The elusive Professor Krugman

Sometimes I become convinced that Paul Krugman made a mistake, and then when I go back and reread his post I find that he used his words very carefully, to artfully avoid being wrong while creating a misleading impression.  I was thinking about all his posts that claimed fiscal stimulus didn’t fail, because it wasn’t tried.  I recall that he kept pointing to graphs showing that declines in S&L government output roughly offset increases in federal output.  But what about taxes and transfers?  Aren’t they also fiscal stimulus?  When I went back and looked at one of the posts, here’s the conclusion I read:

But if they won’t say it, I will: if job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried.

OK, I guess I can buy this.  After all, back in 2008 and 2009 Krugman had some posts pointing out that tax cuts were much less effective stimulants than government consumption and investment, at least according to some Keynesian models.  I don’t entirely agree with those models, but it’s a defensible argument.

But here’s my problem.  If taxes and transfers don’t count for much in 2009, then shouldn’t they also be disregarded in 1937?  I’m referring to the famous Keynesian explanation for the 1937-38 depression, one of the most severe in US history.  Keynesians often point to the tightening of fiscal policy that occurred in 1937 as the key factor that aborted the recovery.  But here’s the problem with that explanation.  Fiscal policy wasn’t all that contractionary in absolute terms, and more importantly the big changes in fiscal stimulus occurred in the area of taxes and transfers–the exact area that Krugman thinks are relatively unimportant.

The reduction in the budget deficit mostly reflected two factors.  First, the large one-time “bonus” payments made to WWI vets in 1936 (an election year) was not repeated in 1937.  And a 2% payroll tax was instituted to pay for Social Security in January 1937.  As far as I know those are the major contractionary moves.  But it was always understood that the 1936 bonus payments were a one-time deal.  How could that have caused a severe stock and commodity crash in late 1937, as well as a sharp plunge in industrial production in late 1937?

I found the following data from Thayer Watkins at SJSU:

Year   RGDP   Cons.  Inv.   Gov.   Exp.  Imp.  Balance

1934  641.1  519.0  31.5  127.3  21.4  31.1  -9.7

1935  698.4  550.9  58.0  131.3  22.6  40.7  -18.1

1936  790.0  606.9  75.5  152.5  23.7  40.2  -16.5

1937  831.5  629.7  94.0  147.0  29.9  45.3  -15.4

1938  801.2  619.5  61.3  157.8  29.6  35.2  -5.6

I just don’t see it.  Government output does decline slightly in 1937, but is still far higher than 1934 and 1935.  If you apply a multiplier of 1.6, it should have reduced GDP by about 1%.  But RGDP rose more than 5% in 1937.  Then in 1938 government output rises by twice as much as it fell in 1937, and RGDP plunges by almost 4%.  (BTW, we should be using NGDP figures, but everyone else uses RGDP, and the qualitative results would be similar either way.)

The 1938 depression had two causes, or perhaps one proximate cause and two deeper causes.  The proximate cause was a sharp increase in real labor costs.  Nominal labor costs rose sharply in 1937, due to a powerful union drive after the Wagner act, which rapidly doubled union membership and led to a wave of major strikes.  The payroll tax also slightly boosted nominal labor costs (I believe by 1%, but am not certain.)  Because wholesale prices were pretty high in the spring and summer of 1937, at first the wage boost merely led to a sharp slowdown in growth.  But then prices plunged due to a worldwide bout of gold hoarding, which increased the purchasing power of gold.  This tightened US monetary policy and caused the WPI to fall about 9% between mid-1937 and mid-1938.  Now two factors were driving up real wages, higher nominal wages and lower prices.  A supply shock and a demand shock.  Output plunged.  Severe slumps almost always have multiple causes.

So which is it?  Is Krugman wrong about 2009?  Or is he wrong about 1937?  Keynesians can’t have it both ways.

BTW, I eventually did find the quotation I was looking for, in another Krugman post:

The Obama fiscal stimulus more or less evaporates when you look at it closely, and take state and local cutbacks into account; basically, all it did was to keep overall fiscal policy from being outright contractionary.  (italics added)

I feel like that poor hunter trying to nab the roadrunner.  He usually gets away, but once and a while I catch him.

