While today's economic slowdown pales in comparison to the Great Depression, when it comes to political action, the ghost of the 1930s may still be haunting Washington, D.C. President Franklin Roosevelt explained the need for the New Deal this way in his 1932 address to the Democratic National Convention: "While [Republicans] prate of economic laws, men and women are starving. We must lay hold of the fact that economic laws are not made by nature. They are made by human beings."
That's not so different from the sentiment behind modern-day calls for action, like Rep. Barney Frank's plan to bail out homeowners. When the market takes a wrong turn, it's the job of government to grab the wheel—by boosting spending or cutting taxes—and steer the economy back on the right path.
But if there's anything more unpredictable than the direction of the market, it's the effects of government tinkering with economic policy. And even today, economists and historians still vigorously debate not only whether or not the New Deal helped take the country out of the Depression but if it actually made things worse.
Just how divided are experts? In 1995, economist Robert Whaples of Wake Forest University published a survey of academic economists that asked them if they agreed with the statement, "Taken as a whole, government policies of the New Deal served to lengthen and deepen the Great Depression." Fifty-one percent disagreed, and 49 percent agreed. Whaples today says that the New Deal remains a thorny issue for economists because it's so difficult to measure the effects it had on the country. "You need a credible model of the economy, and not everyone is going to agree on what that model should be," he says.
Yet most economists, including defenders of the New Deal, do agree that Roosevelt's policies were far from perfect. The National Industrial Recovery Act of 1933, in particular, gets a lot of blame. It created the National Recovery Administration, a federal bureaucracy that limited competition in various industries by setting prices and wages above market levels. The ensuing upward pressure on the price of goods and unemployment may have turned a bad situation worse. While it benefited some producers, the NRA's policies meant basic goods were more expensive for consumers and jobs harder to come by for people who were already in dire straits.
But the law was struck down by the Supreme Court in 1935, so some argue it did not last long enough to create severe damage. "The NIRA might not have been a good idea," says Eric Rauchway, historian at the University of California-Davis, "but it was not exerting enough of a drag to prevent a rapid rate of recovery. If you look at the economic performance of the 1930s, you see a rapid upward trend."
Fears of confiscation
Just how rapid that trend was, though, depends on whom you ask. Except for a downturn in 1938 (historians still debate its origin), the economy and unemployment did improve after the onset of the New Deal. The country's real gross domestic product fell from $865 billion in 1929 to $635 billion in 1933 but rebounded to $1 trillion by 1940.
The only hiccup was a decline from $911 billion in 1937 to $879 billion in 1938. But the percentage of jobless Americans remained in the double digits until the onset of World War II. In 1930, unemployment was at 8.7 percent, and it climbed to 24 percent in 1932 before declining to 15 percent by 1940. Jim Powell, author of FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression, asks, "There was expansion, but how come you still had average unemployment of 17 percent from 1933 to 1940?"
One explanation is that in addition to the harm done by the restrictions imposed by the NRA, the "soak the rich" rhetoric coming from the Roosevelt administration had a chilling effect on economic growth by making people fear for their property rights. Who knows, maybe Uncle Sam would just start wholesale confiscation of the fortunes of America's wealthy or the nationalization of industries—Americans were already observing that going on across the pond with the rise of communism in Russia and fascism in Europe. This uncertainty, along with a jump in the top federal income tax rate from 25 percent in 1931 to 79 percent in 1936, may have deterred investment.
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.
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.