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.
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:
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?
Republicans and business people charged that the New Deal programs were too radical, undermining private property, economic stability, and democracy. Critics on the left faulted the New Deal for its failure to allay the human suffering caused by the depression and for its timidity in attacking corporate power and greed.
1st new deal
new deal
Perhaps the greatest accomplishment of the New Deal was to ease the economic hardship faced by many during the Great Depression. While not being able to end the Depression, the New Deal did preserve the people's confidence in America's institutions and government. The relief measures of the New Deal were considered a success. Not everyone supported the New Deal. As a formula for economic recovery, the New Deal failed. Many businessmen and financiers did not support the economic measures of the New Deal. With the recession of 1937, many business leaders and politicians claimed that FDR's policies were a failure and the attempt to maintain prosperity during peacetime was not successful at all. Many Americans however in both rural and urban areas of the nation did support the efforts of the New Deal. FDR's Fireside Chats provided confidence and reassurance to many.
Communists denounced the slow pace of change and accused the New Deal of failing to serve the interests of the workers who produced the nation's wealth. Conservative leaders believed that the New Deal's failure to lift the nation out of the depression indicated that Americans were ready for a change. Left wing critics insisted that the New Deal had missed the opportunity to displace capitalism with a socialist economy and that voters would embrace candidates who recommended more radical remedies. -Amanda
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The New Deal.
The New Deal
Republicans and business people charged that the New Deal programs were too radical, undermining private property, economic stability, and democracy. Critics on the left faulted the New Deal for its failure to allay the human suffering caused by the depression and for its timidity in attacking corporate power and greed.
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The Failure of the New Economics was created in 1959.
2nd new deal
1st new deal
new deal
The New Deal
Perhaps the greatest accomplishment of the New Deal was to ease the economic hardship faced by many during the Great Depression. While not being able to end the Depression, the New Deal did preserve the people's confidence in America's institutions and government. The relief measures of the New Deal were considered a success. Not everyone supported the New Deal. As a formula for economic recovery, the New Deal failed. Many businessmen and financiers did not support the economic measures of the New Deal. With the recession of 1937, many business leaders and politicians claimed that FDR's policies were a failure and the attempt to maintain prosperity during peacetime was not successful at all. Many Americans however in both rural and urban areas of the nation did support the efforts of the New Deal. FDR's Fireside Chats provided confidence and reassurance to many.
The Failure of the New Economics has 458 pages.