Update:  Many commenters argued that Krugman cited both a contractionary fiscal policy, and a contractionary monetary policy.  True, but irrelevant.  I’m saying that if fiscal policy was contractionary in 1937-38, then you really need to include taxes and transfers.  But in that case it was expansionary in 2009-10.



38 Responses to “The elusive Professor Krugman”

  1. Gravatar of John hall John hall
    8. July 2011 at 05:48

    How can the coyote be poor when he buys all that stuff from Acme?

  2. Gravatar of Daniel Kuehn Daniel Kuehn
    8. July 2011 at 06:07

    I could be wrong, but I always thought Krugman pointed to monetary contraction for 1937. Didn’t he actually write a couple posts about how people wrongly focus on the fiscal contraction of 1937?

    Now, granted, the fiscal contraction didn’t help according to Krugman, and that’s a fair point to make even if it wasn’t the major story. But I thought he always pointed to monetary factors there.

  3. Gravatar of marcus nunes marcus nunes
    8. July 2011 at 06:16

    Scott I love these passages:

    In March 1937, just before the final leg of the increase in required reserves was implemented, Marriner Eccles, the Fed Chairman said:

    Recovery is now under way, but if it were permitted to become a runaway boom it would be followed by another disastrous crash.
    Several months later, halfway through the recession, at the November 1937 meeting John Williams, a Harvard professor, member of the Fed board and its chief-economist said:
    We all know how it developed. There was a feeling last spring that things were going pretty fast … we had about six months of incipient boom conditions with rapid rise of prices, price and wage spirals and forward buying and you will recall that last spring there were dangers of a run-away situation which would bring the recovery prematurely to a close. We all felt, as a result of that, that some recession was desirable … We have had continued ease of money all through the depression. We have never had a recovery like that. It follows from that that we can’t count upon a policy of monetary ease as a major corrective. … In response to an inquiry by Mr. Davis as to how the increase in reserve requirements has been in the picture, Mr. Williams stated that it was not the cause but rather the occasion for the change. … It is a coincidence in time. … If action is taken now it will be rationalized that, in the event of recovery, the action was what was needed and the System was the cause of the downturn. It makes a bad record and confused thinking. I am convinced that the thing is primarily non-monetary and I would like to see it through on that ground.

  4. Gravatar of Arnold Kling Arnold Kling
    8. July 2011 at 06:16


    1. One way that Krugman is being elusive in the “more or less evaporates” post is that he wants to combine Federal with state-and-local budgets when it comes to *spending* but not when it comes to *taxes.* In a recession, taxes and spending at the state and local level both drop. If you just look at spending, you make it appear that state and local governments are super contractionary.

    2. Having said that, John Taylor has a slightly different take that supports Krugman. He says that much of the Federal aid to states was not passed through as either tax cuts of spending increases. Instead, it went to shoring up the balance sheets of state and local governments. Thus, Taylor would agree that for all the talk of stimulus, fiscal expansion was not tried.

  5. Gravatar of John Thacker John Thacker
    8. July 2011 at 06:37

    But I thought he always pointed to monetary factors there.

    This is true, but back in the ’90s Krugman also pointed to monetary solutions for other recessions too.

    I realize that Krugman has been talking about a liquidity trap making monetary stimulus impossible here– but wasn’t the liquidity trap first proposed by Keynes for the Great Depression?

  6. Gravatar of engineer27 engineer27
    8. July 2011 at 06:57

    Krugman also likes to paraphrase Tolstoy:
    “All good economies are alike. Each bad economy is miserable in its own way.”

    I also recall him citing monetary contraction as a cause of the 1937 contraction, and has consistently stated that due to the ZLB, fiscal expansion is going to have more direct effects than monetary expansion in 2009 onward. He certainly sees similarities between current conditions and the Great Depression (he wrote a whole book about it), but each situation is unique and requires a unique policy response. His primary critique of the “Austerians” is that they apply the same medicine to every situation — balance the budget, fight inflation.

  7. Gravatar of Kevin Bob Riste Kevin Bob Riste
    8. July 2011 at 07:00

    Some comments have touched on this but I had thought that increased reserve requirements were most of the 1937 story. Or was that an earlier, not wholly related slowdown in the same year?

