Interesting article in the latest Milken Institute Review which argues that the fiscal policies of the New Deal lengthened the Great Depression. It seems like a thoughtful critique without the right wing polemic that flavors so many of these discussions.
The current economic crisis has made some nostalgic for Franklin D. Roosevelt’s New Deal, an era that we are now inclined to remember as a grand – and successful – struggle to bring the economy back from the brink of chaos. After all, Roosevelt’s social insurance programs, including Social Security, unemployment compensation and the WPA did aid millions of Americans.
But despite the benefits of the New Deal safety net, and despite the success of Roosevelt’s financial reforms – notably, the creation of the Federal Deposit Insurance Corporation and the Securities and Exchange Commission – this nostalgia is misplaced. The central component of the New Deal – the programs aimed at restoring private-sector jobs – was highly problematic, and largely accounts for why the Depression ground on through the 1930s.
I’m not convinced, but I’m not an economist either. Today, as then, we’re in uncharted waters. You can download the article as a PDF here.
July 15th, 2009 at 12:39 am
[...] Was the New Deal a Bad Deal? – Creative Class. [...]
July 15th, 2009 at 6:21 am
http://www.prospect.org/cs/articles?article=learning_from_the_new_deals_mistakes
Guess again, Michael.
Telling point: if the argument is that government spending during WW2 got us out of the Depression, and government spending on the New Deal did not, then conservative idiot economists are forced to prove that one kind of government spending is different than another.
July 15th, 2009 at 11:24 am
Interesting interplay with the last post. As I said, I’m not convinced by the Milkin piece, just intrigued. If we are to learn from the past we have to understand it.
This is the next to last sentence of the Milkin article:
“Indeed, we would argue that the primary test for judging the value of intervention should remain a familiar one: would the change preserve (or improve) market- based incentives to work, save, invest and innovate?”
This is from Richard’s comment on “Innovation Interrupted” post:
“Field has looked in detail at the Great Depression. He dubs it the most technologically progressive decade of the 20th century, even when compared to the 1990s high-tech boom period. It was far more innovative than either the 20s or the great post war boom as well. Like Mokyr he finds organizational innovations, in addition the individual technological innovations to be key. The development of broad systems of innovations are what really boost productivity in a big way.”
So if Field is right, we could theorize that government intervention in the Depression did help “market-based incentives to innovate.”
Could it be that the turmoil of the Great Depression was a Great Reset? That the creative destruction that was rampant in the whole economy/society in the ’30’s prepared for the mobilization for WWII and the postwar boom?
July 15th, 2009 at 1:17 pm
Way back in an undergraduate economic history class, I read a book I believe was titled “rethinking the great depression” by an economist names gene smiley (not sure on spelling) that made a similiar argument.
His basic argument was that the depression was caused by bad fed policy in the U.S. and poor monetary exchange conditions coming out of post-WWI (the Fed over expanded the money supply in the late 1920’s and then seriously contracted the money supply at the onset of the depression. The British reinstated the gold standard and pre-WWI exhange rates inspite of the fact they had undergone an price inflation).
He also argued that the new deal did little to nothing (and he even goes as far as saying it had the effect of perpetuating the market distortions leading to the depression) in regards to ending the depression. Further, he finds evidence that the spatial distribution of New Deal expenditures had more to do with political benefit than economic.
So… I have seen this argument (smiley’s is quite well written and was backed by significant economic history research) before yet also remain on the fence.
July 15th, 2009 at 11:45 pm
Swordsman,
Thanks for the link to the American Prospect piece. I don’t think the two conflict, they both focus on the National Recovery Act. I think the Milken is a little more neutral, the Prospect a little more liberal partisan but not in disagreement.
From the Milkin article:
The NIRA effectively suspended the antitrust laws so that firms could openly collude to raise prices by keeping the lid on total industry output.
From the American Prospect article:
Early on, the New Deal put too much public power in private hands. Conservative critics now focus on the National Recovery Administration, which created government-licensed cartels so that industries could self-regulate. Modern NRA critics have good historical company: Many New Dealers disliked the NRA, and Roosevelt himself eventually admitted it was “pretty wrong.” The NRA established boards to set prices, wages, and conditions of work. These boards were supposed to have representatives from management, labor, consumers, and government — but in practice fewer than 10 percent had labor representatives, even fewer had consumer representatives, and the government representative was normally someone from the ranks of management. One New Dealer noted only two cases when the government enforced codes of behavior on businessmen against their wishes.
But the case against the NRA is not a case that America would have been better without the New Deal: It is a case that the New Deal would have been better without the NRA — a position at which many New Dealers had arrived by some time in 1934.
July 16th, 2009 at 8:04 am
You really need to read Milton Freidman to understand why the GD happened (awful monetary policy, in the US and elsewhere).
Once you understand WHY the GD happened, you can see that the ND was a complete waste of time, totally peripheral to the true cause of the GD. Almost by definition, this means that the ND did nothing to alleviate the GD. It may have made things worse, but policies implemented by Hoover in ‘30 and ‘31 are also to blame (tax increases, tarrifs, etc.).
