Johann Hari tries economic history

And fails, badly.

Here’s what we learned during the Great Depression, when our view of economics was revolutionized by John Maynard Keynes. In a recession, private individuals like you and me, perfectly sensibly, cut back our spending. We go out less, we buy less, we save more. This causes a huge fall in private demand, and with it a huge fall in economic activity. If, at the very same time, the government cuts back, then overall demand collapses, and a recession becomes a depression. That’s why the government has to do something counter-intuitive. It has to borrow and spend more, to apply jump-leads to the economy. This prevents economic collapse. Instead of spending a fortune on dealing with mass unemployment and economic break-down, with all the misery that causes, it spends the money on restoring growth. Keynes called it “the paradox of thrift”: when the people spend less, the government has to spend more.

Wherever it has been tried, it has worked. Look at the last Great Depression. The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt. The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shriekers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it.

Sigh.

No, Herbert Hoover did not cut spending and he most certainly did not pay off the debt. He ran budget deficits as he massively increased federal spending. It\’s true that Roosevelt did more of this than Hoover had done but it just isn\’t true that Hoover balanced the bedget and most certainly isn\’t true that he either reduced spending or paid pof a single penny of the national debt.

However, there is another example from the 30s that could be used. The UK experience. Here there was no large public deficit, in fact, taxation and spending were kept broadly in line with each other. According to the Keynesian prescription, this should have meant that the UK had a deeper recession than the US and a longer one.

The thing is though, it didn\’t. The recession in the UK was shallower than that in the US, was shorter, recovery came sooner and so did economic growth surpassing that of the previous peak.

What the UK did do is come off the gold standard and allow the pound to depreciate. What the UK government is currently doing isn\’t actually all that far from what the UK government of the 30s did. Devalue, (at least try to) keep some close connection between tax and spend, so as not to run huge defiits and thus increase the national debt.

One of the things you need to know about economic history is that there is indede this lovely Keynesian theory. It\’s just that when you look at the economic history of the 1930s, there doesn\’t seem to be any empirical support for it. The US, which followed the prescriptions of the theory, had an entirely shite time of it, the UK which rejected the theory had a dreary but OK time of it.

We were bust when we beat the Nazis. We were bust when we built the NHS.

Quite true. But having gone bust beating the Nazis and while building the NHS, Major Atlee was running budget surpluses. One of the very few times we really have actually been paying off the national debt, as opposed to just not increasing it very fast…..

Young Johann is of course quite free to make his comments…..but facts are sacred you know.

29 comments on “Johann Hari tries economic history

  1. I sent him this email – I wonder if he will understand it:

    Dear Johann

    Just about all the facts in your article about the great depression of the 1930s were incorrect.

    Here’s what we learned during the Great Depression, when our view of economics was revolutionized by John Maynard Keynes.

    Actually Keynes published his magnum opus in, I believe, 1936, a little too late to help us but anyway it took until the 50s before people such as Hicks started to interpret what that meant for economic policy

    In a recession, private individuals like you and me, perfectly sensibly, cut back our spending. We go out less, we buy less, we save more. This causes a huge fall in private demand, and with it a huge fall in economic activity. If, at the very same time, the government cuts back, then overall demand collapses, and a recession becomes a depression. That’s why the government has to do something counter-intuitive. It has to borrow and spend more, to apply jump-leads to the economy. This prevents economic collapse. Instead of spending a fortune on dealing with mass unemployment and economic break-down, with all the misery that causes, it spends the money on restoring growth. Keynes called it “the paradox of thrift”: when the people spend less, the government has to spend more.

    Wherever it has been tried, it has worked. Look at the last Great Depression. The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt.

    Incorrect. if you read Galbraith, he did everything correctly – he spent. He approved, for example, the Hoover Dam in Nevada (Roosevelt, to his shame tried to cover up the fact that Hoover had agreed the construction programme).

    The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shrinkers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it.”

    Roosevelt increased the spending and the US economy went into meltdown until WW2. There WAS NO recovery. However, he won the PR war to such an extent that even you believe Roosevelt’s propaganda rather than the judgments of economists such as Galbraith, whom you suspect would be more favourable to Roosevelt.