  8. Gravatar of David Pearson David Pearson
    8. July 2011 at 07:05


    With today’s report, the Household Survey provides additional clues as the the efficacy of QE2. Last June, before markets had an inkling of QE2, SA Employed persons totaled 139,092k. One year later, the number is 139,334. Total 1-yr change in Employed persons: 242k. From memory, the 5yr TIPS spread was significantly lower a year ago. My sense is that QE2 raised that spread by about 180bp before that change fell to a still-decent 100bp.

    So QE2 raised inflation expectations and had an immaterial impact on Household employment. Real wages, not surprisingly, are down strongly in the latest Establishment Survey, and real DPI has been negative.

    BTW, the weakness in real discretionary services spend, in the small-business NFIB and NACM (credit manager) surveys, and in the non-manufacturing ISM all point to something other than a manufacturing sector supply shock at work here.

  9. Gravatar of MW MW
    8. July 2011 at 07:06

    State government spending is exogenous to the federal government. Plenty of exogenous organizations experienced spending decline. Why not combine federal spending with charitable spending? Surely that would cancel out as well.

    It is not a stimulus if it is meant to replace dollar for dollar all other spending. That would imply a multiplier of 1.

  10. Gravatar of RZ0 RZ0
    8. July 2011 at 07:10

    I dunno. I follow K. pretty closely, and from the beginning he said the Obama stimulus wasn’t big enough to create an employment boom, using one of his notorious ‘back of the envelope’ calculations.
    He also advocated increased spending over decreased taxes, saying taxes made the stimulus weaker.
    Later – after the fact – he added that reductions in state spending roughly offset the size of the stimulus.
    He’s also said at least since early 2010 that inflation worries were overblown.
    On these two major predictions – Obama stimulus wouldn’t solve the economy’s problems and inflation wasn’t around the bend – he went against the conventional wisdom and was right both times.
    I wish the guy’s ego was a bit smaller, so his “I told you so’s” grated less. But that doesn’t make his analysis any weaker.

  11. Gravatar of David Pearson David Pearson
    8. July 2011 at 07:19

    The reason I focus on the Household Survey is that it captures small business employment trends better than the Establishment one. The decline in housing prices (and resulting drop in middle income household Net Worth) creates a shortage of start-up capital for small firms. As a result, net new firm creation has been stagnant, and this is a plausible explanation for the lack of economy-wide employment growth. QE2 raised equity and commodity prices and reduced credit spreads; it did nothing for house prices. Also, the effects of the Lybian conflict and Japanese earthquake are not robust explanations for why house prices have continued to decline. Something else is at work, and it may have to do with the after-effects of price distortions created by previous Fed policy.

  12. Gravatar of Alexander Hudson Alexander Hudson
    8. July 2011 at 07:40

    Scott, I’m not sure what Krugman has said about the causes of the 1937-38 contraction, but you can’t go from talking about what Krugman himself argues to what many Keynesians argue. “Paul Krugman” and “many Keynesians” are not the same thing.

  13. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 08:24

    My previous post went out prematurely, I’ll replace it with this:

    John, I now realize I confused the hunter and rabbit, with the coyote and roadrunner.

    Daniel and Kevin, He argued that both were a problem. But he’s slightly more skeptical of monetary policy being a key factor. He certainly saw fiscal contraction as a big problem. But I can’t see why.

    Marcus, Yes, thanks for sending me that quotation. I fear the Fed is still concerned with losing face.

    John, Yes, Krugman claimed we were in a liquidity trap during the 1930s.

    David, You can’t assume the total change in inflation expectations is due to QE2, you need to look at the market response to new information. I seem to recall that was more like a 1/2%, in response to rumors of QE2.

    Much of the growth in expected inflation is due to supply side factors (food and energy) which don’t boost growth.

    Job growth has certainly been disappointing, although many claim the payroll number is more accurate. (It shows much more growth after QE2) And the unemployment rate fell sharply after QE2. In any case, I wouldn’t expect much job growth when NGDP is growing at only 4%. What we need is more NGDP growth.

    MW, I’ve made a similar argument.

    David, Fed policy doesn’t directly affect housing prices, it affects them through unexpected changes in NGDP. Of course lots of other things also affect housing prices, like plunging rates of immigration.