BTW, there are some monetarists that have convincing arguments that monetary policy is to blame for the crash late last year. Scott Sumner is really, really convincing to me.
If Sumner is right, the TARP, stimulus, etc. are all counterproducive, and all that matters is that we start the printing presses.
I don’t think it is a coincidence that Sumner is a PhD from UChicago.
Finally, much like today, liberals used the GD as a pretext to implement their socialist and/or fascist ideas. It’s really all about seizing and consolidating power. You see it today when liberals try to seize “The Commanding Heights” of our economy today: health care.
BTW, before you go after me for calling liberals “fascist”, the NRA was fascist. Cartels are pretty standard for fascists, Mussolini did it, for example.
July 16th, 2009 at 9:13 am
http://www.publiceye.org/eyes/whatfasc.html
might help you to understand fascism
July 16th, 2009 at 11:05 am
Freidman’s policies have been widely proven to be failures, no matter where they’ve been tried; South American countries, Poland, US. You’ll also notice that there’s a dictatorial regime not too far behind because people don’t want those policies. Mostly Friedman’s policies are upward wealth distribution.
Btw, aren’t these the same economists that missed the greatest bubble in a lifetime? Yeah, they’re pretty reliable, eh?
Buzzy, lack of regulation is what caused the Great Depression and the current depression. And if memory serves me right, Republicans were in charge both times. As they say, you’re entitled to your own opinion, not your own facts.
It’s nice to know you can take the boy out of the cult, but not the cult out of the boy. Whooooooo, liberals are evil, liberals are scary. Whoooooooo. Happy Halloween. What are you dressing up as, Pollyanna?
July 16th, 2009 at 11:22 am
Freidman’s policies have been widely proven to be failures, no matter where they’ve been tried; South American countries, Poland, US. You’ll also notice that there’s a dictatorial regime not too far behind because people don’t want those policies. Mostly Friedman’s policies are upward wealth distribution.
Alex, Chile has been a democracy since the ’80s. It has never been a dictatorship since Freidman consulted with Pinochet in the 1970s.
Poland has not been a dictatorship since ‘89 either.
And… it goes without saying that the US is not, nor has never been, a dictatorship.
As they say, you’re entitled to your own opinion, not your own facts.
Indeed.
Seriously, for the open minded, just check out Sumner’s FAQ. It’s at the very least an intriguing hypothesis (that the current depression was caused by bad monetary policy, not growing the money supply fast enough, indeed letting it contract in the 4th quarter of ‘08 and 1st quarter of ‘09).
July 16th, 2009 at 11:23 am
Btw, aren’t these the same economists that missed the greatest bubble in a lifetime? Yeah, they’re pretty reliable, eh?
Sumner’s targeting of nominal GDP growth at 5% would have predicted the crash. Unfortunately, it’s a bit of a trailing indicator.
July 16th, 2009 at 12:06 pm
As Buzzcut often reminds us, these are all hypotheses. And while what got us into the messes in 1929 & 2007 are interesting, what will get us out is more immediately important.
Of course, the situations are far from identical.
Here’s another hypothesis, get out your piggy banks.
http://www.financialsense.com/editorials/litle/2009/0714.html
July 17th, 2009 at 6:11 pm
And… it goes without saying that the US is not, nor has never been, a dictatorship.
Ah, apparently you were out of the country the last eight years. The imperial presidency is the same as a dictatorship, since they believed they were a government unto themselves, so they ignored the other branches or went around them.
Let’s see, Sumner’s FAQs is sponsored by the Liberty Fund, a libertarian point of view, in the vein of The Federalist Society, Cato Institute, and The Constitution Society.
C’mon Buzzy, I’m falling off my chair laughing at the “impartiality” here. That’s like saying Sarah Palin has all her marbles and is the voice of reason for the Whig, um, Republican party.
If you’re dressing a conservative pig up to be respectable, it’s still a pig. Try harder next time, ok.
July 17th, 2009 at 6:25 pm
Michael, I think I could agree with that, but I’d have to read it a little closer. I’m conflicted by Obama, one right move and one wrong move is his MO it seems. He wasn’t my first, second, or third choice, but he was better than the pilot who bombed civilians and got shot down. Strange how Amurikans lurve their war heroes, regardless of how incompetent they are.
In both cases (1929 & 2007) no regulation and deregulation of the Financial sector played a key part (a key part, not the only part). When Glass-Steagall was repealed, it didn’t ten years for the banks to screw things up.
But all in all, this problem started with Reagan’s embrace of Friedman’s policies. The US became a corporate state since then. (I still think Bonzo was the better actor).
July 18th, 2009 at 12:58 am
A lot of America seems divided between people who think FDR was a disaster and those who think Reagan was a disaster. I’m certainly more in the latter camp, but also think it’s more important to figure out what to do to get out of our current mess than who to blame historically.
July 19th, 2009 at 3:53 pm
Ok, this is fairly straight forward. Three steps to fix the mess.
