Evidence shows that “austerity” during a sharp downturn in 1920 coincided with quick economic recovery and robust growth throughout the rest of the decade. Nevertheless, there is a belief that the example of President Herbert Hoover from 1929–1933 was a failure of austerity, which pushed the economy into the Great Depression. It was not. Hoover never cut spending or slashed tax rates.
In fact, Hoover doubled spending in real terms during his four years in office. When FDR arrived at the White House, according to Cato economist Steven Horowitz, FDR’s advisors noted that, “‘When we all burst into Washington . . . we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself.’”
Economist Tim Taylor adds that “The budget ran a small deficit of .6% of GDP in 1931, followed by much larger deficits of 4.0% of GDP in 1932 and 4.5% of GDP in fiscal year 1933.”
And in 1932, Hoover raised taxes from a top individual income rate of 25 percent up to 63 percent, and the bottom rate from 1 percent to 4 percent.
Small wonder, then, why the economy didn’t quickly recover like it did after the downturn of 1920. Hoover followed the opposite path. Rather than cutting government to let the free market grow, he grew government, which shrank the free market and staved off recovery.