What are the lessons from the New Deal?

by on November 22, 2008 at 7:40 am in Economics, History | Permalink

This week they put my Sunday column on the web on Friday; I was alerted by the ever-vigilant Mark Thoma.  The intro is this:

The traditional story is that President Franklin D. Roosevelt rescued capitalism by resorting to extensive government intervention;
the truth is that Roosevelt changed course from year to year, trying a
mix of policies, some good and some bad. It’s worth sorting through
this grab bag now, to evaluate whether any of these policies might be

If I were preparing a “New Deal crib sheet,”  I would start with the following lessons…

The conclusion is this:

In short, expansionary monetary policy and wartime orders from Europe,
not the well-known policies of the New Deal, did the most to make the
American economy climb out of the Depression. Our current downturn will
end as well someday, and, as in the ’30s, the recovery will probably
come for reasons that have little to do with most policy initiatives.

Read the whole thing.  For critical responses, perhaps you can try the comments section at Mark Thoma’s.  For reasons of space, it was not possible to specify that I was praising the proposed Obama middle-class tax cut.  I do not, however, think it will do much (if anything) to end the current recession, although tax hikes could make things worse.

1 E. Barandiaran November 22, 2008 at 8:08 am

I agree with most of what you say in your column. Perhaps you should have stressed first how different current policies and the regulatory framework are today in comparison with the early 1930s, and then the implications of these differences for policymaking and in particular how much they limit the range of good policies that can be implemented. I’m afraid that by ignoring these implications, most new policies will turn out to be bad. I’ve just read that earlier today Obama announced a goal of creating 2.5 million jobs in two years without saying anything on how he plans to do it–apparently he has yet to learn that grown-up people don’t announce goals without saying how to get them (he may think he’s still running for President).

2 Matthew C. November 22, 2008 at 8:24 am

You are praising a policy to put millions more Americans on the Federal dole under the guise of a “tax cut”? You know these are just transfer payments to low income earners, right?

3 odograph November 22, 2008 at 8:33 am

The really amazing thing is how everybody is revisiting the New Deal. Imagine a Rip Van Winkle who took a cat nap for just the last 5 years … to wake up and find the market down and Dew Deal options in vogue.

I sure hope this is excess preparation, and not as I fear, that too many economists think we are 30’s style policy for a 30’s style economy.

Wheres Alex? Maybe I’ll take “there is no credit crisis” after all!

4 dennisw November 22, 2008 at 8:47 am

It’s very hard to do but you get out of a deflation depression by dispersing people to the countryside to grow food. There they engage in honest labor and save money (build savings) for a new economy

This happened during the great depression. War also disperses men to the countryside and bare living conditions. WW2 — that meant dispersal to the periphery meaning foreign nations to fight

Deflationary depressions sober people up while inflationary depressions connote chaos and degeneracy. Inflationary depressions make for a lot of fast buck artists as people frantically buy and hedge against their diminishing in value savings. The psychology is 180 degrees different than in a deflationary depression

5 MikeP November 22, 2008 at 9:25 am

The first commenter on Thoma’s post is indeed a loon. But the second is a gem as well: an unrepentant Keynesian who says things like…

If the government raises taxes during a recession, the worst thing that would happen is neither a stimulus nor a contraction of the economy. One form of spending is simply replaced by another. Tax hikes are NEVER CONTRACTIONARY.

Uh, there is a big difference between what people spend and what government spends. People spend money on things people want. Government, in general, spends money on things people don’t want.

Recovering from a recession or depression requires retooling the economy to produce things that people want. Taking money from those who buy what people want to be spent by planners who neither know nor really care what people want is entirely destructive of those ends.

6 RV November 22, 2008 at 10:21 am

Hi Tyler,

Learned a few things reading it but felt it was too short and didn’t have
anything more than neat summarizations.In future, can you put up any longer, unedited drafts here so that we can read the more detailed version.


7 DanC November 22, 2008 at 10:31 am

The Obama tax plans are bad because they create extra layers of complexity and distort incentives. Plus they give politicians the ability to be social engineers with the tax code. Leaving Pelosi, Franks, Dodd, Waxman et all in charge of “planning” for America is enough to give you a fright.

I am amazed that some critics still think that the path to prosperity is to tax and spend. You just have to tax people you don’t like and spend it on things you do like?

