There is an element of the bizarre in the backlash against “austerity” in Socialist-led countries of Europe and among mainstream (read: Keynesian) economists – because true austerity hasn’t even remotely been tried in most European countries. Most have taken what is known as a “balanced” approach – big words and little action on cutting expenditures, and some all-too-real tax increases through the back door. Not surprisingly, this hasn’t worked anywhere, while those few countries that took a dose of pain, such as Estonia, are doing remarkably well. Generally, the problem with austerity is that it is not a short-term panacea – the painful cure needs time to work its magic on the ailing patient who may in fact feel worse for a while before getting better.
Now Spain, where socialist as well as nominally conservative administrations have produced a vast welfare state, has produced a regional governor with the audacity of pushing through fairly draconian real cuts. Maria Dolores de Cospedal talks the talk, too, with no-nonsense language that could come straight out of Calvin Coolidge: “We cannot be drowning in debt if we want growth,” she says. “I, too, want to invest, but right now, with this deficit we inherited, it’s impossible.” Like Coolidge (who was in the more enviable situation of presiding over a booming rather than a stagnating economy), she correctly identifies crippling debt and government overspending as the worst enemies of growth. Not surprisingly, Ms. de Cospedal is being pilloried by the Left. If she sticks to her guns, there may be hope among the pain for Spain.
In the current climate of economic turmoil, with Europe and the U.S. both trying to push back the fateful pay day when decades of governmental overreach and overspending come home to roost at the same time that economic growth appears to be stalling, so-called liberals and progressives like to argue against budget cuts with the Keynesian argument that austerity would be poison for any hopes of economic recovery, let alone renewed growth. As the economy lurches, and stock market indices tumble, you will no doubt see this argument made forcefully by proponents of unrestrained government spending.
Lucky for us, we can turn to at least one significant historical example when the U.S. government did NOT resort to hectic macroeconomic retooling, pump-priming, and deficit spending. As Professor George Selgin explains, the sharp economic reversal of 1920 did not deter the government (and this means essentially the just-elected Harding government, as the Wilson administration was hardly functioning at the end of Wilson’s 2nd term) from prioritizing cutting the bloated wartime budget and retiring the enormous wartime debt. Far from plunging the nation into ruin, these policies worked so well that within two years an unemployment rate of close to 12 percent had given way to labor shortages, and industrial production, which had fallen precipitously in 1920, rose to new record levels.Notably, government spending was tightly controlled during the Harding/Coolidge years, while the economy boomed.
As Selgin points out, Treasury Secretary Mellon was unfairly tarred as “liquidationist” by none other than Herbert Hoover, who did not in fact follow austerity measures while battling the Great Depression. Moreover, the Harding/Mellon austerity of 1920/1921, which was continued under the Coolidge administration, is rarely given credit for turning the economy around. It seems austerity just can’t win!
With several partisan plans for budget austerity on the table, and with the budget situation shaping up as one of the main issues in the upcoming presidential campaign, the anti-austerity faction has been busy hauling the tar barrel out of the garage and trying to tar the GOP in particular with the image and memory of Herbert Hoover – you know, that laissez-faire guy who sat on his hands in the White House while the country slid ever more deeply into the recession.
Never mind that this is a caricature of Hoover that gets everything wrong. Robert Murphy, in an incisive post over at the Ludwig von Mises Institute, neatly uses the liberal pundits’ own words to discredit the point they are trying to make. It really is one of the more irksome yet persistent myths of American history that Hoover was a free-market ideologue who sat out the onset of the Great Depression – in fact, he was the most interventionist chief executive outside of war up to that time, and FDR merely extended and expanded Hoover’s interventionist agenda.
Coolidge and Harding are the two presidents whose policies provide a sharp contrast to those of both Hoover and FDR. It is a matter of conjecture what Calvin Coolidge would have done differently, had he been in office when the depression set in. If his life story, his philosophy, and his actions as chief executive are any guide, it is reasonable to assume that he would have stayed pat and attempted to steer the country through a brief albeit severe recession as Harding had done in 1920/21. There really is no way of knowing whether this would have worked better than the Hoover/FDR policies, other than the undisputable fact that these latter policies demonstrably did not work and the country was not lifted out of the depression until WWII.
Finally: remember that Coolidge had no great love for Hoover and famously remarked that “that man has given me nothing but unsolicited advice, all of it bad.”