Friday, April 08, 2011

Nicholas Kristof Gets His History Backwards

In a column in the New York Times, he writes:

"But one of the most basic principles of economics is that when an economy is anemic, governments should use deficit spending as a fiscal stimulus, even though that means an increase in debt. If Senator Rubio believes that the response to a weak economy is to slash spending, he is embracing the approach that Herbert Hoover discredited 80 years ago."

Kristof has his historical facts precisely backwards. From 1929 to 1932  federal spending increased by 50% in nominal terms, doubled in real terms, tripled relative to national income. Judged by that measure, Herbert Hoover makes Barack Obama look like a fiscal conservative.

Kristof is not the only one to subscribe to this particular historical myth. Just over a year ago, I wrote a op-ed that appeared in several places, responding to the same mistake made by David Frum, a conservative commentator.

As I pointed out there, we do have an example of a Republican president who responded to a surge in unemployment in the way they think Hoover did. From 1920 to 1921, unemployment rose from 5.2% to 11.7%, almost as sharp an increase as from 1930 to 1931. Harding responded by sharply cutting spending. By 1922, federal expenditure relative to national income had dropped almost fifty percent.

And the unemployment rate was back down to 2.4%.

That does not prove that Kristof's (and Frum's) view of the relevant economics is wrong; proof is hard to come by on such questions. Perhaps there were other features of the two episodes that explain why the Great Depression that happened in the thirties did not happen in the twenties. But both of them chose to base their argument on historical facts, and the historical facts are the exact opposite of what they claim.

15 Comments:

At 9:57 AM, April 08, 2011, Anonymous Perry Metzger said...

Bravo. I hate that this historical inaccuracy has become so entrenched that it is almost universally believed.

 
At 9:59 AM, April 08, 2011, OpenID increasingmu said...

But was the free market behavior of 1920-21 a myth?

http://www.springerlink.com/content/5683j4v650187261/

Professor Friedman, I'm surprised you cited 1921 when this paper has been making the rounds on the economics blogs the last two weeks.

 
At 2:15 PM, April 08, 2011, Blogger Paul, just this guy, you know? said...

Dr. Friedman, I've just learned you have a blog. I've added you to my newsfeed, and will be looking forward to reading!

- Paul Mitchell UTexas Arlington '96 (BA-Econ)/Galen of Bristol, KSCA

 
At 4:21 PM, April 08, 2011, Anonymous Anonymous said...

@increasingmu...

I'm not aware of anyone who has claimed Harding's response in 1920-1921 was an example of "free market behavior". That claim certainly does not appear in this blog post. What the author said was...

"From 1920 to 1921, unemployment rose from 5.2% to 11.7%, almost as sharp an increase as from 1930 to 1931. Harding responded by sharply cutting spending. By 1922, federal expenditure relative to national income had dropped almost fifty percent."

I assume you don't dispute this. The author then continues...

"That does not prove that Kristof's (and Frum's) view of the relevant economics is wrong.... Perhaps there were other features of the two episodes that explain why the Great Depression that happened in the thirties did not happen in the twenties."

...which specifically addresses the possibility that factors other than Harding's cuts were responsible for the quick turn-around. The author "cited 1921" only as "an example of a Republican president who responded to a surge in unemployment in the way they[*] think Hoover did".

I don't see how Kuehn's critique relates to this blog post at all other than the fact they both mention Harding's actions during 1920-21.

[*] Kristof, Frum and, although he implies it rather than actually saying it, Krugman

 
At 5:20 PM, April 08, 2011, Blogger James A. Donald said...

At 9:59 AM, April 08, 2011, OpenID increasingmu said...

"But was the free market behavior of 1920-21 a myth? http://www.springerlink.com/content/5683j4v650187261/"

So, Keynsians tell us that Keynsianism, rightly understood, did not apply in 1920-21 because people were willing to invest.

And why were people willing to invest in 1920-21, and not in 2010-2011?

 
At 11:13 PM, April 08, 2011, Anonymous Anonymous said...

"Kristof has his historical facts precisely backwards. From 1929 to 1932 federal spending increased by 50% in nominal terms, doubled in real terms, tripled relative to national income. Judged by that measure, Herbert Hoover makes Barack Obama look like a fiscal conservative."

But government spending was lower as a % of GDP in those days.

Arguably the reason why we haven't had a repeat of the Great Depression is that government got bigger, so the deficits which occur automatically in a recession (due to falling tax receipts and more welfare spending) are larger. And of course, without the gold standard the federal government is not revenue constrained.

 
At 1:25 AM, April 09, 2011, Blogger James A. Donald said...

