By Price Fishback
Professor of Economics, University of Arizona
The financial crisis and recession of the past year have led numerous people to look back at the Great Depression of the 1930s.There have been numerous calls for policies based on the New Deal.The Federal Reserve and Treasury have taken extraordinary actions to provide funds and guarantees to banks to avoid further problems in the financial system.The Obama administration is pushing for a large stimulus package and hearkens back to the New Deal as an example.
As we discuss modern policies, it is extremely important to have a clear picture of the New Deal policies and their successes and failures.The New Deal was a response to the worst Depression in American History.By 1933, thousands of banks had failed, real output was 30 percent lower than it had been in 1929, and unemployment rates reached 25 percent.In the First Hundred Days of his administration Franklin Delano Roosevelt threw just about every policy that his advisors and Congress could think of at the emergency.You name it and the Roosevelt Administration tried it:aid for the destitute and the unemployed, public works projects, bank holidays, loans, new regulations, reorganizations of industry, farm programs, and more.Some programs ran at cross-purposes with each other.For example, farm programs raised farm prices to help farmers but harmed the unemployed who were thus paying higher food prices.
There were so many changes and so many programs and so many problems that it is hard to sort out how successful the New Deal programs were at resolving these issues.It is quite clear that the U.S. government was a novice at macroeconomic policies.The Federal Reserve System acted too little too late in dealing with bank failures.Federal Reserve Chairman Benjamin Bernanke’s studies of these episodes have led him to join the Treasury Secretary to make a series of extraordinary policy moves over the past year.The Roosevelt administration never attempted a true Keynesian stimulus program, because the dramatic rise in federal spending was nearly matched by a rise in taxes collected. Despite all of Roosevelt’s best efforts the unemployment rate still remained over 10 percent throughout the 1930s, with a second peak at 19 percent in 1938.
At the operational level many of the programs seemed to have worked reasonably well.In a short time the Roosevelt administration established government organizations designed to distribute funds to millions of people through state and local governments and new agencies.Given the difficulties of establishing any successful organization, some of the agencies were service operations miracles.Millions of people directly benefited from work relief and the new federal/state public assistance programs.Huge numbers of roads, public buildings, and public works were built.Lives were saved through better public health.Banks stopped failing at a very high rate.The unemployment rate lurched downward and GNP eventually returned to the peak of 1929, getting set to takeoff once the economy had pushed past the harsh economic realities of World War II.
Yet a simple relationship of better times with the presence of the programs is not enough to effectively measure the impact of the policies.When we ask the counterfactual question of how we would have fared in the absence of the New Deal policies, the answer is more complex.At no time in American Economic history has the economy failed to rebound and soar to new heights within a few years, so there is a natural expectation that a rebound would have occurred.Of course, the administration followed these policies because after four years of sharp decline, no end to the decline appeared in sight.The situation was so complex with so many things happening at once, it is hard to sort out the successes and failures.Talented and very intelligent scholars of the New Deal find plenty of room for disagreement about its short run effects.Some have argued that the sheer volume of policies, changes in direction, and the anticipation that new policies might be adopted created so much uncertainty that it retarded economic growth.Nearly every economist considers the cartel-like features of the National Recovery Administration to have been a misguided experiment that retarded the benefits of competition in markets.In the farm sector the new policies led to gains for farm owners but may well have harmed farm workers, tenants, and croppers.Studies that try to control for the fact that policies were put in place to counteract economic problems in a number of cases find that some of the New Deal programs made positive contributions, but their impact was not nearly as large as the surface comparisons suggest.
The New Deal had tremendous long-range consequences for government in the American economy.A number of programs—the work relief programs, the Reconstruction Finance Corporation, the Home Owners’ Loan Corporation, and the National Recovery Administration--were phased out, but so much of the New Deal legacy remains.By its end the New Deal had established a federal network of social insurance and public assistance programs, federal oversight and insurance of large parts of the financial industry, substantial change in the rules under which labor markets operated, a whole network of programs in the farm sector, and many more.
Over the past couple of decades a number of economic historians have begun performing careful, quantitative studies of the extent to which the New Deal policies were successful.A full book chapter provides a recent survey of the successes and failures of New Deal policies.Access to summaries by the authors and to the original studies are continuously being added to the website.