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The Keynesian Desperation Regarding 1920-21 Is Now Embarrassing

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Submitted by Robert Murphy via Mises Canada,

In a previous post, I discussed the newfound interest in the United States’ depression of 1920-21 because of Jim Grant’s book. As I explained in my post, Grant is following in the tradition of several free-market writers (including me) who think the 1920-21 depression shows the flaws in Keynesian thinking. Specifically, the depression after World War I was sharp but short, with the economy snapping back into recovery without Keynesian “stimulus”–indeed despite massive doses of “austerity” to use the modern lexicon.

Naturally the Keynesians (and others) pushed back, arguing that the Fed was decisive in ending the contraction. But analysis by Jeff Herbener (via Tom Woods) and George Selgin show that that narrative doesn’t work; the timing is simply off. The economy had clearly bottomed out and was recovering before the Fed loosened up the monetary spigots, looking at various criteria. (I should admit that the argument for monetary stimulus does have some support if we look at interest rates, rather than monetary growth. I will elaborate on this in a future blog post.)

But if the attempt to attribute the recovery from the 1920-21 depression to monetary policy is dubious, Barkley Rosser ups the ante by bringing in fiscal stimulus as well. After writing a blog post making the familiar argument about the 1920-21 being a textbook case of tight/loose money, Rosser then follows in the comments with this jaw-dropping argument and “history”:

…Herbert Hoover really does come out looking not so bad, partly thanks to all these people who think that 1921 was the way to go criticizing him. In fact, he was Commerce Secretary under Harding, and while it has not been widely advertised (supposedly there was no fiscal stim in 1921), by the end of 1921 there was in fact an increase in public works spending coming down that was driven by Hoover. So, the bounceback from the 1921 decline was aided by both fiscal and monetary policy stimulus, which you do not hear from Grant or any of these others.

 

Indeed, Hoover attempted fiscal policy after 1929, mostly for investment in airports and dams (they do not call it the Hoover Dam for nothing), but he was somewhat held back by Congress, and, ironically, FDR criticized him for his deficit spending and [FDR] ran on a balanced budget platform…only to abandon it once in office…This is all a bit more complicated than many like to acknowledge.

Do you see how wonderful this is? Rosser is saying the recovery from 1921 is partly thanks to the big-spending Herbert Hoover. Apparently, as Commerce Secretary, he was able to push through Keynesian fiscal stimulus, but as president, the conservative Congress forced him into the mold of the tight-fisted budget balancer that we all learned about in school (and that Krugman used as the villain in his 2008 column “Fifty Herbert Hoovers” to warn against state budget cuts).

Even though we can understand the rhetorical need to tie himself in such knots, Rosser’s version of history is so ludicrous that I don’t have to do much except show the relevant budget figures, put out by the White House (Table 1.1, p. 23):

Federal Outlays FY 1919 1924

As the chart above indicates, total federal outlays fell every single year from Fiscal Year 1919 through 1924. Do you see any evidence of the “fiscal stimulus” that helped pull the economy out of the 1920-21 depression? Now in general, we might have to worry about the calendar/fiscal year mismatch. For example, “Fiscal Year 1921″ ran from July 1, 1920 through June 30, 1921. (Note that the start of the federal government’s fiscal year shifted to October 1 in 1976.) So when Barkley Rosser says there was a spurt of “public works spending” at the end of 1921, maybe he is referring to the calendar year?

But, as the chart shows, it doesn’t matter: there were steady and significant drops throughout the entire depression and recovery. Federal outlays dropped by a whopping 66% from FY1919-1920, by another 20% from FY1920-21, and then another 35% from FY1921-22. (For purists, in the following years it fell an additional 4.5% and 7.4%.) This is not “fiscal stimulus,” and the only reason Rosser is forced into suggesting such an absurdity is that he recognizes the awkwardness of this episode for traditional Keynesian policy prescriptions. (Note that I don’t deny that there may have been specific spending projects at the end of 1921–but clearly there is not “fiscal stimulus” on balance.)

