I had originally intended to do more with this post, but for now I will have to limit myself to briefly commenting on something that Daniel Kuehn argues in a recent post on the topic of Hoover and fiscal stimulus.

Writes Daniel,

Hoover’s biggest spending year had a lower spending level than the 1921 federal budget. I have been told ad nauseum that 1921 was a year of fiscal austerity. If that’s austerity, then so is 1932. Period.

This strikes me as a bad argument.

Here are the budget outlays for 1917–22 and 1927–31,

Yes, comparatively, government spending during the Hoover administration was less than that during the Harding administration. On this basis, however, one cannot call the Hoover administration “austere” (even if it turns out that it may have been, it would be for different, more relevant reasons).

Between 1924–28, the United States did not see budgetary outlays in excess of $3 million. All budgetary outlays during the Hoover administration, starting with the budget of 1929 (1 July 1928 to 30 June 1929), are larger than those of the five years preceding the Great Depression. If low government spending between 1924–28 did not cause deficient aggregate demand, then one cannot call the budget of 1929 austere. It is on this basis that I challenge the comparison between the budget of 1929 with that of 1921.

Let us say that aggregate demand prior to the October 1929 crash is AD 29 = C 29 + I 29 + G 29 + (X 29 – Y 29 ). AD 29 is stable; i.e. the economy can be said to be at (or close to, for all you perfectionists) “full employment.” Suddenly, we have AD GD , which decreases, because I and C fall. I and C fall by a combined amount we can denote as X. Between June 30 1929 and June 30 1930, however, we see a rise in G by $166 million. How can we call government spending policy “austere?”

It certain could be that government spending is insufficient, in the sense that government did not spend enough. I could be that I and C fell by a combined $300 million (this is a completely made-up number, I am just using it for pedagogical purposes), and as such $300 million > $166 million, which means that part of the “income gap” was not successfully made up by government spending. Nevertheless, it is clear that in the context of government spending, the budget of 1929 was expansionary (even if it was not expansionary enough).

For the record, ask me if Hoover engaged in Keynesian policy, and my answer will probably be a resounding ‘no.’ I like Daniel’s original position better: Hoover did too little, and probably too late. Doing too little, though, is not the same as being austere, if we define austere as being contractionary.