FDR spending efforts were more political then economic. The CCC was designed, in part, to get unemployed inner city youths off the streets. Fear of social unrest was very real. Chicago had, by some estimates, a 50% unemployment rate. Many citizens were afraid that the social contract would fall apart, replaced with increasing crime and possible riots. Don’t forget that many big cities in America had race riots in 1919, due in part to unemployment after WW1.

Some of the New Deal jobs programs were about dealing with people like Huey Long, you wanted to push the country to the extreme. As economic policy, the New Deal is highly suspect. If you view these policies as a pressure valve on the society, they may have worked a little better.

Still, there is no evidence that simply spending and then taxing is of much help. Helping the economy quickly reallocate resources into productive activities helps. (This is a big reason why restrictive monetary policy is so hurtful.) But the kind of social engineering that the Democrats in Washington are talking about will dramatically hurt growth prospects.

We can hope. Obama the peace candidate is placing war hawks in key positions. Obama the Social Democrat is placing some center right advisors on economics. Obama has always been a rather empty suit that people projected what ever they wanted to project upon him. I really don’t know what a President Obama will do on many of these issues. The current Obama seems very different from the candidate Obama, or even the Senator Obama. He ran to the left of Hillary now he is ?????

8 odograph November 22, 2008 at 11:02 am

DanC, where would you honestly judge the complexity of American taxes in 2008, and their distortion on incentives?

Call it 100. Call Obama’s changes 105. Big deal.

I’m afraid it’s a weak argument to begin “let’s all pretend we are starting with a free market.” Or “let’s pretend the Bush Administration left us with a simple and uniform system of individual and corporate taxes.”

Or to pretend that we aren’t coming off 75 years of “social engineering” … engineering that did not really lag at all in the last 8 years … it just changed direction. How many freaking billion went to Halliburton?

9 Steve Roth November 22, 2008 at 11:43 am

Tyler, much of this commentary rings true, but I’m kind of shocked that you don’t mention the single most obvious and significant fiscal and monetary fact of the war years: extraordinary government (deficit) spending.

Mark Thoma and a zillion other economists have pointed to that spending as the item that finally broke the depression’s back.



10 MikeP November 22, 2008 at 12:42 pm


During the War spending was up, deficits were up, employment was up, production was up. Economic models based on such numbers will show a “recovery”.

Yet household consumption was down, with rationing a part of daily life. That is not recovery. The purpose of an economy is not to make jobs: it is to satisfy individual demands. Jobs and productivity are only a means to that end.

Consider the limit of the war economy: every worker either builds material to be shipped overseas and destroyed or goes with the material to destroy it himself. Everyone is employed, but store shelves are empty. As a bonus, since there isn’t anything for any civilian to buy, you can pay them whatever you want.

11 dearieme November 22, 2008 at 2:11 pm

“What cannot be true is that wartime orders from overseas pulled the US out of the depression”: Britain and France started placing large orders starting in (approx – does anyone know better?) 1937.

12 spencer November 22, 2008 at 2:50 pm

According to the BEA in 1939 exports contributed 0.25 percentage points of the 8.1% increase in real gdp and in 1840 it was 0.62 percentage points of the 8.8% increase in real gdp. In 1938 the contribution of real exports to real gdp growth was negative -0.05 percentage points.

The BEA data does not break out how much of this contribution to growth was war related shipments to Europe, But this data makes it hard to accept the thesis that such shipments were a major driving force of the economy between the 1937-38 recession and 1940 when the US really started preparing for war.

13 yoyo November 22, 2008 at 3:20 pm

Ah, so tax based fiscal stimulus=good. Spending fiscal stimulus= bad. Also, wages going up=bad.

Yeah, if your main goal is to promote inequality, not growth, i can see how this makes sense.

14 Andrew November 22, 2008 at 4:00 pm


So, if what you say is true about Bush, that makes what Cowen says about Obama false? The election is over, you don’t have to keep drinking the kool-aid.

15 Paul Johnson November 22, 2008 at 4:38 pm

Great column. We need a part 2, also in the NYT. There’s so much more still to be considered regarding structural issues in the finacial system. Is there some measure of the relative general complexity/fragility of financial systems? Like entropy in physics. I expect that whatever it is, it has increased considerably since the 1930s. Otherwise, with all the safeguards we have now it’s hard to see why the downturn was so sudden.

