Assessing the New Deal

It is fashionable these days to evaluate the New Deal with an eye toward what the Obama administration needs to do to jumpstart the economy. Politicos/historians/economists take sides on the New Deal. Economist Paul Krugman defends the New Deal unequivocally. Righties like Amity Schales and Uncle Tom Sowell condemn the New Deal unequivocally. Here is the most balanced and nuanced piece on the New Deal I've ever read by respected historian Alan Brinkley.

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The New RepublicNo Deal by Alan BrinkleyLearning from FDR's mistakes.Post Date Wednesday, December 31, 2008

Does the New Deal provide a useful model for fixing our own troubled economy? In many respects, yes. The frenzy of activity and innovation that marked Franklin Roosevelt's initial months in office--a welcome contrast to the seeming paralysis of the discredited Hoover regime--helped first and foremost to lessen the panic that had gripped the nation. And, during the prewar years of his presidency, Roosevelt's actions produced an unprecedented array of tangible achievements as well. He moved quickly and effectively to address a wave of bank failures that threatened to shut down the financial system. He created the Securities and Exchange Commission, which helped make the beleaguered stock market more transparent and thus more trustworthy. He responded to out-of-control unemployment by launching the Civil Works Administration, the Public Works Administration, and the Works Progress Administration, which created jobs for millions of the unemployed. He passed the Social Security Act, which over time provided support to the jobless, the indigent, and the elderly--and the Wagner Act, which eventually raised wages by giving unions the right to bargain collectively with employers. He signed the Fair Labor Standards Act, which created the minimum wage and the 40-hour workweek.

Yet, despite these extraordinary achievements, Roosevelt's initiatives did not, in the end, lift the country out of the Great Depression. At no time in the first eight years of the New Deal did unemployment drop below 15 percent. At no time did economic activity reach levels comparable to those of a decade earlier; and, while there were periods when the economy seemed to be recovering, none of them lasted very long. And so this bold, active, and creative moment in our history proved to be a failure at its central task. Understanding what went wrong could help us avoid making the same mistakes today.

Some of the New Deal's most important initiatives were active obstacles to economic renewal.

The National Recovery Administration (NRA), created in 1933 to help stabilize the volatile economy, was enormously popular for a time, mostly because it created the illusion of forceful action. The NRA sought to help corporations cooperate with one another in keeping production low and prices up, effectively creating cartels. This effort proved almost impossible to administer: No one in the federal government had any experience or expertise in managing an economic project of this magnitude; control quickly moved to the corporations themselves, with no better results. But the NRA was even worse when it worked as it was supposed to, because its goal was exactly the opposite of what the economy needed: Instead of expanding economic activity, the NRA worked to constrict it. At the same time, the Federal Reserve Board--operating under classical economic assumptions--saw the economic wreckage around it and responded by raising interest rates so as to protect the solvency of the Federal Reserve Bank itself. No one today would even consider high interest rates in a slumping economy, but the Fed of the early 1930s had not absorbed new economic ideas that would later become almost universally accepted. (In fairness, this catastrophic mistake was not a product of New Deal policy, but few New Dealers recognized the magnitude of the error for years.)

The more important failure of the New Deal, however, was what it did not do. The only way to break the deadlock that paralyzed the U.S. economy in the 1930s was to enormously expand economic activity--quickly and decisively. Instead, the New Deal wavered and equivocated--spending large sums of money with one hand while reducing spending with the other. One of the first acts Congress passed for Roosevelt in 1933 was the Economy Act, which slashed government spending in ways that reduced economic activity. It cut the salaries (and, in some cases, the jobs) of government employees and dramatically reduced payments to World War I veterans, taking $500 million from the economy in a single stroke. The Social Security system, so valuable over the long term, was in the short term a drag on the economy. It began collecting taxes in 1936 but paid out few benefits until the 1940s. In 1937, deluded by a weak economic recovery, Roosevelt (urged on by his Treasury secretary) set out to balance the budget through severe spending cuts. The result was a sudden and dramatic economic downturn--a recession within the Depression that produced some of the highest levels of unemployment and lowest levels of production of the decade.

In the aftermath of the 1937-1938 setback, Roosevelt launched a new $5 billion spending plan to try to shock the economy back to life. This infusion of funds helped undo the damage that the 1937 budget cuts helped to create, spurring a modest recovery that at least got the economy back to the weak and fragile condition of a year earlier. The idea of spending as an antidote to recession--an idea that had never found much favor in the past even among the most progressive figures in the New Deal--began slowly to achieve legitimacy. American economists were now eagerly reading Keynes and imagining more robust uses of fiscal and monetary powers to stimulate growth. It is possible, though by no means certain, that even without a war the influence of Keynesian ideas might have led New Dealers to embark on a spending program large enough to push the economy to somewhere close to full employment. But, in the end, the Great Depression--an unprecedented crisis that had stubbornly resisted the efforts of two presidential administrations over twelve years to restore prosperity--came to a close only because of the massive spending required by the greatest and most terrible war in human history.

Economic orthodoxy--which gave high priority to balanced budgets and fiscal restraint--remained a powerful force in the 1930s, even as its limitations became increasingly obvious. Similar arguments can still be heard today: While most liberals--and most financiers and economists--agree on the necessity of government doing something dramatic to jump-start the economy, there remain powerful voices, particularly on the right, that oppose such efforts on ideological grounds. Hence Republicans' initial opposition to the stimulus package in September and their more recent threat to block, through filibuster, federal aid to the auto industry. The New Deal was least successful when it was least aggressive--when it let concerns about fiscal prudence override the urgent need to pump enormous sums of money into a moribund economy. There is much for the Obama administration to learn from the many achievements of the New Deal. But there may be even more to learn from its failures