Things are equally grim for the other end of Rosser’s historical narrative. The following chart shows federal spending when Hoover actually did have something to say about it:

Federal Outlays FY 1928 1933

Here we see that federal spending went up every year that Hoover was in office, except the last. (Remember that Fiscal Year 1933 ran from July 1, 1932 through June 30, 1933, and that Franklin Roosevelt was not sworn in until March 4, 1933.) Hoover was sworn in on March 4, 1929, and the stock market crash of October 1929 technically happened in Fiscal Year 1930. Rounding, the increases in federal spending from the previous year were 6% and 8% in FY 1930 and 1931, followed by a whopping 30% boost in FY 1932. Remember, this was happening as tax receipts were collapsing and prices were falling, making these nominal increases even more impressive.

Finally, as everyone knows, Hoover was a coldhearted “budget balancer” and slashed spending in FY 1933 by 1.3%, bringing it down to “only” 47% above the level that Calvin Coolidge had bequeathed, at the end of the Roaring Twenties. It’s worth pointing out that in this allegedly austere year, the budget was hardly balanced–the federal deficit was still $2.6 billion, or 4.5% of GDP.

It is truly amazing to see the contortions into which some analysts twist themselves, trying to make the historical facts fit their economic models. (I realize such is a common complaint that Keynesians level against their intellectual opponents; irony abounds.) When it comes to the depression of 1920-21, the central bank and federal government did the opposite of what Keynesians recommend. Nonetheless, recovery ensued despite continued budget cutting and a loosening of monetary policy that happened well after the recovery was underway.

In contrast, both the Fed and the feds engaged in monetary and fiscal “stimulus” after the 1929 stock market crash. Nonetheless, things just kept getting worse, so that the Keynesians have no explanation except to say, “too little, too late.”

In summary, things make perfect sense if we accept the hypothesis that government spending wastes resources. This really shouldn’t be such a scandalous suggestion, especially since it fits the empirical evidence so neatly.

 

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Wed, 12/24/2014 - 19:17 | 5589782 knukles
knukles's picture

Flaws in Keynesian thinking?

Wed, 12/24/2014 - 19:36 | 5589812 rehypothecator
rehypothecator's picture

Notwithstanding the data, nevertheless, the consensus is that government spending pulled the US out of the depression.  Since it is consensus, therefore, it is correct.  

Thu, 12/25/2014 - 00:11 | 5590290 Uchtdorf
Uchtdorf's picture

Not just any ol' government spending though... It was war expenditures, yes war, in all its broken window glory that helped us recover from the depression and live happily ever after, well, that is unless of course you died during the banksters' war and didn't live happily ever after, but in that case you were just an expendable troglodyte anyway and not of any concern to those involved in the rigorous academic circles of economics, Keynesian Economics.

Thu, 12/25/2014 - 07:12 | 5590564 Oracle 911
Oracle 911's picture

Well the question is: On what have to the gov spend OUR money?

The answer is simple building and maintaining the necessary infrastructure, developing technologies for dual (civilian and military) use like the newest Russian jet engines, etc.

 

But on what  the gov spend OUR money?

Meaningless wars, derivatives, bankster handouts etc.

Wed, 12/24/2014 - 19:51 | 5589840 SAT 800
SAT 800's picture

Keynes' book, which I really couldn't read, consists of obfuscation and theorization. By which is meant creating fairy tales and then pretending, for whatever reason,  that they are real. It's all flaw and no thinking. But it does feature a lot  of smoke from the little wooden wheels in his head as he furiously analysed made up scenarios; plus a large ration of bogus math. to make it look "scientific".

Wed, 12/24/2014 - 20:08 | 5589873 nmewn
nmewn's picture

Keynesians don't think, they feel ;-)

Wed, 12/24/2014 - 19:31 | 5589804 apberusdisvet
apberusdisvet's picture

Hey Krugman

 

FUCK YOU

 

yo Bernanke

 

FUCK YOU TOO

 

 

Wed, 12/24/2014 - 19:33 | 5589808 Motorhead
Motorhead's picture

Hoovervilles, bitchez!

Wed, 12/24/2014 - 19:37 | 5589814 petkovplamen
petkovplamen's picture

it always amuses me how no one has even made the connection between the creation of the FED in 1913 and the Great Depression of 1930. It took them 20 years to create the bigest depression USA had ever seen. Bit NOBODY even mentions that fact.  

Wed, 12/24/2014 - 20:59 | 5589973 Osmium
Osmium's picture

I think you just did.

Wed, 12/24/2014 - 19:41 | 5589816 Yen Cross
Yen Cross's picture

 

 I really respect my elders, and at the same time understand how pompus I was to even think I understood their hardship.

