I have all sorts of sarcastic wise-alecky things I could say, but let me just play the straight man on this one. On Sunday Krugman had a quick post titled “Harding” in which he alluded to unnamed gnats who kept repeating that the 1920-1921 experience showed the success of austerity policies. Krugman at that time referred to his earlier post on the subject, and then said:
And let me be peevish: if you’re reading this blog, before demanding that I respond to some argument or other, why not use the little search box off to the right? Not always, but often, I’ve already done what you demand.
(Keep that in mind; it will prove humorous in a bit.)
Then I imagine what happened is that someone (perhaps Daniel Kuehn himself) either in the comments or over email, informed Krugman that Kuehn had recently published a note in the Cambridge Journal on just this issue. So in a follow-up post on Monday, titled “More Than You Want to Know About Warren Harding,” Krugman wrote:
Yesterday I mentioned that they’re still flogging the old line that Warren Harding proved that austerity works. I linked to my old demonstration that the 1921 economy was nowhere near the liquidity trap, and that there was substantial monetary easing, making comparisons to the current situation nonsense.
Daniel Kuehn has more. it turns out that the Austrians/Austerians have their timing all wrong:
[From Kuehn's paper:] Austerity proponents depend on the argument that substantial cuts to federal spending moved the economy to a recovery in 1921, but this understanding fails on multiple counts. The bulk of both fiscal and monetary austerity occurred immediately prior to the onset of the depression. Any austerity in policy decisions by the Wilson administration, the Harding administration or the Federal Reserve Board after the depression began were moderate compared with the considerable austerity measures taken by the Wilson administration and the Federal Reserve before the downturn. The evidence seems to suggest, even more clearly than in the case of the Great Depression, that postwar austerity may have even helped cause the 1920–21 depression. Subsequent monetary easing by the Federal Reserve occurred concurrently with the economic recovery, which itself was underway by the time Warren Harding took the oath of office.
And here’s a chart:
I am quite sure, however, that none of this will stop the Harding thing from being rolled out again repeatedly.
So naturally I clicked on the link to Daniel’s paper, where I read this: “Contrary to the claims of Woods (2009) and Murphy (2009), most of the austerity measures were implemented by the Wilson administration before industrial production peaked in January 1920.”
I thought, “That’s funny. I was meticulous in my research of the fiscal year / presidential term issues. There’s no way I made the mistake Daniel is attributing to me.” The reason I remembered, incidentally, is that the federal fiscal years ran on different dates back then (from starting in July 1, not October 1 as they do now), and presidents were inaugurated in March, not January. So you have to be careful when assigning events to one administration versus another.
Now when Daniel cites “Murphy (2009)” he is referring to my Freeman article. I was curious to see if, by condensing the research I had done for my book, I ended up sounded like I was one of the right-wing fools who doesn’t understand how calendars work, that Daniel and Krugman find so exasperating.
Well no, because neither “Harding” nor “Wilson” appear in my Freeman article. (I mean that literally: I just tried searching for the terms at the webpage of the article; no hits.) Not only does my article consist of true statements, there is nothing even misleading (at least regarding the presidents responsible for what) in there.
Then, just for fun, I looked up my fuller treatment in my book, The Politically Incorrect Guide to the Great Depression and the New Deal. (BTW if you call yourself my fan and haven’t read that book yet, well, I don’t know what that is, but it’s something. It’s like saying you went primal and you eat a croissant for lunch every day.) Here’s an interesting excerpt. It’s a bit long but please do read the whole thing slowly. I think you will enjoy it, if you’ve understood the criticism that Krugman and Daniel have leveled above. The italics are in the original, but the bold I have added right now:
As with the evaluation of Hoover’s high-wages policy, his high-federal-budget policy can be usefully contrasted with the depression occurring at the end of Woodrow Wilson’s watch. With the conclusion of World War I, the U.S. government slashed its budget from $18.5 billion in FY 1919 down to $6.4 billion one year later. As the U.S. economy entered a depression at the turn of the decade, receipts fell. The Wilson Administration responded by cutting spending even more, down to $5.0 billion in FY 1921 and then following with a single-year slash of 34 percent, down to $3.3 billion in FY 1922. (Because of the fiscal/calendar year mismatch, it is debatable whether Wilson or Harding should be associated with the FY 1922 budget.)
So how do the two strategies stack up? We already know that Hoover faced 20+ percent unemployment after the second full year of his Keynesian stimulus policies. Wilson/Harding, on the other hand, was Krugman’s worst nightmare, taking the axe to federal spending in a way that would have given even Ron Paul the willies, and during a depression to boot! Yet as we already know, unemployment peaked at 11.7 percent in 1921, then began falling sharply. The depression was over for Harding, at the corresponding point when a desperate Hoover had decided to (try to) rein in his massive budget deficits.
In fairness, we should concede that there can be no truly controlled experiments in the social sciences. It is theoretically possible that Krugman’s interpretation of history is correct. Presumably he would argue that the 1920-1921 depression was exacerbated (or perhaps even caused) by the enormous cuts to government spending. And he might further argue that Hoover’s profligacy averted unemployment rates of, say, 40 percent in 1931.
But Occam’s Razor recommends the simplest answer staring us in the face: the old-school economic wisdom was correct, while the newfangled Keynesian remedies proved disastrous. (For what it’s worth, Coolidge never let federal spending exceed $3.3 billion, even though he presided over the most prosperous decade in U.S. history.) During a depression, when every private citizen is cutting nonessential spending, the government should do so as well. The experience of the Harding and Coolidge administrations reminds us that Americans used to treat government as a (huge) business; it could run up debts during emergencies such as war, but then it had to pay them off as a matter of fiscal responsibility. (Murphy, pp. 49-50)
Incidentally, I am pretty sure (though not positive) I wrote the above before I even knew who Daniel Kuehn was. I don’t think I was reluctantly dealing with an objection that a Keynesian had raised to my views on 1920-1921; I’m pretty sure (again, not positive) that I actually tried to be a Keynesian for a minute and look at the world with such eyes.
This post is already long, so let me hit one other major point: In his Cambridge note, Daniel refers matter-of-factly to the “austerity” under Herbert Hoover. Huh? In the last fiscal year that can be attributed to Hoover, the federal budget deficit was 4.5% of GDP. In the first three years of FDR’s reign–when Christina Romer says FDR’s deficits ushered in the strongest recovery in American history, and showed the strength of countercyclical fiscal policy–the deficit averaged 5.1 percent of GDP.
I’m not so sure the historical record is as solidly pro-Keynesian and Krugman and Kuehn would have us believe.
P.S. It may appear that I’m throwing Tom Woods under the bus in this post, but I’m not. It’s true that if you read Tom’s article (cited by Kuehn), you might walk away thinking all of the budget cuts occurred under Harding. But as far as I can tell, Tom makes nothing but true statements, and he has some great quotes from leftist historians on the mystery of the 1920-1921 depression. Anyway, time is scarce and I’ll let Tom defend his honor from the young whippersnapper if he wants.
P.P.S. There are some other elements of Kuehn’s note that, in a perfect world, I would address. But I’m not a tenured academic, and nobody is paying me to respond to him. I will just note that there is a lot of assertion, example the stuff about the recovery being ushered in by Fed loosening. I’m not saying I know this to be wrong–after all, it would be consistent with canonical Austrian business cycle theory, do we all agree?–but I’m saying Daniel hasn’t demonstrated it. For example, he hasn’t (in that note at least, maybe he did it in his earlier article) shown that the unemployment rate only started falling until after the Fed changed course.