1. Cut the military budget by 1/2 to 2/3 and close most of the 800+ bases around the world (annual savings of $500B – $663B). Say goodbye to Iraq, Afghanistan, and the Middle East (annual savings $200B). Tell Israel they’re on their own from here on out (annual savings $30b – $60B not to mention all the headaches they cause the US by picking fights with their neighbors. Also, the US has paid Israel $2T in welfare since 1950). Go back to having a War Dept like it was under Truman. Total annual savings +/- $1T savings.
2. Update the Tax code. No effing way that Goldman Sachs should pay 1% ($14M) taxes on their earnings. Close all the loopholes that allow this nonsense and fix it so they’re not moving money offshore to avoid taxes at home. Same thing with the bankers and their earnings. David Cay Johnston agrees and so do I. Annual revenue generated $1T – $1.5T
3. Single payer health care. The biggest cost for businesses is health insurance. Single payer insurance will allow businesses to be competitive again and rebuild the manufacturing base so jobs aren’t leaving. This is one thing taxes are for. Number of jobs generated approx 10M and corresponding revenue generation $400B.
July 19th, 2009 at 3:59 pm
4. Regulation – Regulation of the Finance sector from the 1930s worked. So far it’s cost over $1t to fix today.
5. Unions – Put the Labor laws back the way they were. I agree Europe and Canada have stronger Middle Class because unions work. And the converse is true in the US.
July 19th, 2009 at 4:56 pm
Well, until “they” invent a time machine, history is not subject to double blind studies. We can’t go back and change one factor and then rerun history to see what happened.
As such, events like World War 1, the New Deal, and yes the financial crisis of ‘08 will be shrouded in disagreement. I’m not surprised that a seemingly simple question like “Did the New Deal end the Great Depression” can’t be answered, not now, not ever.
Until that time machine comes along.
Alex, just look at the FAQ, not who the guy is and who he works for. Is it an interesting explanation? It makes a lot of sense.
July 20th, 2009 at 9:55 am
Let me add this for perspective. True, we can debate this all we want but it won’t make a difference because we’re not in charge to do anything.
Second, no matter if a time machine existed or not, and yes it’s important to focus on ways to fix the current mess, but it is important to understand what the problems were the first time around and how they were fixed the first time around. Then and now, it is a Financial system failure with many of the same core problems.
That’s important because as economists like Krugman and Schiller (and others) can point to what did and didn’t work the first time around, and tell Mr. Obama where Summers and Geithner are screwing up. In this case, is is important to pay attention to history and not to repeat it.
Unfortunately, of Mr Obama’s top 10 campaign contributors, you’ll see at least 5 of the investment firms that received government bailouts. Coincidence that he’s taking the same path Bush took? Nope. Let’s hope he’s keeping Volcker around to appoint him to the Fed chairman position.
Btw Buzzy, just for your own benefit, a lot of FDR’s programs from the New Deal were created in the Hoover Administration. Look it up. Hoover was such an ideologue for the free market that he shelved those programs, the very programs that could have fixed the mess in his term, and did nothing during his term. 1932 rolled around and Republicans lost by huge margins across the board. Sound familiar? FDR, after much pushing from cabinet members, started enacting some of those programs. True that there were fits and starts up to WWII, but they stabilized the economy. Even back then, health insurance was still one of the top issues. Big Business (GWB’s relative included) didn’t like these policies and even tried to get General Smedley Butler to remove FDR. Again, look it up if you doubt it.
That’s another reason this has turned into such an ideological battle. Republicans and their untethered free market positions on everything inevitably lead to messes like this. Milton Friedman is credited with formalizing this into an economics position paper funded by corporate backers as something they could point to that had “legitimacy”. That’s why today, most universities can’t be trusted because they receive big donations from corporate sponsors in return for favors.
July 20th, 2009 at 4:07 pm
Alex, the point is that we can’t possibly know what the true causes of the GD were (because we don’t have that time machine). Thus, we can’t “learn from history”.
Hoover was no ideologue for the free market. He was not Calvin Coolidge. He was more in line with the Progressives. He raised the top marginal tax rate to 63%, and started a wave of protectionism by signing Smoot-Hawley. That’s not free market.
Do me a favor. Don’t tell me to look something up until you do it first. Your knowledge of history is poor. I can tell you went to a public school.
July 20th, 2009 at 4:49 pm
He was more in line with the Progressives.
Thanks Buzzy. This tells me everything I need to know. It explains perfectly the referral to the conservative-backed Sumner’s FAQs.
I’m not sure what public school has to do with anything. Probably the same logic if someone who went to Purdue.
July 20th, 2009 at 8:02 pm
You know Buzz, it’s apparent we’re on different ends of the spectrum politically. Maybe Michael will pick something less controversial next time. Like religion.
July 21st, 2009 at 12:49 am
Thanks everyone.
When I tried religion, it didn’t get much interest… http://www.creativeclass.com/_v3/creative_class/2009/04/28/one-nation-under-your-name-here/
December 2nd, 2011 at 11:42 pm
asme…
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