Investment in the Great Depression

Brad DeLong shows a graph of how Gross Private Domestic Investment rises during the New Deal, except for the contractionary 1937-8 downturn.  The pattern is striking.

A loyal MR reader emails me a citation to Robert Higgs’s book, which on Google (pp.6-7) claims that net investment was negative over the 1930-35 period.  There is talk of a "capital consumption allowance" and that allowance accounts for the difference between the gross and the net terms.  Only in 1941 did net investment exceed its 1929 level.  Here’s a chart which seems consistent with these claims and which shows the difference between the net and the gross series for investment.  The waves are very similar but at different absolute levels.

Can any readers explain what is going on  In this time period, using this data, is net or gross investment a better indicator of recovery and economic conditions?  Is the pro-New Deal claim that making net investment "less negative" (but still negative) counts as a success or rather that the gross investment series is what matters? 

When I look at this data series — whether gross or net — I see a few monetary policy actions (initial reflation, breaking the old link to gold, increasing reserve requirements in 1936) as the dominant explanatory variables. 


Capital consumption allowance is depreciation. Thus if gross investment is positive and net investment around zero that means that the capital stock is just being maintained. If net investment is less than zero then the capital stock is shrinking.

Shockingly, the capital stock was lower in 1940 than it was in 1930. I think this illustrates better than any other statistic the failure of investment to recover during the Great Depression and New Deal.

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What DeLong's Gross Real Private Domestic Investment indicates is that investment went up (no surprise, a good portion of it was in response to the New Deal's spending initiatives). What DeLong would appear to be missing however is that these "investments" were largely ineffective.

Here's how we know. If the New Deal was really responsible for improving economic circumstances, that improvement would show up in the bottom line of publicly traded companies, who most certainly would have adapted their businesses to capture what the New Deal-inspired investments were supposed to deliver: increased profits from an increased stream of revenue from new investments.

It didn't. For the long years spanning 1933 and well into 1935, the golden era of the New Deal, the economy entered into a kind of "dead zone," during which private sector profits continued to get worse, only slowly. That decline looks better only in comparison to the plunging profits of the period from 1929 to 1933.

Things only began improving in 1935 with the Supreme Court's ruling that the centerpiece of the New Deal, the National Industrial Recovery Act, was fully unconstitutional. The economic outcomes produced by the NIRA, combined with President Roosevelt's singular dedication to its principles, is the primary reason the economy failed to recover much sooner during the Great Depression.

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Is it possible that a lot of existing capital stock depreciated in economic terms as companies experience demand declines? When companies failed during the depression, wouldn't the value of their capital stock be written down as depreciation? I don't know what counts and what doesn't in capital consumption allowance accounting, but if either of the above is true, then it is possible that a lot of stranded capital in failing firms was a contributor to the poor net investment measures.

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Prof. DeLong is right to use gross investment. Depreciation depends on past investment, not present policy. Thus, New Deal policy couldn't affect how much was subtracted from gross investment to get net investment in 1933. And, as one commentor noted, depreciation estimates are crude. If a New Deal policy somehow made past capital unproductive (or more productive), that would create economic depreciation but not affect accounting depreciation.

I wonder how this relates to the recent JPE paper that argues the New Deal lengthened the Depression. It's on my list of things to read...

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Eric, the point is not that the New Deal caused depreciation. The point is that investment was not even large enough to make up for depreciation. The problem with the gross measures is not that they are wrong but that few people know what is a "big" or "small" number for gross investment. For net investment, however, everyone knows that negative net investment between 1930-1940, i.e. the capital stock shrunk over this period, is very, very bad.

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Nice one, lxm! And sobering.

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You also get the same type of misleading use of data when you talk about the real capital stock. Capital stock in 1939 was below the level in 1929. But that does not necessarily mean the New Deal was a problem. The real capital stock fell from 1929 to 1935 and rose after 1935. The big declines were in the early 1930s before the New Deal came into existence. After the New Deal came about the capital stock bottomed and started rising again. Blaming the drop from 1929 to 1939 on the new deal when the worse of the drop occurred before the New Deal existed does not appear to be an honest argument in my book.

