Did the New Deal make the Great Depression last longer?
I'm interested in hearing opinions on this from people here. This is a popular theory among conservatives right now and I'm wondering what other people's thoughts are on this subject.
Comments
Specifically I've seen a number of Right wing talkers and bloggers over the last 6 months say that the New Deal didn't help at all, and in fact made the depression worse and last even longer. So the subject with which I posed the original question does seem to be relegated to conservatives at this time.
The election in 1936 shows that the new deal was pretty popular at the time, with Franklin Roosevelt beating Alfred Landon of Kansas in a landslide. Roosevelt got 523 electoral votes, while Landon got only 8. The results for 1940 were similar, with Roosevelt getting 449 electoral votes while Wendell Willkie (Indiana) got 82.
Also, only a fool could discount the positive post-war impact of the New Deal. Without all the civil engineering projects done in the 30s (with cheaper labor mind you), there's no way the post-war boom would have been so dynamic.
The same is true this time around. If we're looking at an 8 year recession, nothing Obama does will change that much. But, maybe he can limit unemployment to 9% instead of 12%, and maybe renewable energy initiatives will set us up for another 15 year boom at the end of his 2nd term (assuming he lasts that long).
World War One was the end of the Monarchies. World War Two finished all of the Royal Families for good. I would even venture it is like Africa ridding herself of European rule. The irony of today is that we are once again in a global economic crisis of the haves and have nots.
The new aristocracy of the very wealthy seems to be winding down with real problems of starvation, medical care, water supply, and climate change added to pollution issues.
In Europe and the United States after World War I there was a vacuum of need. People needed to be fed, clothed, and sheltered. There was very little time or money for frivolous things. The Industrial Age showed we could manufacture weapons as fast as we could kill people. Attention was drawn to big steel projects. Dams, Bridges, Trains, and automobiles put people to work. We needed those roads for the big trucks. We needed everything, the world needed everything.
Then World War II put all of those big steel pieces to the test, and we blew up a whole bunch of stuff that in Italy is still blown up today. So in my honest opinion the Great Depression was keeping people hungry so that they would do any job that some one offered. A lot of money was made, but it stayed with the new aristocracy, the very wealthy.
A lot the ideas of the New Deal are tied to Keynesian Theory so I'm not sure what you want to discuss unless you're just taking a poll. In that case, yeah I think the New Deal made the depression worse. Though it still beat the heck out of writing failed banks a blank check.
It is very hard for me to understand how the government's re-direction of capital from private markets to all manner of public investment/work schemes helped the economy. Sure, private investors may never have paid to build the Hoover Dam, but maybe they would have ultimately invested in other things that would have made the economy even stronger (who says Las Vegas really needed to exist in the first place?).
Likewise, the world's governments are doing precisely the same thing today (i.e. by borrowing money governments take money out of the private economy and re-deploy it elsewhere). Instead of letting private capital find it's own outlets, governments are sucking up all this private wealth to allocate towards even MORE housing and other public works. Why is it a given that building even more homes or bridges is better for the economy than funding new start-ups, or manufacturing facilities?
Bridges and other infrastructure is a natural role for government, and so they might as well build them when demand for materials and labor is at a low point. Ordinarily recessions are caused by excess inventory. The current one is more of a crisis of confidence in the ability of companies to stay solvent and pay their bills. There really isn't a shortage of money, since the investments in money funds are at an all time high and the Treasury has no problem borrowing money. So it makes sense to use that borrowing capacity to keep people doing productive work rather than waiting for a job.
As for manufacturing facilities, if the demand was there the private sector could do that, so there is no need for government takeover of that.
The New Deal did not make the Great Depression longer or shorter, but it did do two important things:
It redistributed wealth from the wealthiest to the poorest in the nation.
It built a national infrastructure critical to the future of an industrialized US.
Why was wealth redistribution important? In 1932, a large portion of people were barely able to eat. 25% unemployment can do that. Famine of this sort results in widespread death and disease. Additionally, it gave the poor something to do with their idle hands instead of crime or revolt (eg: Nazi Germany).
Why was national infrastructure important? It helped the US be able to compete internationally, and made the war effort possible. Without roads, trains, bridges, etc to ship troops, goods, and munitions, the US would have been a great resource, but would have had little effect on the Allied Forces.
