Wednesday, August 25, 2010

Keynesians Advocate Emulation Of Hoover's Policies

Recently we have heard two positions from the prominent left-Keynesian pundits:

1) It is wrong with fiscal austerity, because that is what Herbert Hoover did and we all know how that ended.
2) It is right to raise taxes on people with high income.

The two propositions aren't necessarily contradictory if it had been possible to use the extra tax revenues to increase spending or reduce other taxes. Yet given current political reality with Republicans and centrist Democrats likely to block these other measures, it is in fact contradictory.

When faced with this contradiction they have often argued that tax cuts for people with high income are different, because they save most of their income. However, they never present any evidence of this assertion, and as a matter of fact evidence exist that proves it to be false.

Another falsehood is their assertion that Herbert Hoover was a budget cutter, when in fact he increased government spending. Between fiscal year 1930 and fiscal year 1933, federal government spending rose from 3.4% of GDP to 8.0% while the budget balance went from a surplus of 0.8% to a deficit of 4.5% of GDP. Even during the latest year, from fiscal year 1932 to fiscal year 1933, government spending rose from 6.9% of GDP to 8.0%, while the deficit rose from 4.0% to 4.5% of GDP.

Thus, Hoover was no deficit cutter. In fact, as it happens, the only "fiscal austerity" measure he implemented was in fact the very kind of measure which today's left-Keynesians regard as the only acceptable one, which is to say an increase in the top income tax rate from 24% to 63%.

Thus, even as they call others "neo-Hooverites", left-Keynesians in fact advocate fiscal policies that are nearly (it is true that their proposed increase is much smaller, but that doesn't alter the principle since they claim that higher taxes on high income earners won't affect the economy) identical to the ones pursued by Hoover: higher taxes on the wealthy combined with increases in government spending.