    Alexander, Many, many Keynesians argue that the fiscal contraction of 1937 caused the double dip–it’s one of their favorite arguments. I didn’t cite any, as I assumed this was common knowledge. I probably need to dig up some quotations.

  14. Gravatar of Greg Greg
    8. July 2011 at 08:27

    Isn’t it possible that circumstances are different today? I’m not excusing Krugman’s lack of internal consistency, I’m just thinking that, maybe, cash stimulus was important in 1937 at the same time as investment stimulus was important in 2009.

    Without much knowledge of the ’30s, maybe saving and borrowing patterns were different. Or maybe they weren’t different, but in the ’30s bulking up on savings and deleveraging was somehow stimulating the economy in a way that doesn’t happen nowadays. Could have something to do with the increased complexity and size of the financial system — maybe investment by banks had more of an effect on the “brick and mortar” economy than it does today, with all the weird financial instruments and international choices available at the click of a mouse.

  15. Gravatar of Alexander Hudson Alexander Hudson
    8. July 2011 at 08:27

    Right, I’m aware that many Keynesians believe this. But the relevant question is whether Paul Krugman believes it. I can’t answer that question, because I don’t know. My point is that this is supposed to be a post about what Krugman believes, not what other people believe.

  16. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 08:37

    Arnold, OK, but that doesn’t explain 1937–how can he claim that was fiscal contraction? And if he does make that claim, then he needs to include the large federal tax cuts and social program increases of 2009, which he doesn’t.

    engineer27, All true, but it doesn’t affect my criticism here.

    RZO, All true, but it doesn’t affect my criticism here.

    Greg, Maybe, but he needs to make that argument.

    Alexander, Krugman has argued in his blog that the fiscal contraction of 1937 was a big mistake, he’s slightly more skeptical of the monetary argument, but thinks it was also a mistake.

  17. Gravatar of David Pearson David Pearson
    8. July 2011 at 08:38


    “New information” includes what we know about the effects of an already-announced policy. Think of it as two sets of probabilities: first is whether policy A will be announced; second is the conditional probability that outcome X occurs once Policy A is announced.

    Markets are continuously weighing conditional probabilities. This is one reason why announcement effect studies often have very limited utility. That apparently does not stop them from being used frequently: when people have an econometric hammer, they tend to focus their energy on data that looks like nails.

  18. Gravatar of Charlie Charlie
    8. July 2011 at 08:42

    Krugman seems to point to both monetary and fiscal mistakes in 1937. It’s unclear which he thinks is more important, but most of the references are in articles criticizing the Fed for contracting monetary policy too soon.

    “We usually focus on the great fiscal error of 1937, as FDR decided that it was time to slash spending and reduce the deficit. But there was also a turn toward contractionary monetary policy: the Fed got nervous over the alleged inflation risks from the existence of large excess bank reserves, even though those reserves weren’t being lent out, and decided to sharply raise reserve requirements. F&S say that this caused the 1937-8 downturn, although the Romers pointed out long ago (pdf) that their evidence was far less conclusive than advertised.”

  19. Gravatar of John hall John hall
    8. July 2011 at 08:44

    I gave you the benefit of the doubt on that. Technically the coyote is hunting afterall.

  20. Gravatar of Kevin Bob Riste Kevin Bob Riste
    8. July 2011 at 10:01

    Scott, thank you for the response. Regardless of Krugman, your story about the causes of 1937 didn’t seem to include the reserve thing. I ask only for clarification, not to challenge.

  21. Gravatar of Sean DeCoursey Sean DeCoursey
    8. July 2011 at 10:45

    The problem from a Keynesian point of view with counting the current tax cuts as stimulus spending is that the people who got the cuts (primarily the wealthy and corporations) haven’t been spending that money, they’ve been sitting on it.

  22. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 12:24

    David, But we have zero evidence that actual Fed policy turned out to be more expansionary than expected on November 4 2010. I accept your theoretical point, but see no evidence it applies in this case.

    Charlies, Yes, but it doesn’t change my argument. See my update to the post.

    John, I thought so.

    Kevin. My apologies, I get grouchy when I have dozens of comments to answer.

  23. Gravatar of Scott Sumner Scott Sumner
    8. July 2011 at 12:35

    Sean, Then why could them in 1937?