Would private investment have done any good? It definitely would not have helped build infrastructure, and it's likely that it would not have produced jobs for the majority of the nation. Over the past 30 years, we've had an enourmous shift of expenditure from the government (directly) to private industry (via government contracts, and private investment). The result is a vast, unemployable workforce and a handful of high-paying jobs, burger flippers or code shippers, with very little middle ground, and little need for the lower end workers (hence their low pay). It has shipped what used to be middle class jobs (manufacturing) abroad in search of cheaper labor on the back of a communications and shipping infrastructure largely developed in western nations.
If you doubt the effects of the New Deal, look at 1937-38 (thanks, rose-colored-coolaid - I'd forgotten about that), when FDR started repealing some of it. We had a crash and almost instantly descended into another recession.
Complaining that the New Deal lengthened the Depression is like walking for 20 miles and then bitching that your sneakers are hurting your feet (while without them, you wouldn't be going any faster, and you'd be walking on bloody stumps).
My personal opinion is with Plymster and Rose. That it did help and helped more than private industry would've done. I also think that many of the work projects have had long lasting positive effects on the whole country that have had great long term impacts felt even today.
For instance, in our state many of our state parks were developed by the CCC. You can usually find something at any of the parks talking about that.
I think in some ways FDR went too far and that some things were not effective.
I also think that the economy was so bad that there was no fast reversal on making things better, just like there isn't a quick fix to the problem that we find ourselves in now.
That is interesting about your grandfather perfectfire. Do you remember specifically things that he hated about FDR?
My family often times joked about my grandparents and great grandparents being depression babies, because they scrimped on everything. But, they also had things that were 40-50 years old that were still in great shape and very functional, because they took care of what they had.
My great grandfather was an assistant postmaster all thru the depression and pretty well supported most of my extended family thru it. They raised rabbits for meat for a really long time and just got by barely on his USPS salary.
I think one of the things that we do forget about with The Depression is the famine that happened in the dust bowl as well and how that and a lack of a good transportation infrastructure made things that much more difficult for basic needs.
But in the end, I really think that the New Deal had much less fiscal impact than it did psychological impact. Even though many of the alphabet soup jobs were low paying, they were a job. I think that most people would prefer an honest days work to a handout. And I think that allowed people to be able to take a little pride in at least something in their lives.
I think we just haven't seen the excess-inventory hit the markets yet.
I think 2009 is going to be a whole bunch of companies going bust, a lot of used equipment and commercial space hitting the market, and a good-old-fashioned glut of supply with not enough business to use it.
If treasuries crash that would really worry me. All the TARP did was to recapitalize the banks, but that doesn't create jobs or put capital to work.
We need to be deficit spending on creating jobs, and if there's a crash in treasuries that would limit the ability of the government to deficit spend, and would eliminate keynesian job-growth stimulus.
I'm also worried that we haven't gotten the debt deflation that occurred prior to the new deal, so the two different situations may not be comparable. Before the New Deal, capitalism and the free market had already destructively unwound and it was ready for stimulus. If we've got people that are already leveraged up to the hilt with underwater homes and credit card bills they can barely keep up with, what is the use of government stimulus?
What it seems like we need is to ignite a round of 70's-style stagflation. If we get enough spiraling wage growth, then that effectively that reduces debts. The average housing debt burden of 2008 might be easy to pay down with the average salary in 2012 if we generate enough wage inflation. Of course this punishes savers, and it also punishes the upper classes since it makes a million dollars no longer worth as much -- for your average negative-net-worth joe this would reduce the debt burden.
It has to be wage inflation, however, and not the stock, bonds, housing, commodities inflation that we've seen recently. Re-igniting inflation in those areas is only going to wind up coming back down again as wages fail to keep up with those costs.
Second, there are vital projects that private industry simply will not participate in due to a high initial cost and a long time-frame for profitability. In addition to roads, certain power plants, and national parks there are the research items like the internet. Sure, a company who literally owns the internet would be stupendously wealthy (look at Google and they only metaphorically own the internet), but what company could have (or would have) afforded 20 years of zero ROI on a project of such massive scale where the capital equipment (the internet backbone) loses value so quickly? Nobody would.
