Wednesday, February 23, 2011

Alarming image: Burton backwards on Hoover


Ireland's Labour Party spokesperson for finance Joan Burton explains her party's policies to deal with the recession by comparing them with the policies that led to the Great Depression in the US:

After the 1929 great crash and the tsunami of 4,000 bank failures across the United States, the then US President, Herbert Hoover, came up with a cunning plan to restore the economic fortunes of the US. He slashed Government spending to balance the books. The result was the Great Depression.

Burton's conclusion is to follow the lead of Hoover's successor:

After immense human suffering and the enlightened intervention of his successor, Franklin Delano Roosevelt, with some false starts, a path out of the Great Depression was charted for the US.

So is she right to say that Hoover slashed government spending? First let's look at the US Government's own data for Federal spending and receipts during the Great Depression. Below is a graph from the period 1924 to 1935.

Immediately we see the opposite to what Joan Burton claims is true: rather than cutting Federal spending, Hoover drastically increased it. Here is the same graph with Hoover's time in office highlighted.

Far from slashing government spending to balance the books, Hoover spent lavishly and sank the US budget into deficit.

Hoover's response to the economic crisis was that of a ready interventionist:

He directed all Federal Departments to speed up public works and other projects, in order to create more jobs. He directed the Federal Farm Board to support commodities prices and asked Congress to decrease non-essential government spending and use the money to start new public works. President Hoover called many conferences with industry and finance leaders to encourage voluntary cooperation among businesses to relieve the Depression. Hoover also created the President's Organization on Unemployment Relief to stimulate and coordinate employment and relief efforts.

Hoover's Relief and Reconstruction Act in 1932 supplied those states unable to finance "the relief of distress" with $300 million in loans. It also authorised the Reconstruction Finance Corporation to issue $1.5 billion in bonds to state and local governments for construction projects.

Hoover also increased taxation dramatically with the Revenue Act of 1932. Maximum income tax rose from 25 to 63%. Excise taxes were charged on petrol, cars, luxury goods like furs and jewelry and bank cheques. Estate taxes doubled, corporation tax increased.

He increased taxes on imports with the Hawley-Smoot Tariff, which sought to protect American businesses from foreign competitors but instead sparked a tariff war with other countries. (Readers of my generation may be more familiar with the Hawley-Smoot tariff as the topic being taught to bored students in Ferris Bueller's Day Off: "Did it work? Anyone? Anyone know the effects? It did not work and the United States sank deeper into the Great Depression.")

So what on earth was Burton talking about? Hoover did anything but slash spending.

There was another president, however, who really did slash spending in response to a recession. Warren G. Harding came to office in 1921, during the severe recession that followed the end of World War I. The government had been cutting back on its massive military spending, and Harding's response was to continue along the same path:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.”

A graph of the period from 1919 to 1924 looks like this:

For two years the US experienced deflation, but kept cutting spending. Joan Burton says that "when deflation is a greater menace than inflation... fiscal conservatism makes little sense", so presumably she would have opposed Harding's policies.

The policies, though, were followed by dramatic growth. Unemployment fell from 12% in 1920 to 2.4% in 1923. The 1930s was a time dominated by Roosevelt, who Burton sees as a good example for Ireland, yet it is remembered as Depression time today. The 1920s became known as something rather different - the Roaring Twenties.

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