Was the New Deal a Failure?

“Obama is re-running the FDR’s attempt to spend our way out of economic downturn. It failed then, and it will fail now. “

– Matt Cunningam, in a comment posted last week on the LiberalOC.com

I always have to give credit to people like Matt Cunningham and assemblyman Chuck DeVore; their claims of facts on issues of the day always seem to require some homework when the words they say “don’t sound right to me.”  So I spent considerable time this weekend researching some facts behind the success or failure of FDR’s “New Deal.”  I prefer finding non-partisan or partisan sources, simply because they have no dog in the hunt other than the truth.

My research led me to this terrific post from economist Charles McMillion.  He’s the president and chief economist of MBG Information Services, a former associate director of the Johns Hopkins University Policy Institute, and a former contributing editor of the Harvard Business Review.  I also encourage folks to go to the New York Times sitre and read up on several recent Paul Krugman articles.  But McMillion’s post deals with the New Deal.

Hewrites to expose, “a dangerous popular myth regarding the efficacy of President Roosevelt’s actions: that it was not the programs of the New Deal, but only the placing of the nation on a wartime footing years later, that restored the health of the nation’s economy.  This belief, though widely held, cannot stand up to even the most basic economic analysis. Yet the mainstream corporate media, which abound with anti-government ideology, seek to reinforce this myth.”

McMillion writes:  The basic economic facts from the 1930s—according to the Department of Commerce, the Federal Reserve, and other official sources—are fundamentally different from the unsupported claims put forward by (conservative author Amity) Shlaes and prominent in popular myth. The monthly data for industrial production show a near three-year collapse under President Hoover, ending when FDR came to office in March 1933. Production rocketed by 44 percent in the first three months of the New Deal and, by December 1936, had completely recovered to surpass its 1929 peak.

McMillion continues with:

GDP, only available as annual averages, plunged 25.6 percent from 1929-1932, including by 13.0 percent in 1932. It stabilized in 1933, and then soared by 10.8 percent, 8.9 percent and 12.0 percent, respectively, in 1934, 1935 and 1936. Real GDP surpassed its 1929 peak in 1936 and never again fell below it. After-tax personal income, consumer spending, real private investment and jobs all reached or surpassed their 1929 peaks by late 1936.

In fact, like every decade between 1850 and 1990, the 1930s suffered two distinct downturns. The official U.S. Business Cycle Dating Committee established that the downturn that began in August 1929 ended in March 1933 with the remarkable economic expansion that started within days of FDR’s bold—if trial and error—New Deal programs. By any normal definition, the Great Depression had ended by late 1936, with all major indicators surpassing their previous peaks.

A second cyclical downturn officially began in May 1937 when FDR, always a fiscal conservative, mistakenly thought the economy had become self-sustaining and slashed public spending programs to balance the budget. These harsh and premature spending cuts caused another severe recession that ended after 13 months in June 1938.

Even in this severe downturn, annual GDP did not fall back below its 1929 peak. And although many suffered and most economic measures did fall back below their 1929 levels, not one fell anywhere close to its March 1933 low. For example, although industrial production fell sharply in the 1937-38 recession, at its low point, in April 1938, it remained 49 percent above its level of March 1933.

Myth and ideology aside, the data show that from 1933 through 1936 the New Deal produced double-digit annual growth in GDP, production, after-tax income and private investment, with strong consumer spending and job growth exceeding their peaks in the 1929 bubble. The Great Depression ended by late 1936. ”

But that all said. don’t count McMillion as a supporter of the stimulus bill.

“I personally believe the recent and current bailout and stimulus packages are grossly misdirected and inadequate when compared with the remarkable trade and industrial policy strategies being implemented elsewhere, particularly in China.”

So while we continue to debate the merits of Obama’s stimulus plan, which is supported by Pimco executive Bill Gross of Newport Beach, debate over the success or failure of FDR’s New Deal should be a closed book based on the statistics offered by McMillion.

  9 comments for “Was the New Deal a Failure?

  1. Jubal
    February 9, 2009 at 4:03 pm

    Dan, you cann also find people who deny the holocaust, and offer up lots of “evidence’ to back up their claims.