  2. Attlee also had Marshal aid on his side. I don’t think that this time China will be spreading free cash around.

  3. Has a government spending spree ever worked at getting a country out of a recession? It didn’t work in the Great Depression, it didn’t work or the UK in the 1970s, it hasn’t work for Japan during their long stagnation. Is there any empirical evidence that it has ever actually worked?

  4. You can never prove whether or not it worked, either way, because you can (a) never prove the chain of cause and effect and (b) you can never know what would have happened in a counterfactual universe where some other policy was tried.

    Hence the Austrian School praxeological approach which eschews econometrics etc.

    Basically, statists can always say that if it hadn’t been done, things would have been even worse, and you can never actually prove whether or not that is true. All you have to go on is what happened; the crucial data on what would have happened otherwise is intrinsically unavailable.

  5. But it must be possible to find natural experiments where both approaches are taken by different areas. Are there no natural experiments (like the UK – US approaches to the great depression) which show that a spending splurge works, in the same way that the great depression shows that it does not?

    If not then reverse it. We know that following the standard proscription of a splurge of government spending you can still not have recovered a decade later, are there cases where what the Keynesian school says should have happened when you cut spending did happen?

  6. The problem with keynesianism is not in the spending in the recessions. It’s in the continued spending also during the good times when Keynes says that the government should cut back. This is what has been the problem of the UK (anyone remember Brown running any budget surpluses), Sweden (remember that mini crisis of the early 90s) and about every other place that has tried keynes. It doesn’t work becayse politicians are completely incapable of cutting back spending when times are good. For you see, cutting back the spending on Grandma’s dinner in the elderly care home doesn’t get you re-elected, especially not if you do it when the populist press says that other people are making profits

    If you don’t do one side of Keynesianism then the other won’t work either.

  7. The other side of Keynesianism cannot work. Once you have taken the Keynesian route in a recession, you automatically create a “zombie business” sector of businesses that the market tried to liquidate during the bust. The stimulus money props them up; but continued funding is required in the “boom” otherwise those businesses you “saved” will collapse. Because there is no market for them, and effectively never was.

    That’s the big problem with Keynesianism. It distorts the economy into a Keynesian form, which requires continual state support of the zombies. Then the next crash comes, and the zombie sector expands… so there’s a continual ratchet.

  8. I think thqat Ian B has nailed it. keynes is cargo cult stuff…It takes no account of real economic factors. what afre the micro factors that make stimulus works and how do they continue once the stimulus is removed. as you say Tim…ther is micro (real stuff\) and there is macro (for which we only have vague understanding)

  9. Hmm, your economic history isn’t that great here either, Tim.

    CBA going through the details, but you’re being selective to say the least.

    Also you are (as usual) failing to consider the counterfactual: can you be sure that the US wouldn’t have been *even worse* if they’d tried less “Keynesian” policies? Can you be sure that it wasn’t the transmitted effect of US policies that helped the UK – in a very odd situation financially as well as economically, especially after the collapse of the Eastern European economies from 1931-2 – do as (relatively) well as it did?

    It’s easy to shoot out snarky Know It All sniggers – except, if you’re claiming to take the high ground vis-a-vis Hari, this becomes somewhat glass-houses, dontchya think?

    No, probably not. Easier just to keep on churning out the same old snarks. Still, keeps the dollars rolling in, I suppose.

    Tim adds: What dollars? I hardly think snarking at Johann helps sell scandium really…..

  10. very fact free stuff Paul…try harder next time. Can you explain by your weird remarks why the US recovered in 1940 whereas the UK recovered in 1934?

  11. Australia had it bad in the great depression . And dished out money. Didn’t seem to help much.
    WW2 did though.

  12. Facts are: UK interest rate Feb 1932 =5%; interest rate April 1932=2%.Change made possible by coming off Gold Standard.Absolutely Keynesian- led to massive building boom.UK was also part of system of Imperial preference on tariffs which gave UK a huge global market.Also there was a Kondratieff element of new technologies particularly applications of electric motors e.g big Hoover factory in Metroland.
    BTW Keynes was shocked when the post-war Anglo American loan was levied at the full commercial rate by Americans who made it a condition of their entry to the war (see Atlantic Charter) that mutually beneficial tariff arrangements among the Commonwealth countries were abolished.(After the war there many staunchly anti-American British Tories for this reason,Enoch Powell being probably the last of them.)

