The Fake History of the Depression

The Fake History of the Depression
04/20/2009 - Mises Daily by Robert P. Murphy

His new book is "The Politically Incorrect Guide to the Great Depression and the New Deal".

[edited] Nobel laureates and presidential advisors proclaim that it was Herbert Hoover's free-market penny pinching that exacerbated the Depression. They say that the economy was saved only when FDR boldly ran up enormous deficits to fight the Nazis. But, this official history is utterly false.

Contrary to what you have heard, Hoover was a textbook Keynesian after the stock-market crash. He cut income tax rates for 1929 by one percentage point and increased federal spending by 42% from 1930 to 1932.

This enormous jump in spending occurred while tax receipts collapsed, due to the decline in economic activity and the price deflation of the early 1930s. This combination led to unprecedented peacetime deficits under the Hoover administration — something FDR railed against during the 1932 campaign!

Hoover spent $4.6 billion against only $2 billion in tax receipts. The 1932 deficit would translate into an astounding $3.3 trillion deficit in 2007 (instead of the actual deficit of $162 billion for that year). Hoover's 1932 deficit was 4% of GDP.

GDP is Gross Domestic Product, or total national income. The official government measures of rising GDP during the war years is misleading. Massive military spending was included in GDP, even though producing tanks is hardly the same measure of prosperity as producing consumer goods.

Normally, when the Fed prints money to buy massive quantities of goods (such as war supplies), the price level and cost of living goes through the roof. The price level is expressed as the CPI, the Consumer Price Index. The government applied price controls during the war. [ Price controls were either ineffective or produced shortages. -AG ]

Say that your salary goes up from $30,000 to $33,000, a 10% increase. But, the cost of what you buy goes up 10% also because of inflation. Your "inflation adjusted" income is still $30,000. The same applies to GDP, which is supposed to measure total income.

Statisticians would normally adjust for the price level to compute the "inflation adjusted" GDP. This adjustment couldn't occur, because the government made it illegal for the CPI to go through the roof. Official measures showing "real GDP" rising during World War II are as phony as the Soviet Union's announcements of industrial achievements.

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Building tanks and bombs doesn't make you rich. Building new infrastructure (bridges, roads, and railroads) only increases prosperity if it is highly useful. Just the building of the structures doesn't do a thing.

A Tested Stimulus Plan
The housing crisis is the result of our last stimulus plan. How do we like it?

Cargo Cult Economics
Spending and saving by individiuals is more "stimulative" than taxing and spending by government.