherry-picking evidence and ignoring any contravening facts.

We wonder which side will win--the truth or the lies, when the history books are written. Either way, the results of the lies can't be hidden and one day the sheer magnitude of the destruction the lies have created will be too enormous for further denial.