  13. If government spending sprees financed by borrowings really stimulated economies, we would all do it all of the time, and we would all be fabulously wealthy.

    But sadly, the fact hat we aren’t suggests that it doesn’t.

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  15. As a Keynsian I’m sure Hari was demanding cuts during the boom years when Brown was running a deficit. I can’t actually find examples of him doing so but he must have done right?

  16. OK Paul since you seem to claim lots of knowlege about the Great Depression can you answer my question. Are there any natural experiments, like the policy differences between the UK and USA, that show Keynesian spending working?

    Or is there evidence that cutting spending can lead to a vicious cycle of falling demand producing a similar result of a similar scale to the Great Depression or Japanese Lost Decade?

  17. “No, Herbert Hoover did not cut spending and he most certainly did not pay off the debt. He ran budget deficits as he massively increased federal spending. It’s true that Roosevelt did more of this than Hoover had done but it just isn’t true that Hoover balanced the bedget and most certainly isn’t true that he either reduced spending or paid pof a single penny of the national debt.”

    I love this so painfully neglected fact so much. It just makes the “Keynes saved the 1930s!” meme fall apart before it even starts.

    Which in effect makes me despair when you consider that idiots like Paul Krudman regurgitate the same myths and are lauded not only as economists but full blown political theorists by other idiots. Incredible.

  18. Keynesian theory much like chicago school neo-classical economic theory works quite well in a class room. The real problem with the current resurgence in keynes is that governments are only interested in keynes during a down turn.

    At its heart keynesianism is all about smoothing out the business cycle. Government should run major surpluses during the boom time to take heat out of the economy and then run deficits during recessions to stimulate the economy. Over the entire business cycle the government should produce a balanced budget.

    Unfortunately what happens is during the boom times governments simply spend up big to get re-elected. Then during the recession all of a sudden they are keynsians.

    Ultimately keynesian theory is flawed in much the same way that marxism and ne0-classical economics is flawed.

    economists like to give the impression that there is some sort of science to thier field but it is really one part quantitative analysis, one part psychology, and one part fortune telling.

    A pox on all thier houses!

  19. I think Alex nails it. Keynsianism has been tested to destruction time and time again but continues to rise from the grave, primarily because the idea that when you are in a deep hole of debt you can get out of it by taking on more debt, rather than cutting your spending to match your income, is deeply seductive.

  20. Johann Hari said: “This causes a huge fall in private demand, and with it a huge fall in economic activity.”

    Which in turn clears out the least efficient businesses and the economy adjusts itself and gets going again. Government deficit spending prevents this.

    Paul Sagar,

    A possible ‘counterfactual’ is the US recession of 1920-21. War spending came to a stop and Government shrank, the economy creaked to a halt, adjusted and then got going again – even though Federal tax revenue went up.(lower rates but more people paying)

  21. DBC mentions Imperial Preference, but at least that operated among a lot of countries – the Empire! – but the US had the disastrous 1934 Smoot-Hawley protectionist bill, considered by even Keynesians to have been a disaster.

  22. @Dearime:

    Corelli Barnett thinks Britain pissed away its Marshall Aid on maintaining the value of sterling and massive ineffective defence spending to continue the dream of empire. As a proportion of pre-war GDP Greece and Italy got rather more, which does suggest that how helpful it was depends what you did with it.

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  26. Hoover ran a budget surplus in 1930 (http://www.usgovernmentspending.com/year1930_0.html), he increased spending in 31 and 32, but nowhere near to make up for the extreme fall in GDP. State and local where also in austerity mode. (same link as above, write the appropriate year in the search field, don´t forget to check the GDP numbers, they are extreme). He didn´t raise taxes until 32. If you look at the national debt as percent of GDP, oh yes, that rose under Hoover, but almost entirely because GDP plummeted! These are facts. Hari may be careless with his assertions, but so were you, this time :) (ps. I think Hoover hated FDR, as well, surely that means something? ;D)

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