  24. Gravatar of Charlie Charlie
    8. July 2011 at 13:36

    I still can’t find your smoking gun. It seems your argument is based on this assumption, “Keynesians often point to the tightening of fiscal policy that occurred in 1937 as the key factor that aborted the recovery. But here’s the problem with that explanation. Fiscal policy wasn’t all that contractionary in absolute terms, and more importantly the big changes in fiscal stimulus occurred in the area of taxes and transfers-the exact area that Krugman thinks are relatively unimportant.”

    You make two claims:

    1. Keynesians argue (only?) fiscal policy caused the recession.

    2. a) Fiscal policy wasn’t that contractionary. b) what was contractionary was mostly on the tax side.

    PK’s writings that we’ve posted clearly show he believed both fiscal and monetary policy caused the recession in 1937-1938.

    To the second, in each post he never refers to tax hikes he only refers to spending cuts:

    See blog post “Money 1937”:

    “We usually focus on the great fiscal error of 1937, as FDR decided that it was time to slash spending and reduce the deficit. But there was also a turn toward contractionary monetary policy…”

    See Article “That 1937 Feeling”:

    “But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened “” and the economy promptly plunged back into the depths.”

    Sumner says:

    “I’m saying that if fiscal policy was contractionary in 1937-38, then you really need to include taxes and transfers.”

    This seems false. Krugman always has referred to the cut in spending and never the tax hikes from the period. Was fiscal policy “contractionary” without tax raises. According to PK, certainly yes.

    Consider the article you linked, Hey Small Spender:

    “The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need…

    And government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years “” a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth.

    So as I said, the big government expansion everyone talks about never happened.”

    According to the numbers you use, as a percent of the economy, FDR cut about 80 billion off the budget in terms of 2009 GDP. PK is mad at President Obama for not raising it more than the rate of growth.

    You haven’t pointed to a single instance, where he’s being inconsistent. He’s always pointed to spending and monetary policy as being contractionary in 1937-1938. He’s pointed to “slashing the deficit” as a whole, but never highlighted the tax part of that. It seems his position on 1937 is entirely coherent. In 1937 spending WAS cut in a growing economy, and combined with contractionary monetary policy caused a recession.

  25. Gravatar of Charlie Charlie
    8. July 2011 at 13:55

    He’s also come out for modest tax hikes (or at least not against them)

    Blog post Debt Limit Stakes:

    “Think about it. There’s a significant chance that failing to raise the debt limit could provoke a renewed financial crisis “” and Republicans would rather take that chance than allow a reduction in tax breaks on corporate jets.”

    Blog post, “Net Lending by Domestic Business”

    “There’s absolutely no reason to believe that taxing their corporate jets would reduce investment, or that giving them a tax holiday on repatriated funds would increase investment.”

    It’s just not at all clear to me why PK has been inconsistent.

    It seems his position is in 1938 contractionary spending decreases AND contractionary monetary policy caused a recession.

    Now, not expansionary enough spending increases AND not accommodating enough monetary policy have caused growth that’s way too slow and recovery that’s too weak.

  26. Gravatar of James James
    8. July 2011 at 16:19

    “Sometimes I become convinced that Paul Krugman made a mistake, and then when I go back and reread his post I find that he used his words very carefully, to artfully avoid being wrong while creating a misleading impression.”

    I have had this exact experience several times.

  27. Gravatar of Scott Sumner Scott Sumner
    9. July 2011 at 05:36

    Charlie, You are completely misunderstanding my point. The 1937-38 recession is irrelevant. My criticism is his defintion of fiscal contraction, hence the monetary side is 100% irrelvent to my argument. One more time:

    Real GDP grew rapidly in 1937.
    Real GDP fell rapidly in 1938.
    Government output rose between 1936 and 1938

    If you are going to define fiscal policy in terms of government output, then fiscal policy was not significantly contractionary between 1936 and 1938.

    If you are going to argue fiscal policy was contractionary in 1937, you must rely on the taxes and transfer side, not government output. And indeed, when Keynesians talk about the fiscal contraction of 1937, they almost always talk about the change in taxes and transfers, and little else. So it seems like Keynesians regard taxes and transfers as part of fiscal policy. As do the textbooks.

