The democrats have never met a crisis they didn’t like. After the crash in September they all became proud Keynesians. Rep. Dan Maffei (D-NY) touted the Keynesian model as a way to help cash-strapped states. He doesn’t seem to understand (or care) that the very policies he and his fellow democrats put into place are only exacerbating the fiscal problems of the states.
White House economic advisor Christina Romer is the latest to tout Keynesian deficit spending as the only way to grow the economy and battle the recession. To the uninformed her arguments sound plausible, but Robert Murphy at the Mises Institute (via Free Republic) has exposed the faulty logic behind Romer’s Depression history.
In the first full year in which Hoover and Congress would have realized the country was in serious trouble, they boosted federal spending by a whopping 31 percent (from FY 1931 to FY 1932), and this occurred while tax receipts collapsed by 39 percent! Are these facts consistent with the picture of Hoover as a tight-fisted liquidationist that some modern Keynesians are painting?
In any event, Hoover’s last fiscal year was FY 1933, which ran from July 1, 1932, to June 30, 1933. (Roosevelt was sworn in on March 4, 1933.) Unemployment in 1933 averaged 25 percent. But, as Romer told us in the block quotation above, the unemployment rate fell rapidly once Roosevelt took over and cranked up the spending.
Yet look at the relatively insignificant increase in deficits. In the rock-bottom FY 1933, the deficit was 4.5 percent of GDP. In the first three years of the New Deal – when Romer says the economy illustrated the success of (modest) Keynesianism – the deficit averaged 5.1 percent of GDP.
Isn’t that a rather subtle result? Romer and the other Keynesians are claiming that the timid 4.5 percent deficit under Hoover, allowed the economy to sink into the worst Depression in US history, with monthly unemployment rates above 25 percent. Yet by bumping up the deficit’s share of the economy by a mere 60 basis points, FDR was able to achieve the most spectacular turnaround in US history.
Can that be right? Do those numbers really make sense? I submit that there are other factors involved, and that focusing on the size of the government’s budget deficit to explain economic growth, is about as useful as focusing on taco sales to explain Major League batting averages.
Not that anyone in the Obama administration is paying attention to Austrian economists. If they did, it would mean giving up power and control. We can’t have that now, can we?
