Was the New Deal a failure?

Answer 1

Answer

No, it brought the US out of the depression and prepared it for the future.

Answer

In my opinion, what brought the United States out of the depression was WWII. Many believe (and there is strong evidence for) the New Deal prolonging the depression. In fact, during the depression there was a recession in 1937. They called it Roosevelt's Recession due to it being blamed on the New Deal. No matter what it did short term (boost American spirits, give temporary jobs, etc.), I think its lasting effects of dependency on the government that is still felt today is a testimony to the truly insidious nature of the New Deal.

Answer 2

Robert P. Murphy, Ph.D.

In his response to my original salvo against the New Deal, Jeff Madrick points out some gaps in my arguments, which I will try to answer below. However, I must implore Madrick to debate merather than his generic concept of "the anti-New Dealers." For example, Madrick ridicules those who inconsistently criticize the New Deal while crediting the military spending of World War II with ending the Depression. Madrick is right that such Roosevelt critics are being hypocritical, but what relevance does this have to our debate? After all, I had a section entitled, "The Myth of War Prosperity." This debate will only work if Madrick addresses my arguments; I can't be held responsible for the contradictions of others.

In the present essay, I address some of Madrick's main points and then conclude with a list of objections that Madrick must address if he wishes to salvage the legacy of Roosevelt's New Deal.

Praising FDR's Spending While Ignoring Hoover's

One of my main arguments is that Herbert Hoover instituted a "New Deal-lite." Hoover has a reputation for being a laissez-faire president, but that is simply preposterous, as I document in my book. As I mentioned in my previous essay, Hoover ran unprecedented peacetime deficits in an effort to fight the downturn. Yet somehow Madrick thinks I'm cooking the books, for he writes:

In fact, in 1929 and 1930, the federal budget was in surplus. In 1931, it fell into a mild deficit. In 1932, the deficit rose substantially, not principally due to government spending but due to the dramatic collapse of government tax revenues as the national income fell off the cliff. Murphy wants to blame Hoover's spending so badly that he just ignored this.

First, we need to get our timing straight. The federal budget deficit is measured according to fiscal years, which had different start dates back then. Fiscal Year (FY) 1929 ran from July 1, 1928, through June 30, 1929. In addition, at that time new presidents had to wait longer for their inaugurations. Hoover won the election in November 1928 and was not sworn into office until March 4, 1929. At that point FY 1929 only had four months left to run, so Hoover obviously had little to do with it. That is why FY 1929 should be attributed to Calvin Coolidge. In fact, some presidential historians go so far as to credit Coolidge with FY 1930 as well.

To test whether Hoover responded as a good Keynesian would, we must look at the spending increases after FY 1930. (Remember, the stock market crash occurred in October 1929, falling near the middle of FY 1930.) As this somewhat official site shows, from FY 1930 to FY 1931, federal spending as a share of the economy grew from 3.4 percent to 4.3 percent. It's true that some of that increase was the result of a shrinking economy, but nonetheless, it takes political resolve to maintain even a fixed level of spending while the economy-and government tax receipts-are collapsing.

But Hoover behaved as a good Keynesian, even in absolute dollar terms, because federal spending increased by 9 percent. Further, once a whole year of Depression passed, Hoover really jacked up the "stimulus": He increased spending yet again, but this time by 31 percent! Remember, this was the bump in spending in one year (FY 1931-FY 1932), and it occurred amidst a huge drop in tax receipts. By FY 1932, the federal budget deficit as a share of the economy had now risen to 4 percent.

To give some idea of the relative profligacy in this particular Hoover year-the first year in which it would have been clear that the country was in very bad shape-consider that the deficit as a share of GDP was as high or higher in FY 1932 than in four of the eight Reagan budget years. I'm going to guess that Madrick hasn't written articles denouncing the tight-fisted Reagan record and the Gipper's timidity in deficit spending.

Not Keynesian Enough?

The basic Keynesian story-which Madrick clearly endorses-is that the government needs to spend money to prop up "aggregate demand" whenever the private sector falls short. Madrick argues that the New Deal was initially working until FDR chickened out and tried to balance the budget in 1937. At the same time, remember, Madrick is arguing that Hoover didn't spend nearly enough, and that's (at least partly) why things got so bad.

