That 30's Mistake

Continuing with his theme of "spend, spend, spend," Paul Krugman is determined to claim that the free-spending governments of the West really are engaging in "austerity." Of course, not only does he get the New Deal wrong (and he really gets it wrong), but also is wrong about what happened in 1937.

First, with the U.S. Government running multi-trillion-dollar deficits, the notion that spending is anything but wild and wasteful is a fantasy in itself. For Krugman to claim that the government is involved in an austerity program is ridiculous, but here it is:

Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.

So, because of a vote regarding a relatively small amount of unemployment compensation funds, suddenly the government is going bare bones. Please.

Second, the depression within a depression in 1937-38 did not come because FDR decided to balance the federal budget. Instead, as Robert Higgs noted in this 1997 paper in the Independent Review, while the Federal Reserve System raised interest rates slightly, nonetheless the real problem came from the White House and its continuing attacks on private capital. Higgs quotes historian Elliot Brownlee, who wrote:

...the tax reform of 1935–37, more than any other
aspect of the New Deal,…stimulated business hostility to Roosevelt.…
[B]usiness opponents of New Deal tax reform charged that Roosevelt’s taxes,
particularly the undistributed profits tax, had caused the recession [of 1937–
38] by discouraging investment....

Furthermore, FDR made it clear after his re-election in 1936 that he was going to tax businesses into oblivion. As Prof. Higgs notes:

Although historians emphasize the president’s defeats with respect to taxation in the late 1930s, contemporary businessmen must have appreciated the reality of increased taxation: in fiscal 1940, with the depression still lingering, the federal government collected 57 percent more total revenue than it had in the prosperous year.

Now, I don't expect Krugman to understand this point, because to him, private capital spending is no different than government spending, and if "capital is on strike" (as FDR declared), then if government makes up the difference through borrowing and printing money, it is just as good. This is something that an economist -- even a Keynesian -- should recognize as being silly.

However, as I read Krugman, I have come to realize that he sees absolutely no difference in government spending and private capital expenditures. Assets really ARE homogeneous, in his view, and there are no real economic fundamentals. Of course, he also wants to demonize anyone who disagrees with him by declaring that anyone who thinks that government spending is out of control is doing ONLY because he or she hates poor people and wants others to suffer. Krugman in his own words:

In America, many self-described deficit hawks are hypocrites, pure and simple: They’re eager to slash benefits for those in need, but their concerns about red ink vanish when it comes to tax breaks for the wealthy. Thus, Senator Ben Nelson, who sanctimoniously declared that we can’t afford $77 billion in aid to the unemployed, was instrumental in passing the first Bush tax cut, which cost a cool $1.3 trillion.

First, "tax breaks for the wealthy" is nothing more than political talking points, and I have an aversion to academic economists acting like political operatives. Second, Krugman assumes that any cuts in tax rates have as their ONLY effect the lessening of revenue. There are no benefits at all, only costs.

This is interesting, as Krugman is saying that any money spent or invested privately, then, carry absolutely no benefits to anyone except the people whose taxes are cut, and that those benefits are completely offset by pain inflicted on others. This is not even economics; it is nothing but political leftism.

I wish that governments actually WOULD go on real programs of slashing spending and reducing its burden. What I find from Krugman, however, is that he views government spending and taxation as a net plus, but private investment and spending is only a cost. So, why should there be any private spending and property at all? If we are to follow Krugman's logic, then the state should take over everything. Then we could be prosperous like the Cubans and the North Koreans!

The government's "mistake" of the 1930s was not balancing its budget. No, its "mistake" was believing that government could control private enterprise, raise taxes, and increase the burdens that governments place upon individuals, and somehow out of that would rise prosperity. Apparently, Krugman continues to perpetuate that myth.