Thursday, March 11, 2010

Again, Herbert Hoover Was No Deficit-Cutter

Again and again you (this is the latest example) hear the myth that we shouldn't reduce the deficit because that's what Herbert Hoover did and we all know how that ended.

So let's again set the record straight. Hoover was not a deficit-cutter. In fact, he increased the deficit more than any other President in peace time (except for Bush, if you, the wars in Iraq and Afghanistan notwithstanding, count that as peace time). If you don't believe me, look at the official statistics on the subject.

Between Hoover's first budget, for fiscal year 1930, and his last, for fiscal year 1933, the budget balance went from a surplus of 0.8% of GDP to a deficit of 4.5%. This reflected in part a drop in revenues from 4.2% of GDP in FY 1930 to 3.5% in FY 1933, but mainly an unprecedented (at the time) increase in spending from 3.4% in FY 1930 to 8.0% in FY 1933.

Some might think that while he pursued "stimulus" policies during most of his term, he did tighten policy during the last year. But that is not true. While he did raise taxes (Which non-Keynesians can agree was bad for non-Keynesian reasons), he increased spending even more, resulting in an increase in the deficit from 4.0% of GDP in FY 1932 to 4.5% in FY 1933.

Nor was it the case that the increase in the share of GDP going to government spending reflected merely a drop in private output. Real direct federal purchases increased a cumulative 45% between 1929 and 1933.

Because the price index for federal government purchases fell a lot less than the price index for private sector purchases (the federal purchase deflator dropped by 8.7%, while the GDP deflator dropped by 25.3%) , even this number significantly underestimates how large the increase in government spending was.

Given that Keynesians keeps arguing that direct government purchases (such as spending on schools, roads etc.) provides a more effective "stimulus" than tax cuts, this is especially significant.

It is true that the fact that Herbert Hoover pursued a radical deficit spending policy doesn't prove that deficit spending is bad (Instead, this cam be shown with a theoretical analysis). But to try to not only falsely present him as a deficit-cutter, but to imply or explicitly argue that his failure proves that reductions in deficit spending is bad, is worse than misleading.