A deficit dummy

It’s easy to find dumb articles on the economy these days, but this one by Robert H. Frank in the NY Times is quite possibly the dumbest collection of nonsense that I’ve read in quite some time.

Mr. Frank is an economist at Cornell – evidently Cornell has loose requirements on who can claim that title – and he has his facts wrong.

For example, Mr. Frank states:  In 1929, President Herbert Hoover thought that the best response to a collapsing economy was to balance the federal budget. With incomes and tax receipts falling sharply, that meant cutting federal spending. But as almost all economists now recognize, President Hoover was profoundly mistaken.

Everyone has heard some variation of that basic statement over the years. The problem is that it’s simply not true.  That’s a polite way of saying that Mr. Frank is lying.

Hoover did not cut federal spending – Hoover increased federal spending.  Here is a chart of federal spending from 1928 -1940.   (Source data is the GPO here – link opens Excel spreadsheet.)

Year Total Fed Spending (millions) Percent Change
1928 $2,961 3.64%
1929 $3,127 5.61%
1930 $3,320 6.17%
1931 $3,577 7.74%
1932 $4,659 30.25%
1933 $4,598 -1.31%
1934 $6,541 42.26%
1935 $6,412 -1.97%
1936 $8,228 28.32%
1937 $7,580 -7.88%
1938 $6,840 -9.76%
1939 $9,141 33.64%
1940 $9,468 3.58%

As anyone can plainly see, federal spending actually increased every single year from 1929 through 1932 – the four years of the Hoover presidency.  Yet Mr. Frank states that Hoover cut spending. The fact is that federal spending increased from $2.9 billion in 1928 (the year before Hoover took office) to $4.6 billion in 1932.

That’s a 63% increase in federal spending in just 4 years!  How can Mr. Frank be that ignorant of history and still write authoritatively about economic history?

And this data also lets a little air out of the myth that FDR’s spending brought us out of the depression.  It’s true that FDR increased spending, but when you actually look at the numbers, he increased spending in his first term from $4.6 billion in 1932 to $8.2 billion in 1936 – a 76% increase.  That’s not dramatically larger than Hoover’s 63% increase.  And during his next 4 years, FDR increased spending from $8.2 billion in 1936 to $9.4 billion in 1940 – a meager 15% increase in 4 years.

I have no doubt that “almost all” Keynesian economists will continue to propagate the lies about the Great Depression, Hoover, and FDR, but you and I know that they’re lying.

With that common fallacy exposed, we now turn back to Mr. Frank.

Mr. Frank states When a downturn throws people out of work, they spend less, causing still others to be thrown out of work, and so on, in a downward spiral. Failure to use short-run deficits to stimulate spending amplifies that spiral, causing further declines in tax receipts and even bigger deficits. That this path makes no sense is a settled issue.

It sounds good, but his statement that this is “a settled issue” is false.  It’s false because of his implicit premise that government deficit spending creates productive employment.  I have no doubt that government spending can employ otherwise idle people, but this is not a net gain for the economy.  The government simply transfers wealth from one segment of society to another – it doesn’t create wealth.  Mr. Frank’s major flaw is in his unstated assumption that the government can allocate resources better than individuals.

Take the current auto bailout as an example.  What would have happened if the government didn’t bail out GM?  GM would have declared bankruptcy.  People who had invested in GM stocks and bonds would be SOL – and that’s the way it should be.  When you invest your money, you (whether you realize it or not) are incorporating risk in choosing where to invest.  You may choose to invest in something risky like a dot com or alternative energy start-up, because you balance the risk of them going bankrupt against the possibility of huge returns.

It’s your money – invest it however you want.  But don’t bitch and moan and beg for a bailout when the money you invested disappears because the company goes broke and leaves you with a sock puppet.

In the case of a GM bankruptcy, valuable assets such as factories and parts would be auctioned off to the highest bidder.  Assets with no value are wiped out and those who invested in them would lose money.  Some would be unable to survive and would themselves go broke.

In other words, the “bad” (non-profitable) assets of GM would disappear.  But the “good” (profitable) assets would be sold to private investors (or companies) who would put them to productive use.  Good companies survive and thrive off of the mistakes of their competitors.  Just imagine how many productive  jobs Honda, Toyota, or Nissan could provide using GM facilities and patents.

Mr. Frank also shows his ignorance when he states Once the downturn ends, there should be no need to incur additional debt. Indeed, there are many ways to pay down debt without requiring painful sacrifices. A $2 tax on each gallon of gasoline, for example, would generate more than $100 billion in additional revenue a year.

Politicians and economists have been saying that they’ll balance the budget and start paying down the debt for as long as I can remember – and I’m 47.  It has not happened in my lifetime.  Not once.

The last time the US reduced the national debt was 1957.  (Source is the US Treasury.) When do you suggest we start making payments on the principal Mr. Frank?

And a $2 per gallon tax on gasoline would be an additional $283 billion in taxes at the current rate of consumption of 141.9 billion gallons per year. (Source is US Energy Information Administration.)

Mr. Frank also says It’s also useful to put the nation’s debt burden into perspective. Over the last eight years, Bush administration deficits raised the national debt by almost $5 trillion. Given the current crisis, it’s easy to imagine a similar increase during the next four years. At recent interest rates, servicing $10 trillion of extra debt costs about $400 billion annually — a big amount, to be sure, but less than 3 percent of the economy’s full-employment output. We’ll still be the richest country on the planet even after paying all that interest.

Bullshit.  That’s like saying you got the highest score of those who failed.  I’m not a fan of Bush – since I consider Bush the worst President in my lifetime, that’s the understatement of the year – so I don’t like it when Obama imitates Bush.  Liberal or Conservative – big government is big government.

The 3% figure Mr. Frank gives is technically accurate – when you take the $400 billion figure he uses – but why does he use that number?  The bottom line is the one that matters.

The national debt is currently over $11 trillion (source US Treasury).  The US GDP for 2008 was $14.2 trillion (source BEA).

Our current national debt is 77% of GDP.  If Obama adds $5 trillion more in the next 4 years (as seems likely) our debt will be over 100% of GDP.  And if Mr. Frank thinks that’s sustainable, I’ve got some great beach-front property to sell him.

I could go on and on about the errors in Mr. Frank’s article – such as his mistaken assumptions about the wealthy – but you can read it yourself.  I’m amazed that the NY Times editors allowed an article this full of errors to be published.

gk

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3 Responses

  1. Great work “debunking”. The lies about Hoover is pretty much one of the basic premises modern Keynesians strive off. Because if Hoover did in fact “stimulate the economy” as well, this would mean that (all logic thrown out the window, and relying on empiricism only) “fighting a serious crisis requires at least more than a decade of government deficit spending, and possibly a war to trash the economy after that”. Somehow Keynesianism sounds a bit more questionable when we put it like that. Hope it’s ok if I link this in the next round of capitalist blog links (missed doing it last week unfortunately – too much to do, too little time).

    It was indeed an excellent read.

    Best Regards,

    // Hpx

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  3. […] disagree with some of his opinions, and the disagreement stems from my post a few days ago (A deficit dummy) where I took Robert Frank to task because of numerous errors and half truths in a NY Times […]

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