20 Jul 2010

Krugman Back to Being My “Favorite Blogger”

Economics 4 Comments

[UPDATE below.]

I don’t know when I will learn… This Krugman blog post on Depression-era debt literally made my jaw drop.

After chronicling how the federal debt went up under Herbert Hoover–thus making the “Hoover was a liquidationist Hayekian” thesis a bit awkward–Krugman then said, “OK, um, I owe Bob Murphy an apology. He set me straight, thanks Bob.”

Heh heh a little joke there for you. Here’s what Krugman actually said:

Nonetheless, the fact that virtually all the deterioration in the US debt position from 1929 to 1939 took place under the tight-fisted Hoover rather than under FDR is an object lesson in the crucial importance of growth in dealing with debt. And the Hoover experience also provides a nice illustration of self-defeating austerity — not only didn’t austerity produce economic recovery, it didn’t even improve the fiscal position.

This is simply astonishing. Krugman is trying to reconcile the following propositions simultaneously:

(1) Herbert Hoover was tight-fisted.

(2) Herbert Hoover engaged in fiscal austerity.

(3) The absolute, nominal level of US debt consistently rose under Hoover.

(4) The US debt situation deteriorated under Hoover but not under FDR.

(5) FDR should be praised for his free-spending ways, in contrast to Hoover.

Dr. Krugman, if you read this, please do a follow-up post in which you discuss the level of federal spending under Herbert Hoover. I really want to see how large increases in nominal spending for the first three years count as fiscal austerity. Does it have to do with the liquidity trap? Do we need to divide federal expenditures by mean global temperature, perhaps?

UPDATE: I was a bit unclear in the above. My point is that there is one way Krugman could reconcile all the propositions listed. Namely, if Hoover cut spending throughout his term, but federal revenues fell even more, thus driving up the debt, both in nominal, absolute terms and as a percentage of GDP (as the economy collapsed). That is clearly the narrative Krugman is pushing.

And yet, Hoover did no such thing, as I document in this article. Krugman keeps painting himself into a smaller and smaller corner. I imagine when people read this earlier Krugman column, for example, they would have thought the federal government ran surpluses under Hoover. Now the truth gets dribbled out. Krugman’s readers now know that the federal debt went up under Hoover, even after his “austerity” measures. So rather than saying, “Hmm, OK maybe we shouldn’t keep describing Hoover as tight-fisted after all,” Krugman takes it in stride and says, “See? Cutting spending doesn’t even reduce the deficit, so it’s a double-plus-stupid policy.”

4 Responses to “Krugman Back to Being My “Favorite Blogger””

  1. Yancey Ward says:

    Well, this is part and parcel with the explaining away of Japan, too. Somehow, someway, Japan ended up with the biggest government debt relative to GDP in the OECD (fast approaching 200%), and yet never really employed stimulus the last 2 decades, or, if they did, they ended it too early.

    • bobmurphy says:

      Right, I have been trying to put my finger on that too. They say we need massive government spending and huge monetary expansion lest we end up like Japan. Then when some of us worry about price inflation, they say, “Nah, Japan engaged in massive government spending and huge monetary expansion, and they didn’t get inflation. No worries.”

      I suppose “our side” is doing something hypocritical or inconsistent too, but still it’s funny.

    • Not an Economist says:

      I have to be honest – I find the treatment of Japan very confusing.

      Keynesians insist Japan did not engage in much stimulus while Austrians say the exact opposite. On the latter I have read LvM Inst posts and an excellent article on Hans Seinnholz’s website which list stimulus measure after stimulus measure that the Japanese Govt implemented after the early 90’s to no good effect. But Keynesian’s turn a blind eye.

      Another response of some Keynesians is to claim that there was sthg wrong with the Japanes banking system which stopped the stimuli working. I have never seen this adequately explained though. Possibly sthg to do with the Central Bank paying extra interest on commercial bank reservces which inturn deters the Commerical Banks from lending – but then thats not a market probelm as far as I can see.

      I want a world with nice easy answers to simple questions where we all agree and are in harmony with one another.

  2. Not an Economist says:

    Exellent post. Thank you for it. Pardon me for being slow but why doesn’t the following give Krigamn a get out of jail card on this issue?:

    I would have thought that Krugam is saying that by cutting federal expenditure much needed support for the economy was taken out resulting in a further slump which caused welfare payments etc…, to have to increase (e.g., increase unemployment causing increase spend on welafre). This latter incerase more than offset the initial austerity measures. (This is the type of claim made by the British Labour Party today in opposition to the British Govt’s austerity agenda).

    I know you are busy but could you take time to clarify why this doesn’t work?