Hoover Didn’t Cut Spending, and Spending Cuts Didn’t Trigger the 1937 Roosevelt Recession

Great post by Hans Bader of the Competitive Enterprise Institute Blog.

"The false left-wing meme of the day is that the modest spending cuts in Sunday’s debt limit deal are bad, because spending cuts caused the 1937-38 Roosevelt Recession. But while spending cuts did occur in 1937, many more important things happened in 1936-37, like higher taxes and increased reserve requirements for banks in 1936-37, and the Supreme Court’s 1937 rulings upholding costly liberal laws that had been struck down by judges in the lower courts, including laws that made it more expensive for businesses to operate and employ workers. I discussed those court rulings recently in the 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 . . .If government spending alone could end a recession, then why did the Great Depression deepen under Herbert Hoover, who increased government spending to $4.7 billion from $3.1 billion?

Left-wingers also erroneously claim that Herbert Hoover cut spending to balance the budget in the Great Depression. For example, New York Times columnist Paul Krugman, an economist who received a Nobel for his writings on international trade, claimed that Hoover made the decision “to slash spending . . .in the face of the Great Depression,” in a January 23, 2009 op-ed.

But federal budget figures show Hoover dramatically increased spending and the deficit: Specifically, Table 1.1 on page 21 of a document on the White House 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 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. Hoover increased government spending from $3.1 billion to $4.7 billion in a failed effort to stimulate the economy. And he increased marginal tax rates to 63 percent.”"