   How can I possibly begin to understand their hardship. How can the children 75 years from today, even begin to understand our hardship?

  I say hardship in a singular way, because history repeats, with or without generations.

Wed, 12/24/2014 - 20:04 | 5589862 knukles
knukles's picture

75 years from now and looking back these just might have been the good old days.
Jr (30+ y/o) is reading a book about generational societal advancement and decline, similar to the Fourth Turning.  He points out one truly interesting insight (his own) with respect to "empires".  What with the interconnectedness of all things economic, social and political, there will be no rise and falls of great civilizations and empires here on out.  They're/We're all one Big Agglomerated Blob of Human Goop.  Meaning when it goes all to hell (wealth being the greatest indica of societal peaks and that can simply be measured by obesity, trinkets and shit) it all falls to hell at the same time, for everybody.
Good luck running away.
Perhaps the ISIS/ISIL/whateverthefuck are simply more advanced than we.  They've gotten there first by never leaving the shit piles.

Merry Christmas
My God always hold you close in the palms of His hands

Wed, 12/24/2014 - 20:18 | 5589892 Yen Cross
Yen Cross's picture

 God Bless, and Merry Christmas to you Knuks & Family.

  I really hope Mrs. Knuks lets you devote more time to your writing passions in '15. ;-)

 Knuks, you have the innate ability to transgress generational boundaries in a very p[ositive way.

 

Wed, 12/24/2014 - 19:46 | 5589835 ebworthen
ebworthen's picture

Monetary "stimulus", QE, bailouts, and all the other methods of central bank/.gov skullduggery are akin to removing the pain receptors from a person's body.

Or, removing the hunger/thirst response, or libido, or other bodily sense.  You'd have people running around burning themselves, dying of malnutrition, and not making any babies.

Wed, 12/24/2014 - 20:00 | 5589855 Fix-ItSilly
Fix-ItSilly's picture

To not consider the state of worldwide manufacturing and consumption, this is but a stupid tiff exposing us commonfolk to the waste that farts away in academic towers.

The US was unscathed by WWI.  Its people ever more educated and now more worldly through war contacts and immigration. The US, with its international banking power increasing, uniquely stood ready to supply a starving Europe.

Another example of insular economic thinking that is worth very little.

Wed, 12/24/2014 - 20:16 | 5589889 Spungo
Spungo's picture

Don't get angry at the Keynesians. Just front run their idiotic ideas and call it a day. 

Wed, 12/24/2014 - 20:52 | 5589960 CaptOveur
CaptOveur's picture

I try to do both.

Wed, 12/24/2014 - 20:59 | 5589969 Freebird
Freebird's picture

Read up on this one a few years ago...cannot recall exact gdp but after a couple of years of hardship & working through, gdp grew in double digits for a quarter or two.

This should have been the blueprint for this depression. Fuck you moneychangers & political whores.

Looking forward to getting a copy of Grants'.

Thu, 12/25/2014 - 02:11 | 5590401 JAFAH
JAFAH's picture

Looking forward to drinking a dram or three of Grants. Ho Ho Ho

Wed, 12/24/2014 - 20:59 | 5589974 alexmark2013
alexmark2013's picture
U.S. Government/Central Bankers Push The Economic Recovery By Manipulating The Economy http://investmentwatchblog.com/u-s-governmentcentral-bankers-push-the-economic-recovery-by-manipulating-the-economy/
Wed, 12/24/2014 - 22:09 | 5590083 kchrisc
kchrisc's picture

The summary: In 1920-1921 the banksters' theft machine wasn't as quite as organized as it was in 1929. So the banksters could not promote more theft as a remedy to the effects of their prior thefts.

In 1929, they did have the apparatus in place to promote more theft as cover for their prior thefts. They even got their violence-puppet, governmnet, to steal the American people's gold for them.

Since 1971 their fiat ponzi has gone "full retard," and they now steal even more by leveraging up their theft.

We now have them stealing our deposits, out wealth, and our futures.

The banksters need to repay us.

 

"Save Humanity, Guillotine a Bankster."

 

Wed, 12/24/2014 - 22:39 | 5590135 breadonwaters
breadonwaters's picture

I loved the story where Radio Shack is being propped up long enough that massive CDO's will not be triggered.