Real Net Stock: Private Fixed Nonresidential Assets (Bil.Chn.2000$) Souce BEA


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J Thomas,

It would matter if the country recovered from other, similar recessions more quickly without New Deal legislation. Many on the laissez-faire end of this debate cite the '21 recession as an example. The argument is that without the New Deal, the Depression would have been much shorter, like nearly every other recession in American history.

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Selfreferencing --recessions- recoveries tend to be symmetrical. If you have a mild recession you have a weak recovery and in a severe recession you get a strong recovery.

Using NBER standards the term recovery has an exact meaning. It is the period from the economic bottom until real gdp surpasses the prior peak. On average in post WW II business cycles recoveries have had the same length as recessions -- the average for both is about three quarters. Three quarters of recession followed by three quarters of recovery. Interestingly, the 1929-1936 recession- recovery followed exactly this pattern -- three and a half years of recession followed by three and a half years of recovery so that in 1936 real gdp surpassed the 1929 peak.

This means the 1929-1936 recession recovery was identical to the norm in post WW II business cycles. On this basis the 1933-1936 economic recovery was neither a weak recovery or a strong recovery.

The standard argument that the 1933-1936 recovery was weak is based on the Cole argument that the economy should have recovered to the trend growth rate in 1936, assuming 3.5% growth for 8 years his implies that real gdp in 1936 would have been some 25% higher than it actually was. But interesting there is not a single case of an economic recovery taking real gdp back above trend or potential GDP after a period equal in time to the recession. Essentially, assuming that the economy should have returned to trend real gdp in 1936 is roughly the equivalent of arguing that FDR was a poor president because he could not win a slam-dunk contest from his wheelchair. It is a standard that has never been filled and applying that standard means that every economic recovery on record was below average.

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To Tyler's question on gross investment vs. net investment:

If net investment is negative, the capital stock is shrinking. *Ceteris paribus*, that should increase the marginal product of capital, and thus the incentive to invest. So we shouldn't expect negative net investment to stay negative for long. Unless there's a bad policy environment.

That net investment went negative was cyclical. That it stayed negative reflects bad policies on the part of Hoover and FDR.

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Will - net investment was negative throughout the 1930's.

Tyler - net investment was not as high throughout the 1930's as it was in 1929.

I'd say Tyler got the facts right. Interpretation still goes to Paul Krugman - net investment will be weak as long as the overall economy is weak. But yes, monetary policy could have been better during this period - even if Paul was right to criticize FDR's 1937 premature return to fiscal restraint.

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Mario, I don't see how to put gross investment below zero. Maybe we could have packed up whole factories and sold them to the USSR? Short of that, well, by the time FDR took over gross investment was at around 10% of the 1929 level. It didn't have much farther to go to reach zero.

Instead, how about we compare the merits of FDR's New Deal against... oh, I don't know... some alternate policy strategies.

The two we have data for are Hoover's strategy, and FDR's strategy in 1937. The comparison is pretty clear between those.

Do you want to compare them against untested strategies, and you'll predict how well the alternative would have worked? That sounds like fun.

OK, imagine that FDR had made fractional-reserve banks illegal. Set up a national bank that performed the essential functions of banks, without the usury. What would the result have been?

Bankers would have become illegal loan sharks. Unfortunate that such things happen but you can't jail them until you catch them. People could still lend and borrow money, but when you lend it you actually lend it. You can't lend the same dollar repeatedly. So investment would have quadrupled. Tremendous prosperity, that the banks don't suck away. If FDR had done that in 1933 the depression would be over by 1935 and we'd have a baby boom starting by 1937. And imagine how much simpler it would be to manage inflation without banks complicating it. How much simpler the business cycle would get. How much more wealth there would be.

Too bad it didn't happen. But we could still do it now....

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Sorry, I was mistaken, I posted the comment at the site where the graph was drawn.

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Very grateful to a bunch of much better skills. I look forward to reading more of the future of the subject. Keep the good work.thanks.

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