16 meter November 22, 2008 at 6:16 pm


So, if what you say is true about Bush, that makes what Cowen says about Obama false? The election is over, you don’t have to keep drinking the kool-aid.”

I don’t disagree with what Tyler says about Obama, but I do disagree with the notion that Obama’s policies are somehow beyond the historical pale in terms of social engineering – (something said by DanC, not Tyler.) Especially compared with his (soon-to-be) predecessor.

If people are going to attack Obama on policies that a) haven’t been implemented and b) are an improvement over current policy, expect comparisons with Bush.

17 Bill Stepp November 22, 2008 at 11:17 pm

No mention of the New Deal’s legal attack on businesses, especially small businesses (which employ more workers than large ones), such as the Schechters’ chicken business, price fixing (which didn’t allow for price discovery and proper resource allocation), and the “regime uncertainty” that followed the attack on property rights. Hayek’s Nobel essay “The Pretence of Knowledge” is worth a read these days in this context. It’s on the web. The latest Nobel winner might learn a thing or two from it, although his continuing absurd characterization of the Hoover junta’s supposed policy of “laissez faire” shows that maybe he couldn’t.

Some deluded commenter at DeLong’s blog defended the NRA’s monopolies as a counter to deflation. Amity Shlaes has some good analysis of the Schechter case and the baneful effects of price fixing in her book on The Forgotten Man.

18 Eric H November 23, 2008 at 12:31 am


Amen, amen, and amen. (okay, and awomen). At every change of the presidency, the other side starts talking like we’re going to experience armageddon. ehh, I mostly can’t tell except that Jane’s Law combined with the swap produces humorous results when they start speaking or typing publicly. Plus, we get counterintuitive only-Nixon-could-go-to-China results like welfare reform with Billy, new medical entitlements with Dubya, and who knows what with Obama. If they overreach, we change out Congress, if they don’t get the message, we change out the Glorious Leader.

The only thing for certain is that it is a one-way ratchet. Sometimes it goes faster, sometimes slower, but always in one direction.

19 Bill Stepp November 23, 2008 at 11:56 am

But the NRA doesn’t have a monopoly.

I was referring to the New
Deal outfit, which thankfully doesn’t exist anymore, not the National Rifle Association. Wasn’t it obvious from the context? Or are you part of the 20% who thought that the E.C. was set up to supervise the first televised presidential debate?

And why should NRA members be referred to as “gun nuts”? Are you a “gun grabber”?
You can thank the ancestors of NRA types for the fact that we won the American Revolutuion.

20 p.e. November 23, 2008 at 1:25 pm

When I think about the New Deal, I don’t think “monetary policy” or “unionization” I think Hoover Dam. I think Red Rocks, I think WPA… what is the macroeconomic effect of these massive public works projects?

21 J Thomas November 23, 2008 at 3:44 pm

Bill Stepp, I thought it was a decent small joke. People keep comparing the current crisis to the Great Depression, when to me it looks like the main similarity is the potential severity. Arguing about FDR and the Depression is a whole lot sillier than getting ready to fight the previous war. It should be clear that FDR got us out of the depression with a whole lot of deficit spending, particularly during the war, and also the war etc disrupted things so much that after it was over people didn’t assume they were in a depression. But now we’re hemorrhaging money buying imports (including lots of oil) and pumping out more money is like relying on transfusions when you have a spurting wound.

And why should NRA members be referred to as “gun nuts”?

Is there a better description?

You can thank the ancestors of NRA types for the fact that we won the American Revolutuion.

Sure, and you can thank the longbowmen who practiced long hours with their own equipment for the victory at Agincourt — but it doesn’t make much difference whether people have longbows now.

So, the guys who’re fighting for independence in iraq, what do they use? A few years ago I heard they switched from having two AK47 guys with 1 RPG to 1 AK47 and two guys with RPGs. The AK47 provides a little bit of distraction while the RPGs aim and fire. So, if it comes down to a crunch, do you think you can do much with legal firearms? You might do better with longbows.

I think from what we’ve seen recently, when it’s amateurs against foreign professional troops you do better to hide and get them with boobytraps. And when it’s amateurs against their own nation’s professional troops you do better to persuade 2/3 of them to switch sides.

22 marmico November 23, 2008 at 6:15 pm

In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression. The conclusion is not supported by the evidence.

Measured by real GDP, the U.S. economy had recovered from the 1930-1933 depression by 1936.

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