Thread: FDR and The New Deal..Did it do More Harm than Good?

I've just finished reading a new book by a columnist named Mr. Folsom. He claims that the people got a Raw Deal instead of a New Deal and that we still suffer repercussions today. In fact, the title of the book is New Deal or Raw Deal?: How FDR's Economic Legacy Has Damaged America . The book tells how many programs have either been a failure from the start or have over time become economic burdens:

-National Recovery Administration (NRA)- created in 1933, which let industries set "codes of competition", supposedly to reduce unfair competition by establishing a minimum wage and maximum hours per work week. When it shut down in May 1935, industrial production was about 22% higher than in May 1933. However, on May 27, 1935, the NRA was found to be unconstitutional. Some aspects of this live on in a minumum wage, for example. The problem is, setting a minimum wage makes menial work harder to find during tough times (like today) because employers must limit their workforce.

- The Works Progress Administration (established in 1935 and shut down in 1943)- lead to a 7 billion bridge-building, public building construction, etc...spending extravaganza that could have potentially been used to aid the ailing economy.

-The Agricultural Adjustment Act (AAA)- enacted May 12, 1933, restricted production during the New Deal by paying farmers to reduce crop area. Its purpose was to reduce crop surplus in order to raise crop value, giving farmers relative stability. The farmers were paid subsidies by the federal government for leaving some of their fields unused. The problem was that people would begin farming cotton and other popular goods to excess in order to obtain government subsidies. Many other crops were therefore neglected and cotton was sold at a great loss.

Roosevelt's lack of business savy is mentioned as a possible reason for his lack of foresight. The man did back his "dirigibles" when airplanes were coming of age. He was a C student at Harvard and one of his great friends said "I would never go into business with the man". Is FDR truly the hero people make him out to be?

I've heard a lot of noise coming from the political right about the New Deal and how it lengthened the depression. But actual data is few and far between.

Now I'm not saying the New Deal was some sort of panacea which kept us all from Armageddon. But there is some data suggesting that it helped. Specifically the unemployment rate dropped after FDR took office and enacted New Deal programs. And it rose again sometime in 36/37/38 when government spending was reduced to try and balance the budget (forget which exact year it was).

Minimum wage above free market equilibrium creates unemployment, so I can agree that the NRA and the like probably created more harm than good.

Public works projects were a good idea in my mind on several counts:

1. It was important for national psychology. The depression had eroded most folks' sense of hope and well being. The world was a dark and bleak place, full of uncontrollable demons. Controlling nature and bending her to the will of the American people was cathartic for a nation in a clinical depression as well as an economic one

2. The investment in infrastructure helped create access to resources to fuel economic growth. In my opinion the reason the American economy is the powerhouse of the world is because of our vast infrastructure of roads and bridges and the like. Whenever the government spends time road and bridge building, it fuels further economic growth in a multiplicative way.

3. The injection of capital into the economy, though limited, was important. Both Keynesian and Supply Side economists agree that the Great Depression was caused by a supply shock to the money supply, and that the cure was an injection of capital into the economy. Putting money into the economy was important for recovery.

4. Giving even temporary jobs to as many people as possible is extremely important. If you've ever tried getting a job, you know that employment gaps are a real problem on your resume. That's the same now as it was 70 years ago. Likewise, idle workers have a tendency to get into trouble. Like forming communist uprisings

5. It was a form of welfare. There wasn't any unemployment insurance, so if you were out of a job, you were screwed.

Paying farmers not to grow food is an economically sound idea, because food is different from pretty much any other product. I forget exactly how it's different, something to do with demand elasticity I think. But basically farmers were caught in a Red Queen's race where they had to grow more and more food just to stay at the same income level. But Americans can only eat so much, so the increase in quantity caused a supply glut forcing prices even lower and farmers had to grow even more to stay even. Free market equilibrium was for food to be nearly free and farmers to be broke.

Even today we're still a nation with way too much food and not enough mouths. Witness our obesity epidemic, which perversely targets people of low income preferentially.

FDR may or may not have had business savvy, but he definitely hired the who's who of economists for his time. None other than Keynes, the god father of modern demand side economics.

If you ask me, I think the Dust Bowl is what made the depression last as long as it did. Think it's coincidence that the Dust Bowl ended about the same time the economy recovered? Then on top of that millions of workers were removed from the labor pool to fight in WWII. That gave the economy a chance to reach full employment levels, and gave everyone involved a work record so they could find work after the war was over.

That's always the nail in the coffin for conservative criticism of the New Deal programs. Pretty much everyone agrees that WWII ended the Great Depression through (drum roll please) massive government spending. So clearly it's possible for the economy to recover through massive government spending.

I've just read The Forgotten Man by Amity Shlaes which makes the same case that FDR did more harm than good. In fact there seems to be quite an FDR bashing industry at the moment.

Numsqil, while it's true FDR had Keynes as an advisor, towards the end Keynes was urging FDR to change some of his policies. Another criticism of FDR is that he was a tinkerer who would try something then quickly abanon it to try something else. This created an unpredictable environment for business.

Personally I find economics daunting, and have not really reached an opinion on FDR. I am thankful for our wonderful Red Rocks amphitheatre, and the superb dioramas in the Colorado History Museum, both products of FDR's programs that provide lasting enrichment to many people's lives.

My understanding is that towards the late 30s, he started listening to his other economic advisers instead of Keynes. This is what lead him to try and balance the budget, and created the mini recession in 37(?). He never went maverick; he was always listening to some big shot economic adviser or another.

I would be very interested in a data based comparison of government spending during the 30s, and government spending during the 40s. If FDR was unpredictable to business during the 30s, one would expect to see a very different spending profile during WWII than during his New Deal programs.

I love all Numsgil's points above. Artificial tinkering in the economy is, to me, like artificial tinkering in sports. What sports game would be fun without rules? (I'm sure someone knows of one, but I don't, since all the major traditional sports have rules.)


One other advantage of government spending vs. private: Zero risk.

If you tell a potential investor that they are absolutely, perfectly, guaranteed to make a profit on their investment, regardless of what happens in the economy or their particular market. A funny thing happens: it suddenly becomes very easy to find investors.

Though the increase in private military contractors during WW2 seems to have caused us some incredibly dangerous social ills (such as the need to declare periodic wars in order to support our military industrial complex), it also had the effect of motivating the private sector to build infrastructure (factories and stuff), without the government specifically having to pay for the factory, just guaranteeing profits to the investors, who were in turn willing to pay to build the factory.

Anyway, zero risk has other advantages. That's just the one that I pick out. People are always less willing to invest in a bad economy, because they don't know if they'll be getting any of their money back, so the natural thing is to try to get them to invest for other reasons.

What I found interesting is that some said the New Deal didn't help, but the war did. But I don't see any real difference, they were both "wasteful" spending. Apparently the more wasteful the better

As long as what you're wasting is human labor. What's dangerous to waste is natural resources, like steel, or farmland. (Things I think we still did waste, and quite a lot).

In a strong enough depression, just paying people to ride on stationary bicycles so you can harness the electricity can do wonders for the economy. (Even though the amount of electricity they generate will be far less than enough to power even their own household)