Later On

A blog written for those whose interests more or less match mine.

The New Deal

with 2 comments

The GOP has found some success in taking some lie and then repeating it endlessly until people mistake it for truth. They’ve done that with “the liberal media” (in general, the media are slightly to right of center, except for talk radio, which is WAY to the right). And they’re trying with the New Deal, FDR’s effort to move the US out of the Great Depression. Steve Benen summarizes and explains:

A few days ago, Tyler Cowen had an op-ed piece in the New York Times questioning the efficacy of FDR’s New Deal policies in addressing the Great Depression. The Heritage Foundation also recently went after the New Deal.

Yesterday, on ABC, George Will summarized the conservative line nicely: “Before we go into a new New Deal, can we just acknowledge that the first New Deal didn’t work?”

Actually, no, we can’t. Paul Krugman explained reality a few weeks ago, but since some political observers seem to have missed his piece, it’s worth reemphasizing.

The New Deal brought real relief to most Americans. That said, F.D.R. did not, in fact, manage to engineer a full economic recovery during his first two terms. This failure is often cited as evidence against Keynesian economics, which says that increased public spending can get a stalled economy moving. But the definitive study of fiscal policy in the ’30s, by the M.I.T. economist E. Cary Brown, reached a very different conclusion: fiscal stimulus was unsuccessful “not because it does not work, but because it was not tried.”

This may seem hard to believe. The New Deal famously placed millions of Americans on the public payroll via the Works Progress Administration and the Civilian Conservation Corps. To this day we drive on W.P.A.-built roads and send our children to W.P.A.-built schools. Didn’t all these public works amount to a major fiscal stimulus?

Well, it wasn’t as major as you might think. The effects of federal public works spending were largely offset by other factors, notably a large tax increase, enacted by Herbert Hoover, whose full effects weren’t felt until his successor took office. Also, expansionary policy at the federal level was undercut by spending cuts and tax increases at the state and local level.

And F.D.R. wasn’t just reluctant to pursue an all-out fiscal expansion — he was eager to return to conservative budget principles. That eagerness almost destroyed his legacy. After winning a smashing election victory in 1936, the Roosevelt administration cut spending and raised taxes, precipitating an economic relapse that drove the unemployment rate back into double digits and led to a major defeat in the 1938 midterm elections.

What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.

This may be difficult for some to wrap their heads around, but FDR’s New Deal was less effective when it was too conservative. The lesson to be learned, then, is to be bolder and deliver a more expansive recovery through a more aggressive stimulus.

UPDATE: Another post on the same topic, with graph.

Written by LeisureGuy

24 November 2008 at 10:09 am

2 Responses

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  1. Interesting. First I’ve heard of that one. Thanks for the pointer.

    Thank heavens we’re returning to enforcement of anti-trust laws. And, of course, the union movement today is a shadow of what it was in the 30’s.


    16 July 2009 at 5:33 am

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