...In FDR’s Folly and other writings, I have asked whether the New Deal cured or prolonged the Great Depression. Many people are asking the same question now that Obama is pursuing what he calls a “New New Deal.”
Since the Old New Deal, economists have learned quite a bit about FDR’s efforts and their effects. These researchers’ findings — principally about New Deal obstacles to recovery — have been ignored for decades by biographers and political historians who continued to rely on diaries, correspondence, speeches, official documents, and other traditional sources relating to the political story of that period. In Black’s 1,280-page biography of FDR, published in 2003, for example, he ignored the findings of economists that were the basis of FDR’s Folly, which he now dismisses as “an anthology of [my] favorite economists.”
Perhaps Black believes all the economists I cited are wrong. Or perhaps he doesn’t feel equipped to rebut them, so he ignores them now as he ignored them in his book, and soldiers on as best he can with his considerable knowledge of political history.
Black indicates a continuing lack of curiosity about the economic effects of the New Deal by insisting on a political framework for distinguishing among “five New Deals.” The first New Deal was this, the second New Deal was that, etc. Such a descriptive, political approach tells us absolutely nothing about the economic effects of the New Deal — when economic issues were at the forefront of people’s minds. If one is trying to determine the economic effects of the New Deal, the logical procedure would be to do empirical studies of New Deal policies one at a time, as dozens of economists have done and as I reported in FDR’s Folly.
What were the effects of the tripling of taxation? What were the effects of New Deal laws that banned discounting and made sales illegal? How much did New Deal policies to force up food prices affect the three-quarters of Americans who weren’t farmers? What was the effect of the Tennessee Valley Authority during the 1930s, considering that it took out of production about 730,000 acres, forced about 15,000 people out of their homes, finished only three small dams during the 1930s, and, overall, transferred resources from the 98 percent of the people who didn’t live there to the 2 percent who did? Some kind of economic analysis, not a political narrative, is needed to answer such questions.
Of course, economists don’t always agree, and I discussed such disagreements in FDR’s Folly. For instance, I talked about the longest-running research dialogue, one that has spanned more than three decades, about the reasons for the New Deal’s skewing of spending away from the poorest people who lived in the South.
Black might have cited Paul Krugman, one of the most ardent Keynesians, who wrote an interesting New York Times column called “New Deal Economics.” Replying to those who said Keynesian “stimulus” spending didn’t work during the Great Depression, Krugman wrote that “the New Deal didn’t pursue Keynesian policies” (Krugman’s emphasis). According to Krugman, FDR’s budget deficits weren’t big enough to qualify as Keynesian stimulus. FDR should have been “bolder.”
The same article shows a graph of U.S. economic expansion that occurred from 1933 to 1937, based on data from the St. Louis Federal Reserve Bank. Gross domestic product increased about 60 percent. This was the biggest expansion of the New Deal period, and according to Krugman, it couldn’t have been caused by Keynesian stimulus because government spending and deficits weren’t big enough. So . . . what reason is there to expect that Obama’s $800 billion “stimulus” bill is going to stimulate anything other than government jobs? Why does Obama look back fondly at the New Deal?
Look at Krugman’s graph more carefully, and you’ll see it shows the U.S. economy beginning to turn around in early 1933, probably before FDR took office. Despite Hoover’s blunders — trying to prop up wages and prices, signing the Smoot-Hawley tariff, signing a big tax hike, and signing the Norris-LaGuardia Act that accelerated union organizing and doubled the number of strikes during Hoover’s last year — enough adjustments had occurred that the economy was ready for a turnaround before FDR began his Hundred Days.
Ready for a turnaround? Remember, the U.S. economy had recovered from previous panics and crashes without a big government-jobs program, and the economy didn’t collapse during the Great Depression. Output, employment, and income were down by about 25 percent at the low point in 1933. This was severe, millions were desperate, and economic problems increased the risk of political problems. But about three-quarters of the private sector was still functioning. It needed to expand. It had dynamic forces within itself that had generated expansion before and could do so again — in an environment with predictable rules to live by, low taxes, sound money, secure private property, and other essentials for enterprise...
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