Isn't that precious.   The financialization of assets is sometimes difficult to explain to my kids ....how the actual oil market might be worth $500 Billion a year, but the derivative gambles on oil price are 100 Trillion ....

 

Then we get to see a derivate debtor actually holding up the lifeless body of Radio Shack just long enuf for the derivative debts to pass their contract date.  The actual cash it takes it make it appear to still be alive, are nothing compared to the derivative debts if someone can actually force it into bankruptcy.

PRICELESS!

 

Its all a big club and you aren't in it!

Wed, 12/24/2014 - 22:52 | 5590158 adr
adr's picture

Same me thing is going on with Sears, Bed Bath, JCP etc.

The rigged game to keep wealth expansion alive.

Thu, 12/25/2014 - 01:05 | 5590344 Nobody For President
Nobody For President's picture

It just occured to me that it is 9 pm (2100 hours) on Christmas Eve and I'm sitting here reading ZH? WTF!?

My wife died in February, and the homestead has become a very lonely place.

I'm 75, she put up with me for 47 years, and I was the luckiest guy in the room, always.

This Christmas just sucks, I hope it is a lot better for all you faithful ZH'ers.

I'm gonna shut this bastard down and have another 4 or 5 drinks. 

 

Thu, 12/25/2014 - 07:16 | 5590569 Farqued Up
Farqued Up's picture

Good on you NFPrez, I have always said that I want to go first and not make me suffer this world without my bride.

Thu, 12/25/2014 - 03:27 | 5590448 ReactionToClose...
ReactionToClosedMinds's picture

Not one mention of Andrew Mellon.  Therefore, factually & circumstantially, pretty useless.  Go do some unprejudiced research and what no one seems to have the patience or fortitude to do anymore!

Read some books with different perspectives.  Andrew Mellon, 'that bankster', was central to the policies and acts that changed or corrected the Wilsonian economic dynamic.  But it seems many cannot find the professionalism, integrity or objectivity to give Mellon his due.

 

The  political and bolshevik hacks under FDR clearly knew they had to destroy thoroughly any lasting reputation Mellon might have.  And they succeeded because there is a reservoir  of animosity towards Mellon that is mysterious once anyone with an inquiring mind delves into all the history.

I once thought Rbt Jackson was  a great judge.  After studying what he did to Mellon I can now entertain why he was never a 'judge' at all.  He was a legal hack elevated to the Supreme Court by FDR as political reward.  No wonder Hermann Goering made Jackson look inept at the Nuremberg trials.....because Jackson was a hack.

Yet the narrative was set about Mellon despite his total acquittal frombJackson's FDR induced political/legal attacks.

Mellon, despite his economic literacy, was reputationally destroyed.  Hence  no mention of the fact that he and the UK Chancellor of the Exchequer saved the West from itself by negotiating a 'doable' reparations schedule with a then destitute Germany.

But history is so archaic and irrelevant that we cannot take our precious time to revisit what really happened.   Our loss ..........

 

Thu, 12/25/2014 - 15:03 | 5591187 Future Jim
Future Jim's picture

+1. So Mellon wasn't in on the trip to Jekyll Island and the creation of the Fed?

Thu, 12/25/2014 - 09:25 | 5590668 Raoul_Luke
Raoul_Luke's picture

Exactly correct!  And with regards to the monetary policy argument, in that the Fed raised rates going into 1920, which likely had more than a little to do with the cause of the downturn, the subsequent loosening of interest rate policy merely undid the former mistake - that's not "stimulus" in any way shape or form.

This episode also brings up an excellent illustration for the folly of Neocon application of tax rate cuts.  Spending = Taxes (current + deferred).  So cutting tax rates while increasing spending is seen by rational expectations for what it is - a deferred tax increase.  I believe Harding also cut tax rates at Andrew Mellon's suggestion in response to the 1920 downturn, but with the spending trajectory as shown in the above chart, there was a concomitant reduction in spending, which means this (unlike George W. Bush's "tax cuts") was a genuine reduction in the overall tax burden.

This is the stuff that works - a reduction in the size and scope of government, less regulation and a strong currency.  Why aren't we trying it again???

Thu, 12/25/2014 - 11:51 | 5590814 RaceToTheBottom
RaceToTheBottom's picture

When has the Keynesian 2nd half ever been done?

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