    Now go to 2009. Keynesians insist that there wasn’t really any fiscal stimulus. This is partly by adding in S&L government, which is itself incorrect as that spending is endogenous to federal fiscal policy, just as private investment is endogenous. But let’s say I’m wrong, and it’s OK to include S&L spending. Krugman can only claim there was no stimulus in 2009 if he excludes taxes and transfers. But if they are not considered part of fiscal policy in 2009, why are they considered part of fiscal policy in 1937?

    James, Many times.

  28. Gravatar of Charlie Charlie
    9. July 2011 at 07:16


    The point of my comment is to make you debate against what PK actually says and not attribute some invented “Keynesians say” position and attribute it to him.

    Though now it seems your whole point relies on using 1936 to 1938 and not 1937 to 1938 (when spending contracted). Why do you do it?

  29. Gravatar of bill bill
    9. July 2011 at 15:45

    Is this possible?
    Tax cuts aren’t very expansionary because they get largely saved.
    Tax increases can be contractionary since the taxpayer has to fund them out of something and most taxpayers fund them out of consumption.

  30. Gravatar of ssumner ssumner
    9. July 2011 at 18:48

    Charlie, I stand by everything I said about Krugman, there are no misleading comments in the post. Government output did not contract between 1937 and 1938, it rose very sharply. It’s the economy that contracted. How does that fit the Keynesian model?

    Bill, I’ve never seen a model with that asymmetry, and can’t imagine how you’d justify it. But it doesn’t really apply here anyway, because much of the contract was the 1936 “bonus” going away. But I don’t doubt people will try to spin new theories to save the Keynesian model, there’s a lot invested in it. So please don’t repeat that idea. 🙂

  31. Gravatar of Charlie Charlie
    10. July 2011 at 13:43


    Let’s inject some serious data into this, and then you can tell me where I (or Krugman) have it wrong. After some deliberation, I’ve decided to include links, even though my comment will get stuck in moderation land (which stinks, btw). I want the data I use to be transparent.

    “Government output did not contract between 1937 and 1938, it rose very sharply.”

    Thayer Watkins doesn’t give notes on how he prepared the data (except to say it’s 1992 prices), so let me go back to the standard gov’t expenditure data source from the period The Statistical Abstract of the U.S. published by the census bureau.

    I’ll start with this version from 1950 []. Chart No. 357. Later I’ll have to go back to 1930s reports to get monthly data, but the aggregate data is slightly different. I’m assuming the revised data is more accurate than the 30s data.

    All years are Fiscal Year Ending June 30 (nominal data in millions):

    Total U.S. Gov’t Expenditure

    1936 $8,493
    1937 $7,756
    1938 $6,979

    Switching to 1939 data, we get the same pattern, but different numbers []

    1936 $9,068
    1937 $8,546
    1938 $7,091

    Remember, this data shows July 1935 to July 1938 (3 fiscal years). The data show that between July 1936 and July 1938 nominal government expenditures drops between 18 and 22 percent.

    The data show a $500 million to $700 million drop from 1936 to 1937, but using census data, we can see where the drop actually occurred. Data, table 172, Total Expenditures []

    Government expenditure is very seasonal with almost all of it occurring at year end (in June). If you compare Fiscal Year 1936 to FY 1937, you’ll notice most months of 1937 have more expenditure. The major exception is June 1937.

    June 1936 $2,347
    June 1937 $1,302

    Over a billion dollars was cut compared to June of 1936!

    This is what PK is (almost certainly) referring to when he points to FDR’s 1937 spending cuts. The data also fits the standard (textbook?) story quite well.

    From FDR by Jean Smith, p. 396 [link is too long, but can be found on google books]:

    “In June 1937 Roosevelt assumed that the economic battle had been won and slashed spending drastically. WPA activities were sharply reduced, farm subsidies curtailed, and public works pump priming eliminated.”

    We have been using nominal figures, and since we are using monthly data, I think an inflation adjustment is actually non-trivial. But here’s a first pass using, measuringworth’s inflation calculator.

    1939 Expenditure data, using 1938 dollars:

    1936 $9,220
    1937 $8,390
    1938 $7,091

    In real terms, the fiscal contraction rises to 23%.

    “How does that fit the Keynesian model?”

    Considering the actual data, it seems to fit the model quite well, no?


    P.S. – I hope you don’t think I’m a troll. I actually send a fair amount of people to this site. It’s just that PK’s very good at what he does. He’s almost never wrong about what the data says.