That said, occasionally the lines do blur. The railroad systems across the global were all built by governments, except for Britain. In Britain all their empire wealth allowed them to create a rail bubble funded privately to build their system. Of course, this destroyed significant wealth when the bubble popped, but they did do it.
Here's how it relates to today. Deficit spending to build public infrastructure is justifiable. So is spending on renewable energy research, at least where that spending is too expensive for private industry. Spending on renewable energy tax breaks is definitely justifiable. Spending money on banking bailouts...I suspect history will judge us poorly.
I further agree that there is absolutely no danger of inflation, unless the world's reserve currency crashes. Given everyone's (China, Europe, Middle East, Japan, India, etc) dependency on the US Dollar as a major trading currency, that should only happen if true printing occurs (as opposed to borrowing, which is what's happening now).
If Obama's administration can reign in reckless spending (like tax rebate giveaways to the wealthiest American's who don't really need any more T-Bills), and concentrate on what puts food in bellies and shelter over people, then T-Bill parkers should have confidence that the US isn't going to default.
It'll get tricky when/if the economy starts to recover, driving up the costs of trillions in treasuries outstanding, and forcing an increase in taxes. We'd better have somebody with brains in office then to curb spending and stifle the tax giveaways, or that could cause a default situation.
I already do. I don't think it'll take long before the consensus is that bailing out certain banks accomplished nothing.
I only left some doubt because history is not always the most accurate judge. Consider this discussion about the New Deal. Here we are 75+ years later and nobody is really certain how much good or bad it did. It's possible that 75 years from now history will be split on whether the banking bailouts saved the world's economy or were a stupid waste.
Like you, I'm convinced it's the later.
I definitely take the former view (i.e. that the New Deal only prolonged the first great depression).The government can't possibly find more productive uses for capital than the private sector (which is eager to get the biggest return possible, at little risk). Who knows, maybe if the Federal Government hadn't built all those dams and infrastructure projects we would have seen a greater investment in railroads, rather than automobiles, which led to a massive depedency on foreign oil. The big age of suburban sprawl may never have occured at the same scale if the government hadn't subsidized so much of the infrastructure.
I would also point to examples like Japan, where massive government stimulus have been innefective in preventing a crash in asset values, and economic decline. About the only positive thing I can say about the New Deal is that it made people feel good. FDR's policies may not have helped the economy, but they did lift people's spirits. Maybe that's worth a good $20 or $30 trillion in stimulus. You may be starving, but you'll feel so grateful for those morsels of government bread you get at the soup kitchen.
Where I disagree with views such as sniglet's is that private industry is always better at utilizing capital than governments. Private industry and capitalists are always short sighted; their goal is to maximize ROI. But not everything good has a positive ROI. Roads may have led to urban sprawl, but they also greatly increase the efficiency of moving goods and people. A capitalist would never create a park, or build a levee or dam. Capitalists spent the last 5 years throwing money at houses we didn't have buyers for, and prior to that internet startups we didn't have a use for. Hardly an efficient use of capital.
The funny thing is that most historians believe that it did help, whereas only about 1/2 of economists think it helped. Could economists have a foul view of the New Deal because they have an idealistic view that no matter what free markets and private industry are always better and because of that anything contrary has to have been a failure? There was a recent joke by Seth Meyer on SNL where he took a quote from Greenspan, who said in an interview that he regretted his role in the financial collapse, but still didn't understand why it happened. Seth then explained it all in about 15 seconds. Inability to admit that free markets can fail may be part of this.
The idea that the New Deal made things worse is theoretical, because we frankly don't know what would've happened had Hoover won re-election and done whatever it is that he would've done.
In almost all cases, an always/never approach to things like this I think is dangerous, because most things in life aren't always or never. Sometimes private industry is better (see Space Ship One vs NASA), sometimes government is better (see roads, infrastructure, etc).
I like what Westside said about it, that private industry is not going to do something that doesn't give a monetary ROI, or that shares the ROI with others. Government does do things that don't have a monetary ROI, but have a quality of life ROI that is a little less tangible and can often times have long term monetary ROI for everyone else, which in turn creates more tax revenue and eventually means more cash flow in taxes.
