No, the Government Didn’t Cut Spending During the Great Depression, and More Government Spending Won’t Fix the Economy

by Hans Bader on August 26, 2011 · 1 comment

in Economy, Politics as Usual, Stimulus to Nowhere

The federal budget deficit is already around $1.6 trillion, meaning that the government is borrowing more than 40 cents of every dollar it spends. But The New York Times’ editorial board and some Obama administration officials want to run up even bigger deficits to pay for liberal programs, supposedly to “stimulate” the economy. (Never mind that the $800 billion stimulus package failed, and even wiped out some jobs, such as in America’s export sector.)

At the root of this demand for ever-increasing spending is the false belief that falling government spending caused (and deepened) the Great Depression, even though government spending (and budget deficits) rose dramatically in the Depression under both the Hoover administration and the Roosevelt administration. Decrying proposed spending cuts, a letter  in the August 18 St. George Spectrum claimed that “cutting spending . . . didn’t work in the 1930s, and it won’t work today.” Writing in the August 16 Des Moines Register, David Osterberg of the left-wing Iowa Policy Project claimed that “Hoover’s mistake was to cut budgets in the face of terrible unemployment and poverty in America. He and his economic advisers assumed that budgets should be balanced.” Similarly, The Washington Post’s Greg Ip claimed on August 21 that “President Herbert” Hoover’s “obsession with balancing the budget in 1932 worsened the Great Depression.” Teamsters leader James P. Hoffa claimed in the August 10 Detroit News that “too little federal spending will strangle our economy as it did in the early 1930′s.” On August 9, Neil Conan of NPR claimed that “in 1929,” in response to the stock market crash, “President Hoover famously said no, we need to balance the budget,” rather than increase spending. On August 2, Ralph Harbin mistakenly wrote in the San Francisco Chronicle that “in the 1930s, President Herbert Hoover cut federal spending to balance the budget.” Similarly, New York Times columnist Paul Krugman falsely claimed that Hoover made the decision “to slash spending . . . in the face of the Great Depression,” in a January 23, 2009 op-ed.

But data from the White House’s own web site, and from the federal Office of Management and Budget, shows that Hoover and Roosevelt increased, rather than cut, spending in the Great Depression, and ran up deficits that were huge by historical standards.

That is illustrated in Table 1.1 on page 21 of a document on the White House’s own web site, a table entitled, “Historical Tables: Budget of the United States Government, Fiscal Year 2009.”  It shows that Hoover increased the federal budget from $3.1 billion in 1929, the year he took office (and the Great Depression began), to $4.7 billion in 1932, his last full year in office, and $4.6 billion in 1933, the year he left office. As I noted in a 2009 letter to the editor in The Washington Post, “Hoover inherited a large budget surplus, which he quickly turned into a deficit. By 1932, when he lost his bid for reelection, the deficit had reached $2.7 billion—the third-largest budget deficit America had ever experienced.” The Post‘s letters staff double-checked my figures and reviewed my sources before printing my letter, confirming that Hoover indeed increased spending, but so pervasive among liberals is the belief that Hoover cut spending that the Post unlearned the lesson of my letter, and later printed two columns falsely implying that Hoover cut spending. (Even as other publications, like the moderate Richmond Times-Dispatch and conservative Washington Times, confirmed that Hoover actually increased spending; The Atlantic noted that Hoover increased spending from 3.4% of GDP to 8 percent, increasing spending even as the economy shrank and deflation occurred.)

On August 14, I published a letter in the Des Moines Register noting that Hoover increased spending and the budget deficit:

David Elbert made the dubious claim that President Herbert Hoover “was a firm believer in balanced budgets” (“Obama’s Situation Looking a Bit Like Hoover’s,” Aug. 7). But in reality Hoover increased federal spending from $3.1 billion in 1929 to $4.7 billion in 1932, resulting in a budget deficit of $2.7 billion. (Budget figures come from the White House’s website.) That spending increase did nothing to prevent America from descending into the Great Depression.

The Des Moines Register‘s editorial page staff not only double-checked and confirmed the accuracy of my figures showing Hoover increased spending, but also revised my letter to include a parenthetical citing to a document on the White House website proving this (“(Budget figures come from the White House’s website.)”).

But my letter had no effect on liberal myth-makers. A mere two days later, The Des Moines Register printed an op-ed by David Osterberg of the left-wing Iowa Policy Project, an op-ed in which Osterberg falsely claimed that Hoover “cut budgets in the face of terrible unemployment” because he “assumed that budgets should be balanced.” Either Osterberg had not seen my letter, or he saw it, but disregarded it out of ideological blindness (perhaps he assumed that all non-liberal letters are filled with lies, and was too lazy to use Google to confirm the accuracy of the figures my letter contained, even though doing so would have been easy, since the documents I have cited are on the web, and economists and historians have cited the same figures I did).

The myth that Hoover reduced spending is as persistent and immune to reason as any religious superstition. Big-government liberalism is a religion, not a school of rational thought. A false understanding of the history of the Great Depression is the cornerstone of left-wing ideology, so central to it that it cannot afford to acknowledge even irrefutable historical data about the federal budget.

Left-wingers also claim in papers like The New York Times that the Great Depression persisted under Roosevelt because he didn’t spend enough money, and cut spending in 1937. But Roosevelt spent way more in peacetime than any other American president ever had, and spending cuts weren’t why the Depression deepened in 1937.

If you look at Table 1.1 in President Obama’s 2009 budget request’s Historical Tables, you can see that government spending rose under Roosevelt from 4,598 million (around $4.6 billion) in 1933, the year he took office, to 8,228 million (about $8.3 billion) in 1936, before temporarily falling slightly to 7,580 million (around $7.6 billion) in 1937. He ran a budget deficit every single year of his administration (it was $2,193 million in 1937), and spending was much higher in 1937 — when liberals claim low federal spending and budget-balancing deepened the Great Depression — than it was when he took office. (Federal spending reached $9,468 million by 1940, but unemployment remained high by historical standards.)

Why, then, did the 1937 Recession occur? Not spending cuts.  I discussed one reason in the August 5 New York Times:

In 1937, the Supreme Court upheld anti-business legislation that had been struck down by lower courts, like the National Labor Relations Act, in decisions like National Labor Relations Board v. Jones & Laughlin Steel Corporation. That made unions more powerful, led to a wave of costly strikes and discouraged hiring. The increased wages demanded by unions resulted in employers’ laying off many workers.

There were several other factors that led to the 1937 Roosevelt Recession. Those include, but were not limited to, (1) increased reserve requirements for banks, which limited the availability of credit needed by businesses to expand;  (2) tax increases in general; and (3) an undistributed profits tax that encouraged companies to pay out hefty dividends before it went into effect, while reducing investment and productive capital thereafter, artificially pumping up the economy in 1936 and then depressing it beginning in 1937. (The harmful undistributed profits tax was reduced in 1938, and then completely eliminated in 1939, after voters removed dozens of liberal Congressmen from office in the 1938 elections. The 1938 mid-term election resulted in so many liberal Democrats losing their re-election races that a coalition of Republicans and conservative Democrats was able to block additional anti-business measures from being enacted, resulting in the restoration of business confidence and economic growth.)

Georg Thomas August 26, 2011 at 4:50 pm

Thanks for this excellent piece.
I suspect, you made an inadvertend error in writing:
“The myth that Hoover increased spending …”

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