    But a few points, just for starters:

    Your guy claims the “downturn” ended in March 1933. Given that FDR only became president in March 1933 annd there was as yet no New Deal, how can they receive credit for ending the downturn?

    Also, McMillion seems unimpressed that the frenetic, unpredictable, zig-zagging policies of FDR failed to ever reduce unemployment below 14%. Per worker productivity increased — a credit to workers and the private sector, not the government.

    McMillion conveniently ignores the impact of thew Wagner Act and the rapid unionization of the labor force — and concomitant rise in wages, and therefore the cost of doing business — had in the recession-within-a-depression of 1937-38.

    Finally, McMillion is hardly an unbiased source. If I quoted you a blog post from Townhall, you’d hardly fiid that convincing.

  2. Jubal
    February 9, 2009 at 4:06 pm

    Oh, and there was also FDR’s Treasury Secretary, Henry Morganthau, tell Congress in 1939 that they had tried government spending their way to prosperity, and it didn’t work.

  3. Dan Chmielewski
    February 9, 2009 at 4:28 pm

    About 3.4 million relief workers, who were drawing paychecks, were still counted among the unemployed. The recession in 1937 was due to FDR’s miscalcuation that the economy had recovered to the point of being self-sustaining and it wasn’t yet ready to be. Once more New Deal funds were put back in place, the economy rebounded up until the time America entered WWII. Click on the charts in the article; official government statistics at the time. The \evidence\ McMillion cites is government statistics.

  4. RHackett
    February 9, 2009 at 4:43 pm

    Jubal,

    One of the great hobbyhorses of the right is the New Deal didn’t end the Great Depression, but WW II did.

    What was WW II other than a massive influx of public investment in the form of employment, R & D, infrastructure, and manufacturing?

    The two statements don’t make any sense.

  5. RHackett
    February 10, 2009 at 8:46 am

    Dan,

    Don’t waste your time. Jubal cites sources that are impartial. Your’s must have a liberal bias.

    Get it?

  6. RHackett
    February 15, 2009 at 9:52 am

    One last point Dan. Isn’t it funny how you cite empirical evidence of your premise and Jubal cites a lone soundbite from one bureaucrat?

    Irony.

  7. Bladerunner
    February 15, 2009 at 10:43 pm

    Of course there were some failures in the New Deal—-starting out with over 25% unemployment and in virtually uncharted waters, mistakes were made. But failures in the private sector occur daily now and daily then. Its the flip side of the creative brilliance and sucess of the private sector. Its a wonder that the New Deal acheived as much as it did.

    Most economists without an ideological dogma to reinforce will acknowlege that the New Deal was an important part in stopping the bleeding and helping the private sector get on its feet again. It didn’t “end” the Great Depression without the intervention of Lend Lease and World War II but it did three things.:

    1) Helped improve virtually all economic indicators to some degree,
    2) Put a paycheck in the pocket and food on the table for millions who otherwise would have likely perished,
    3) Left lasting public infrastructure improvements that otherwise would never have been built, and
    4)By generating hope in the people who had been hopeless, being told before FDR that they would eat pie in the sky. This was no insignificant measure to preserve democracy .

    Government works best in the economy when it can get in quick and decisively, and then get out where private markets can provide the services.

  8. Bladerunner
    February 15, 2009 at 10:44 pm

    Well, ok four things.

  9. Dan Chmielewski
    February 16, 2009 at 9:17 am

    I love it when Bladerunner backs me up. The perception among the American public at the time was that the New Deal was a success. Republicans in Congress who fought it were viewed as obstructionists and that paid for it ini the election.

    Frank Rich’s column in Sunday’s NY Times wrapped up with this paragraph:

    “Republicans will also be judged by the voters. If they want to obstruct and filibuster while the economy is in free fall, the president should call their bluff and let them go at it. In the first four years after F.D.R. took over from Hoover, the already decimated ranks of Republicans in Congress fell from 36 to 16 in the Senate and from 117 to 88 in the House. The G.O.P. is so insistent that the New Deal was a mirage it may well have convinced itself that its own sorry record back then didn’t happen either.”

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