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It's become an accepted as fact among many on the right that the New Deal actually prolonged the Great Depression.  It's a concept that was popularized by Amity Shlaes book The Forgotten Man.  Shlaes' book caused a sensation on the right but has been repeatedly debunked for using a set of employment figures the were inaccurate (they excluded millions of people with jobs) and for measuring economic growth solely by the Dow while ignoring GDP and other measure of economic growth.  I mention this because in recent weeks, people on the right have taken to repeating these lies.  For instance this article by Thomas Sowell writes:

The American economy usually rebounds a lot faster than it is doing today. After a recession passes, consumers usually increase their spending. And when businesses see demand picking up, they usually start hiring workers to produce the additional output required to meet that demand.

That's accurate as far as it goes.  Recessions caused by financial crashes are different creatures.  I'm sure someone with a PhD in econ could explain all the details and reasons but for our purposes it's sufficient to recognize that the Great Depression and the Great Recession are not examples of normal economic downturns; we can't expect them to behave like normal downturns.  Among other things, interest rates at rock bottom should stimulate the economy and they're not.  

Sowell then aregues:

In that sense, this is an unusual recovery in how long it is taking and in how slowly the economy is growing — while the government is doing virtually everything imaginable.

Government intervention may look good to the media but its actual track record — both today and in the 1930s — is far worse than the track record of letting the economy recover on its own.

The obvious flaw in his statement is that government is quite notably not doing everything imaginable to boost the economy - I can imagine many things the government could be doing that it is currently not doing to boost the economy.  Sowell is simultaneously engaging in rhetoric disconnected from reality and simply repeating what has become common wisdom among many right wing commentators and voters.

The argument runs along the lines that because the New Deal didn't end the Great Depression it was therefore a failure; since the New Deal failed to end the Depression that is treated as proof that things would have been better off left alone - i.e. without government action the economy would have righted itself and done so faster, hence government action resulted in a longer depression than would otherwise have happened.  It's not a view shared by actual professional economists or historians.  It's also an argument with many many problems.

The New Deal was built around FDR's liberal pragmatism - try something, figure out if it works, and if not, try something else.  As a result the New Deal was less a single program than it was a host of programs and the basic outlines of a social safety net with minimum wages, Social Security and unemployment insurance.  The New Deal also included the National Labor Relations Act which guaranteed the right of workers to collective bargaining and later included Fair Labor Standards Act.  The New Deal sought, in part, to keep wages high which benefitted employed workers by maintaining their standard of living (though it's fair to argue that such a policy didn't encourage new hiring, the policy itself is sound - a living wage should be considered a human right).  Some programs lasted years, others were quickly abandoned.  The New Deal also included a host of banking regulations and the creation of the FDIC - that's the agency that insure bank deposits so that consumers don't lose their life savings if a bank fails.  (As an interesting note, a friend of mine works in the banking industry and observed that when a bank fails we know how to unwind the problem but with the financial nonsense of credit default swaps and securitized mortgages and various derivatives of derviatives we do not know how to unwind those things so we're not sure how to fix it when one of the companies schilling those products fails.)

Programs like the WPA and the CCC directly employed millions of Americans and built much of the national infrastructure we still use (i.e. lodges and hotels in national parks, campsites in national forests, schools throughout the nation, public buildings in many cities).

The WPA in particular is fascinating; Harry Hopkins (a Grinnell grad thank you very much), the WPA's dynamic and occassionally colorful director was fearlessly creative in finding ways to use WPA funds and projects to employ people.  In one case, items needed for a project weren't locally available so Hopkins brought in people who knew how to make the item who then taught local laborers how to make it.  WPA photographers, for example, toured the country capturing images of Americans, images which have become iconic.  (Total aside - the photo of the migrant mother and her children is endlessly powerful - the woman has despair on her face, yet she also looks tough, she's going to do what it takes.)  The WPA employed out of work writers to go around the country and record folklore.  In another case, the WPA hired a woman and a mule to carry library books and magazines around the backwoods of Appalachia.  In retrospect, WPA projects served multiple purposes - they put people to work earning an honest day's pay, but they also strengthened community ties and community ties, they upgraded local and national infrastructure, they gave not only the people doing the jobs but the people in the community a sense of dignity and community pride.  Much of that is secondary to the standard Keynesian analysis, but I believe it's valuable and shouldn't be ignored.

Scholar Eric Rauchway has a clear explanationof the problem with the stats Shlaes used and which have been repeated around the American right - the short version is that her stats counted as unemployed millions of people who were in fact employed.  Huh?

The statistics relied on by people on the right treat people employed in emergency work programs, like the WPA, as unemployed which inflates the unemployment figures significantly.  By excluding millions of people who had jobs Shlaes has constructed a story in which the New Deal didn't have much effect on unemployment which makes the whole thing look worse.  (Here's another take on her book.)

That's just part of the problem:

But if the New Deal did not end the Great Depression, was it doing some good? Historical Statistics of the United States says yes: Except in the 1937-38 recession, unemployment fell every year of the New Deal. Also, real GDP grew at an annual rate of around 9 percent during Roosevelt's first term and, after the 1937-38 dip, around 11 percent.

So on the numbers, the U.S. economy improved briskly during the New Deal. Things that are moving quickly and in the right direction, but still haven't reached their destination after a while, are things that have a long way to go—which is true of the U.S. economy recovering from 1932. Historians disagree on which part of the New Deal most encouraged economic growth, but at the least the New Deal did not prevent this recovery.

Shlaes makes a different argument about numbers, because she uses different numbers. She starts each chapter with a rat-a-tat of just-the-facts, but instead of GDP, which represents the overall economy, she quotes the Dow Jones Industrial Average, which represents the maybe 10 percent of Americans who owned stock. And though she quotes an unemployment number, she doesn't quote the figures I've just mentioned. Instead she chooses different estimates of unemployment that (she acknowledges) show a much larger share of Americans out of work during the New Deal.

Rauchway's point is simple - the New Deal produced extremely strong economic growth and greatly reduced unemployment.  You may not like the means it used but that's different than using bad data to argue those means didn't work.  The New Deal - whatever else it did - did not prolong the Great Depression.  People who make that case are doing so in the face of the consensus among economists and historians.  They are abusing history in an attempt to win a contemporary political fight.

Originally posted to glendenb on Tue Sep 13, 2011 at 09:57 AM PDT.

Also republished by Keynesian Kossacks and Community Spotlight.

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