But this doesn't make any sense, as a glance at the budget figures linked above will illustrate. In FY 1933, the last budget year attributable to Hoover, the federal deficit was 4.5 percent of GDP. Over the next three fiscal years, the federal deficit averaged 5.1 percent of GDP. Does Madrick want to argue that private demand had gotten itself into such a pickle that a deficit of 4.5 percent was consistent with 25 percent unemployment, while a higher (average) deficit of 5.1 percent of GDP was the blazing path to recovery, in which the economy grew at record rates? Those 60 basis points pack quite a wallop, don't they?

The Keynesian story doesn't fit the facts. The deficit record of Hoover is barely distinguishable from Roosevelt's. It's silly to say the economy tanked under Hoover because he didn't borrow and spend enough. In the early 1930s, the market economy didn't need any "stimulus" from the feds to recover from the previous boom, which itself was caused by government intervention into the market.

The 1937-38 "Depression within the Depression"

In light of the above discussion, we can now see the weakness in Madrick's explanation for the 1937-38 reversal of FDR's initial (apparent) success. Madrick tries to blame Roosevelt's belt tightening, but as we showed above, even during the allegedly "good years" when Roosevelt spilled much red ink, he was not qualitatively more profligate than Hoover had been at the height of the Depression. The huge spike in unemployment of 1937-38 must be due to something other than the fall in the deficit.

Economists have other theories besides the straight Keynesian one to explain why the official unemployment rate jumped back up to 19 percent by 1938. One popular explanation points to the Federal Reserve's decision to double the "reserve ratio," meaning that for a given level of customer checking balances, banks now had to hold twice as many reserves in the form of either vault cash or reserves with the Fed. Yet there are problems with this explanation too, because in the depression of 1920-21, the Fed had raised the discount rates to record highs, yet this "tight" policy didn't trigger a five-year slump back then. So why was the Fed tightening supposed to be so much worse in 1937?

In my opinion, one of the biggest factors for the 1938 "depression within the Depression" was the 1937 Supreme Court decision to uphold the Wagner Act. After the Supreme Court's overturning of other staple New Deal measures, this was an unexpected ruling that was very favorable to unions. The strengthened union demands meant that employers in many sectors were expected to pay more per hour of labor. By making labor more expensive, with unemployment already in the double digits, it's no wonder that the economy was further crippled.

Questions for Madrick

In the interest of brevity, I'll close with some short questions for Madrick. Unless he answers these, his defense of the New Deal remains very weak:

• If the New Deal was such a great success, why did Canadian unemployment rates fall more quickly than the U.S. rates once Roosevelt was sworn in? (I explained this in more detail in my first essay.)
• Madrick explains the 1933-37 fall in unemployment by Roosevelt's moderate deficits, he explains the 1937-38 spike in unemployment by Roosevelt's (temporarily) small deficits, and finally he explains the conquering of unemployment by the massive deficits of the war years. But the Allied victory, and consequent slashing of military spending, meant that from FY 1945 to FY 1947, the federal budget was transformed from a deficit of 21.5 percent of GDP into a surplus of 1.7 percent of GDP. There was an official recession after the war, but it lasted all of eight months. The economy very quickly rearranged resources in light of the new, peacetime channels of demand, and the U.S. experienced a tremendous postwar prosperity. How is this possible? If the 1938 "depression within the Depression" occurred when Roosevelt cut back on deficit spending, why didn't Truman's enormous budget cuts plunge the economy into the Great Depression II? Isn't a better theory that the economy doesn't need central planning from Washington, D.C., and can figure out what to produce without political oversight?
• Whatever Madrick thinks of the (in)adequacy of Herbert Hoover's efforts to revive the sinking economy, surely Hoover did more than all previous U.S. presidents when they were faced with depressions (or "panics") when they were at the helm. Yet these earlier presidents somehow managed to skirt disaster, even though they did much less to "help" the economy than Hoover did after the stock market crashed on his watch. Isn't it obvious that laissez-faire policies work and allow the economy to recover quickly, while aggressive interventionist policies-such as those launched by Hoover and then amplified by Roosevelt-give rise to a decade or more of economic stagnation?

It Doesn't Add Up

There's no way around the simple facts: Hoover and Roosevelt ran the largest (peacetime) deficits in U.S. history, when their predecessors had largely been "do nothing" presidents who sat back and let the market fix itself. And yet during the Hoover and Roosevelt years, the U.S. experienced by far the worst economic disaster, and then the most sluggish economic recovery, of its history. The government screws up everything it touches. Does Madrick really believe the bureaucrats did a good job patching up the economy after the election of 1932?

Answer 3

the great Depression

Answer 4

It was.