Anonymous said...
"arguably the reason why we haven't had a repeat of the Great Depression is that government got bigger"

And why did we not have any great depressions before the great depression?

 
At 2:07 AM, April 10, 2011, Anonymous Anonymous said...

"And why did we not have any great depressions before the great depression?"

Well, we did have depressions - the GD was just the biggest.

In ancient times, depressions were caused by war, crop failure, and such. They were supply side depressions.

A modern depression is endogenous. The economy self destructs. This automatically drives the government budget into a large deficit, which counters the depression - but the curative power of the deficit depends on its size relative to the economy.

 
At 6:25 AM, April 10, 2011, Blogger dkuehn said...

increasingmu -
Thanks for not only discussing my paper on your blog, but sharing it here. A few thoughts - first, I agree with "anonymous" that to talk of this as "free market behavior" is a little misleading, and I'm not sure it's worth talking in these ideal-types anyway. Friedman is right that Harding cut spending, but we need more context than that and this is what I point out in the paper. Harding's budget cuts were less substantial than Wilson's, and Wilson balanced the budget not only before Harding came into office, but before the 1920-21 depression even started! So I think Friedman's take on Harding is accurate, but it's relevance to getting out of the depression is negligible.

One thing that I do think a lot of people ignore about fiscal policy in 1920-21 is that the "tax cut" wasn't much of a tax cut and also had little to do with the recovery. We were already on our way out of the depression when it took effect, and it didn't immediately lower taxes all that much. Harding cut rates but expanded the tax brackets that he assessed those rates against, so that income tax revenue as a share of total income actually increased modestly in the first year of the tax cuts (it decreased subsequently). This is a very tried-and-true approach to tax reform that gets support from both sides of the aisle: "lower the rates, broaden the base" - but it was not the sort of response a lot of libertarians have claimed it is.

If you want to look for a cause of the recovery, don't look at the Harding adminsitration. It didn't have all that much to do with it.

Look at (1.) rate cuts by the Fed, and (2.) the inventory cycle.

 
At 10:03 AM, April 12, 2011, Blogger John McGinnis said...

Dkuen writes, "If you want to look for a cause of the recovery, don't look at the Harding adminsitration. It didn't have all that much to do with it."

Exactly.

 
At 9:57 AM, April 15, 2011, Anonymous Anonymous said...

Oh, really?

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/hist.pdf

Year Receipts Outlays
1928 3,900 2,961
1929 3,862 3,127
1930 4,058 3,320
1931 3,116 3,577
1932 1,924 4,659
1933 1,997 4,598

But we know THE TRUTH and wont let the government types confuse us with their numbers, right?

 
At 2:23 PM, April 25, 2011, Anonymous Anonymous said...

I don't understand what you're trying to say?

If you're pointing to his last year in office, 1933, where the deficit was *slightly* less in nominal terms than the previous year, but still massive compared to historical peacetime deficits, I don't see what that proves.

 
At 9:54 PM, April 25, 2011, Blogger Lola said...

Defecit spending is not a 'principle of economics' it is a 'principle of economic policy'

 
At 1:11 PM, April 26, 2011, Anonymous Libety13 said...

Excellent, Mr. Friedman, much too long have the media, government, and lacky economists gotten away with their ruinous Keynesian theorizing and policies that were at the HEART of the cause and prolongation of the Depression, and every boom and bust cycle since.

You are right in line with a long list of Austrian economists and historians that have already convincingly refuted such false revisionist rewrite of historic and economic truth.

 
At 8:09 PM, April 26, 2011, Blogger VangelV said...

Friedman is right that Harding cut spending, but we need more context than that and this is what I point out in the paper. Harding's budget cuts were less substantial than Wilson's, and Wilson balanced the budget not only before Harding came into office, but before the 1920-21 depression even started! So I think Friedman's take on Harding is accurate, but it's relevance to getting out of the depression is negligible.

Sorry but the point is still the same. If you want to ensure a healthy economy you need to cut spending. Wilson did cut spending because he did not have to finance a war. Harding continued with the cuts and added tax cuts to the picture. Those tax cuts stimulated investments once the necessary liquidation had taken place.

Here we must note that the US economy was geared to support a war effort. Once that war effort was made the companies that made the products needed for the war had to close down. The Keynesian prescription to keep the balls up in the air by supporting companies that were no longer needed has always been a failure and has never made any sense. There is nothing in your paper to suggest otherwise to any rational reader.

And one thing that puzzles me about all this. How is it that economists can talk so confidently about GNP figures when the statistical data gathering did not become entrenched until the 1940s?

 

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