  32. Gravatar of ssumner ssumner
    12. July 2011 at 09:34

    Charlie, Nice try, but you just undercut Krugman’s argument. The big drop in June expenditure is the end of the bonus program (I’m pretty sure.) And that’s exactly my point. The bonus program is of course not government output. You are looking at government spending, and I agree that did fall. The point of my post was that Krugman now says taxes and transfers don’t count, only government output counts. Plus he also counts state and local government output (which he really shouldn’t.) The article I linked to has total governemnt output from the GDP accounts, you have federal spending, which is wrong in two ways, it’s not total, and it’s not output.

    And it’s certainly not true that Krugman is “almost never wrong” about what the data says. I will admit that he is usually right, and he has dramatically improved from the early 2000s

  33. Gravatar of TheMoneyIllusion » The many excuses for fiscal failure TheMoneyIllusion » The many excuses for fiscal failure
    12. July 2011 at 10:17

    […] a recent post I pointed out that many Keynesians, including Paul Krugman, argue that there really hasn’t […]

  34. Gravatar of Charlie Charlie
    12. July 2011 at 12:27


    You have three data points, and you act like it doesn’t matter at all what happens between them.

    The NIPA tables are year end right? Are you just assuming that the gov’t purchases are uniform throughout the year. If gov’t purchases fall from mid year 1936 to mid year 1938 and then pick up, doesn’t that matter?

    That’s exactly the path that Recovery and Relief spending followed. The books about the period (including the one I cite above) say Roosevelt cut spending drammatically in June 1937 and then started to reverse course in April 1938.

    I think the space between the data points matters.


  35. Gravatar of ssumner ssumner
    13. July 2011 at 11:44

    Charlie, Once again, no one denies that FDR cut spending in 1937. But Krugman says government spending doesn’t matter, government output matters. And government output did not fall sharply in 1937. To Krugman, ending the bonus program is like a tax increase–and he says taxes don’t count in 2009.

  36. Gravatar of TheMoneyIllusion » Did Keynes understand his own theory? Apparently not. TheMoneyIllusion » Did Keynes understand his own theory? Apparently not.
    27. November 2011 at 06:15

    […] In previous posts I’ve pointed out that there are all sorts of problems with the modern Keynesian explanation for 1937.  The tightening was mostly in taxes and transfers, not government output.  In contrast, modern Keynesians suggest that stimulus involving government output is far more effective than tax cuts. […]

  37. Gravatar of The 1937-1938 Recession | Economic Incubator The 1937-1938 Recession | Economic Incubator
    31. December 2011 at 21:53

    […] problem with the argument (as Scott Sumner has pointed out here) is that fiscal policy was not all that contractionary in absolute terms; moreover, the deficit was […]

  38. Gravatar of AK 6989 AK 6989
    11. November 2012 at 08:53

    When I was in High School, this is when Teachers and Professors were teaching and not politicizing, I remember my Teacher very clearly saying that our constitution names the 3 powers under which we live, they are, Nominated Judiciary and Elected President and 2 houses of Congress, and that they equal and none of them is Superior to any other. Also he said in our Democracy “the president proposes and the congress Disposes” it seems that Professor is so one sided on his politics that he is forgetting that the People did Elect the President, but, also the same people saw fit not to change the constitution of House or Senate.
    As far as I am concerned the message to the politicians, we do not like any of yours proposals, negotiate and come up with solutions that are acceptable to all, and not insist on your solution and nothing else as the Professor proposes.
    It is deplorable that a man in his position does not know our constitution and how it is supposed to work. We do not elect a King or an Emperor; we elect a President with specific powers and responsibilities and a Congress to control the Laws and the Purse, and we expect that the President lead but not impose, convince but not make changes without consulting with congress. And we have the Supreme tribunal that has the power of interpreting what is constitutional and what is not.
    As we saw in the case of Health Care Insurance, as much as some wanted it thrown out, it prevailed that it can be viewed as constitutional under certain format. I believe the format worked and I believe that it does work in a majority of cases that go to the Supreme.
    I can’t see the president dictating his wishes, but I can see the president negotiating and cajoling to get the majority to agree with him to come up with a solution to the immediate problem.

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