There are many private parks and dams. The parks are obvious, those are the places where you pay admission. Private dams are harder to observe, but they show up in statistics all the time. Google even returns plenty of hits on private levees. Private roads are always an option, and interstate railroads have been private except when railroad buffs are able to get government funding for ridiculously poor passenger service.
The many internet startups that failed are just the messy way that capitalism works to find the best from among a large number of alternatives. The guys that worked on those would not have been as motivated to work so hard and try new things if they had no potential reward. And anyone who has worked on government contracts will tell you that a huge number of those are canceled after blowing through $100s of millions or more also.
There were a large number of networks that were being developing at the same time as everyone's favorite example of government prescience, the internet. But there are network effects that lead to a natural monopoly. That force for a common networking platform is even stronger than what Microsoft showed for operating systems. With the government as a major player, they simply won the race. But the government-built internet was designed to work with trusted peers, which is why there are still huge gaps in security being exposed even now in the base protocols.
I'm not claiming that there isn't a role for government, obviously there is. But you have to look at the facts as they really are.
Chuck already said as much, but all or nothing statements like this can't possibly be true. If an all capitalist society were so much more efficient than any other conceivable society, any nation adopting it would out-compete all other nations. In short, Europe would be toast, USA would be pretty alright, and some other nation or another would have adopted the 100% capitalism 100% of the time mentality that would cause them to rule the world. Taken to the extreme, we shouldn't elect government, we should compete it. Remove all government, let local despots rise to power, and whoever out-competes the others becomes US overlord. Wahoo!
Evidence that partially capitalist and partially socialist societies out-compete communist societies exists in that very few communist nations still exist, but I've heard of no evidence to legitimately suggest an entirely capitalist society is optimal.
Bad argument. The government's network won because nobody else had the same incentive to build a massive unprofitable venture, not because it was the government. The internet didn't even pretend to be profitable until after 1995, and even by 2000 nearly no internet companies were profitable. To get to that point, it was a requirement that a massive number of people be networked. So, which company would have invested tens (hundreds?) of billions over the course of 25+ years to build the internet prior to it becoming profitable?
The answer is simple, none would, which is why nobody did. The WWW rollout was a slow affair until just after 1990 when it suddenly "sprung up". If it were profitable, anyone could have provided a better network prior to that time and won market control.
Anyways, nobody is arguing for "government prescience". Wouldn't that be ironic. We're just pointing out that "market prescience" isn't always brilliant either. Some problems are obvious, not flashy, and not profitable...but need to get done. Tada!
We have not the worst, but definitely not the best cell phone network out there. Many other countries just decided that they were going to have one kind of cellular technology and stuck to it. Because of that, phone companies were able to focus on better service and better products rather than focus on creating competing networks. It's caused better rates and better selection in other countries.
In other countries, say like Japan, you go buy your phone, then you pick out who you want to do your cell service, rather than being stuck with one network and phone type.
There were a lot of profitable ventures that were pre-internet: Prodigy, Compuserve, AOL, and others. But electronic technology did not support fast enough communication to quickly download pictures. About the time that inexpensive modems went over 9600 is also when Andresson added pictures to Mosaic. Before modems speeds increased, pictures were simply too slow for anyone to be interested in adding them to an interactive protocol. Also disk and full-color video card capacity was increasing and computer costs were coming down simultaneously. That's when when www took off, and Mosaic was the killer app for the internet because it provided a visual environment that people could easily communicate in. The other networks then added gateways to the internet, because there was a lot of good content that they could add to their networks at little additional cost. In that sense, it was simply that the open market approach won out of the proprietary approach. In some markets that works, and in others it does not. Sun had already beaten Apollo and others in the workstation market with the open approach, so it was not the first time it happened, and a government role in the Internet was simply incidental to the economics of the network effects.
Here is an interesting blurb from CompuServe's home page:
I think a good rule of thumb is that in any domain where a common resource is being exploited, government intervention is not necessarily a bad thing. Any over-the-air technology (radio, TV, cellular phones) is using a common and limited resource and therefore it necessitates some level of cooperation between users.
Imagine what radio would be like if the government didn't regulate stations. Competitors could blast garbled signals on other stations frequency to block it. You might get a major station in most places, but a local broadcaster might clobber it near your home. Unregulated it would be a mess.
