Did the New Deal Work?

As talk of a "new New Deal" grows, the debate about the original lives on.

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Whaples also points to the 1938 election, in which Democrats lost 72 seats in the House. While the Democrats retained majorities, these losses made it harder to pass their agenda and thus reduced the specter of "soak the rich" policies. "Investment almost immediately went up very strongly after [that election], now that people weren't as worried about the New Dealers and threats to their property," Whaples says.

Relief projects

Among other important New Deal measures were the relief projects, which came in the form of the Homeowners Loan Corp., which tried to reduce foreclosures by lowering mortgages (sound familiar?), and massive public-works projects intended to stimulate the economy by putting people to work. "Recovery was just one piece of the New Deal," Rauchway says. "Relief was another piece, and by all accounts it worked pretty well. It kept people from starving." He also notes that a decline in the relief programs was correlated with the downturn in 1938.

But Powell argues that these relief policies actually put a greater burden on the backs of the poorest in society, the opposite of what they intended. The income tax was not nearly as important then as it was today, so excise taxes on goods predominantly purchased by middle- and lower-class people were the main funding sources for these programs. "If you're just taking [money] from other middle- and low-income people, it's kind of a wash," Powell says. The federal government collected $11.2 billion in revenue from excise taxes on goods like beer, wine, cigarettes, and soft drinks, while the most important work agency, the Works Progress Administration, spent $6.2 billion throughout the New Deal.

A new social contract

What complicates the debate, however, is that the attempt to alleviate the Great Depression isn't even the whole story of the New Deal. Gavin Wright, an economic historian at Stanford University, says "people make a mistake by interpreting the New Deal policies as a response to the Great Depression."

Under Wright's interpretation, the Great Depression merely catapulted the Democrats to power and allowed them to enact the policies they wanted anyway. He argues that the New Deal comes across much better if viewed in the light of the culmination of the efforts of the progressive movement. "The basics of the New Deal really set the terms of the social contract—reduction in inequality, status of labor unions, heavy investment in human capital and higher education."

Some elements of that legacy are not very controversial today. Rauchway points out that "very few people disapprove of most of the New Deal reforms," which include Social Security, the Securities and Exchange Commission, the Federal Deposit Insurance Corp., and Fannie Mae. Ultimately, then, the ongoing debate over the New Deal may be less about its empirical effects in the 1930s and more about conflicting philosophies of the role of government.

Rauchway sees the idea of the New Deal as one to be praised. "[The idea was that] government should experiment very carefully around the margins with economic regulation, and you discard the things that don't work and keep the things that do."

Others see the failures of the NIRA and the massive expenditures required for public-works projects as signs that government should try not to tinker around the margins. "All those things did was transfer funds from one group of decision makers—consumers—to another—federal officials," Powell argues. Expect to see these disagreements resurface in debates about the response to today's economic troubles.