Actually, there is a considerable amount of disagreement as whether there is anything that the government should be intervening in (aside from the police, courts and military). There are PLENTY of examples where national governments that made, or drove, big investments in new technologies or standards wound up with white elephants.
The Japanese government, for example, pushed an analog high definition TV format that wound up going nowhere. There were also many governments that pushed robots, the creation of new microchips, or cell phone standards that didn't go anywhere either. By contrast, the more hands-off US approach often led to more successful results (HDTV, for example, wasn't rushed in the US as elsewhere).
Even the sales of radio spectrum isn't necessarily something the government ever needed to manage. There have been academic research papers that postulated a free market would have figured out ways to accomodate one another anyway, and that technologies may have evolved to randomly use whatever spectrum happened to be free (as needed) if the government hadn't enforced allocations.
But I don't really want to turn this into a debate on the relative merit of free markets (which the US doesn't really have).
Unfortunately, I suppose it may never be possible to prove whether the New Deal prolonged, or shortened, the first great depression. Still, I maintain that a good case can be made that the New Deal only made things worse.
Worse for who?
I'm quite certain the millions of people employed by NRA, WPA, TVA, etc who were able to eat and have a roof over their head were MUCH better off for the New Deal.
Maybe if the government hadn't siphoned money out of the private economy to fund the new deal (or confiscated wealth via currency devaluations, etc) then new jobs would have been created years earlier than they were. Those people getting a pittance through the WPA likely would have been MUCH happier having a real job.
The New Deal most likely kept delayed the creation of private sector jobs, and held back economic growth, for years.
That's a lot of conditional statements. After the New Deal was enacted in early 1933, employment definitely rose, manufacturing and GDP definitely increased, and the vicious cycle deflation definitely ended. When the programs were curtailed in 1936-7, we had another recession. And while we can argue the nuances and high level costs/benefits, when you have 25% unemployment, "We have a job for you" sounds a whole lot better than "The economy is improving, someone will be hiring in the near future, and they'll pay you more than we will."
Well put argument WSB. I wish everyone could see the facts as they are, and not as their ideology would have it be.
Nice summation RCC.
Now let's bring it home with some current observations.
Treasuries are effectively at 0%. Private money has poured their money cash, not into job creation and innovation. Retail companies are going bankrupt at an astounding rate. As many have pointed out, we don't need more Circuit Cities to sell us the same crap we don't need as all the other electronics shops. This goes for half of the other shops out there. Do we really need a half-dozen chains selling kitchen gadgets and dinner plates? Retailers are only just starting to report, and this will do in many of them. Commercial RE's finances just fell apart with the banks. Now they're about to get reamed with the mother of all vacancy hurricanes. Projects were already getting canned before retailers (CRE's bread and butter) started dropping like Hindenburgs. The tourism, airlines, and the hopitality industry is getting destroyed in the current financial crisis. We've yet to see the widespread chaos and destruction in this industry... yet. Manufacturing has been off-shored, so all the 60-80% on the bottom of the education ladder can do is sell things to each other (RE, retailers, auto-sales, etc) or servicing each other (food services, hospitality, tourism, etc). What jobs will be created in our "service economy" for all the food slingers, big box stockers, and waitresses in the next 6 months given the current situation? What jobs will be created in the next 3 years? Can the lower 80%, who live on month-to-month incomes last for 3 years while somebody starts considering investing in something that might require their labor?
What's the point of this laundry list of "gloom and doom"? Without a way to balance the economy quickly (ie: put money in the hands of the have-nots), the wheels of capitalism are going to grind to a halt. Without making work a condition of this re-distribution (ie: government work programs), the wealthy will corral this money and pile it into treasuries until they think things are getting better.
Put another way, if you want to continue living in an egalitarian democracy, then you need to start making it more egalitarian, or it's going to collapse.
The New Deal did not speed up the recovery from the Great Depression. The New Deal made recovery from the Great Depression possible. It was the half-step to centralized planning that saved us from disaster. Without it, the nation would have devolved quickly, and you would be living in a totalitarian regime like Nazi Germany, Soviet Russia, or Communist China.
Of course, I don't want to be pushy and this is all just my opinion.