The truth about stimulus and the Depression
Did FDR's New Deal prolong the Great Depression, as some critics of Obama's 'new New Deal' argue?
By Jia Lynn Yang, writer reporter
February 11, 2009: 6:03 AM ET
NEW YORK (Fortune) -- You often hear President Obama's stimulus plan referred to as the new New Deal. So it shouldn't come as a surprise that some critics of the stimulus aren't big fans of Franklin Roosevelt either. In fact, if you've been following the debate, you may have heard a surprising number of people put forth the notion that the New Deal actually prolonged the Great Depression.
If that doesn't sound like anything your high school history teacher taught you, you're not alone. So let's take a closer look at what the New Deal's critics are claiming.
It's inarguably true that in the very short-term, the New Deal did not fix the economy. Roosevelt's programs were first passed in 1933 but economists generally agree that the Great Depression did not end until 1939, when the country began preparing for World War II. Unemployment rates, which reached as high as 25%, took several years to recover and did not get below 9% until 1940.
Critics say the New Deal failed because some of the government's actions suppressed competition, slowing the economy's ability to rebound. A central culprit was the National Recovery Administration (NRA), from 1933. The goal of the NRA was to lift wages for workers. But to do this, it encouraged industry leaders to meet and establish minimum prices and wages, effectively creating cartels. The result was wholesale prices rising 23 percent in two years.
It's hard to find anyone now who will defend the NRA, which academics agree was a bad program because it stifled competition. It was obvious to people even then that the NRA was seriously flawed; in 1935, the Supreme Court ruled the program unconstitutional
"Anytime you put in price and wage controls, you are more likely than not to make the economy worse off," says Valerie Ramey, professor of economics at University of California, San Diego. "That's the lesson of all economic history."
Economists differ, though, in their estimates of how badly the NRA's bad policies damaged the economy. On the more dire end of the scale, Harold L. Cole and Lee E. Ohanian, economics professors at the University of Pennsylvania and UCLA respectively, estimate the New Deal's labor and industrial policies caused the Depression to last seven years longer than otherwise. (Here's one of Cole and Ohanian's papers.)
But it's important to remember that, like today's stimulus, the New Deal was a program of many parts improvised as the economy continued to sink into oblivion. We think of it as a monolith now, but that's not how it felt at the time. As Price Fishback, an economic historian at the University of Arizona, recently wrote, "It was a broad-ranging mix of spending, regulation, lending, taxation, and monetary policies that can best be described as 'See a problem and try to fix it.'" (That should sound familiar to Hank Paulson.)
In fact, one charge leveled at Roosevelt by his critics is that the uncertainty over the government's strategy discouraged business from investing. This is the argument of economist Robert Higgs and journalist Amity Shlaes, who shows in her book "The Forgotten Man: A New History of The Great Depression" how business people struggled to respond to the government's many actions.
"We know uncertainty played a role but measuring how big an effect it had is really difficult," says Fishback.
Because the New Deal was so sprawling, there are also programs that historians and economists agree were deeply effective, like establishing the Federal Deposit Insurance Corporation, or FDIC, which stopped the run on banks. The Civil Works Administration quickly employed 3.6 million people. And Fishback has done some research showing that an added dollar of public works and relief spending was tied to an increase in retail sales of 40 to 50 cents. There's also a correlation between areas of the country that received more relief spending and lower infant mortality and property crime rates.
"You don't want to say, 'Oh, don't do any of it,' because some aspects did work, but they were impeded by other aspects that led the economy to be worse," says Ramey.
As for what took so long for the unemployment figures to come back up, some economists who are sympathetic to Roosevelt point out how low the economy had fallen. "It was a broken economy on a scale we have never seen anything like," says Eric Rauchway, a history professor at the University of California, Davis and the author of "The Great Depression and the New Deal: A Short History." "To repair an economy that's that broken you have to figure it's going to take some time. That's a homely explanation but that's the best explanation I can do."
So what's the moral here?
Roosevelt and his New Deal were not as saintly or ruinous as either side claims. As usual the truth lies somewhere in the middle. The biggest thing we have in common, perhaps, is that like Roosevelt, we can only take our best guess at what will work. And hopefully, the cure this time will take hold faster.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
The problem with this analysis is that even if new deal worked before, it is not clear it will work this time.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
The problem with this analysis is that even if new deal worked before, it is not clear it will work this time.
- posted on 02/11/2009
"there are also programs that historians and economists agree were deeply effective, like establishing the Federal Deposit Insurance Corporation, or FDIC, which stopped the run on banks. The Civil Works Administration quickly employed 3.6 million people. And Fishback has done some research showing that an added dollar of public works and relief spending was tied to an increase in retail sales of 40 to 50 cents. There's also a correlation between areas of the country that received more relief spending and lower infant mortality and property crime rates."
Let's look at what "were deeply effective". Hehe.
"establishing the Federal Deposit Insurance Corporation, or FDIC, which stopped the run on banks":
All banks practicing fractional reserve banking are inherently insolvent already. Bank runs only make that more obvious. Those banks should have closed their doors. The establishing the FDIC prevented that. The effect is to make the fraud last forever.
"The Civil Works Administration quickly employed 3.6 million people":
What is so sacrosanct about "quickly employed X number of people"? At what cost? At whose cost? "The Civil Works Administration" cannot create any property, it can only uses tax, borrowing and printing press to hire those persons. In the end the current generation and future generations of residents have to pay for that.
"an added dollar of public works and relief spending was tied to an increase in retail sales of 40 to 50 cents":
What is so sacrosanct about "increase in retail sales of 40 to 50 cents"? See the reasoning above.
"There's also a correlation between areas of the country that received more relief spending and lower infant mortality and property crime rates.":
What about those areas that did not receive more relief spending? Who killed those dead infants in those areas? Relief spending is about transfer of private property from one group to another group. It is not about production.
Overall, that article is a piece of bullshit. I do not hastily call a piece bullshit without giving my reasoning as above.
Now, Chairman O8ma is embracing that kind of bullshit. Chairman O8ma will go the Hall of Shames with FDR. - Re: The truth about stimulus and the Depressionposted on 02/11/2009
Is it so hard to understand that the central government can never produce any meaningful property? The central government can only transfer private property from one group to another group, and most of the time, across generations. - Re: The truth about stimulus and the Depressionposted on 02/11/2009
The court historians, court professors, court journalist, in other words, court "intellectuals", are working extra shifts day and night to meet their kings' need. They are rewarded for their hard work by their kings. Everyone wants to live comfortably. The court "intellectuals" are not exceptions.
The gullible are gulled by those court "intellectuals". - Re: The truth about stimulus and the Depressionposted on 02/11/2009
Take whatever valuable reading materials you can get hold of before the State worshipers' wishes come true. Those materials will become your only fresh air in a dark iron house without any windows. - Re: The truth about stimulus and the Depressionposted on 02/11/2009
Logically, if new deal didn't work before, it doesn't mean new new deal won't work now. How's that?
You will be long dead before anything becomes clear.
funny wrote:
The problem with this analysis is that even if new deal worked before, it is not clear it will work this time.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
I guess the same thing will happen to you.
I did not expect someone would get so low. a record on cafe.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
You stupid low life wimp can't face the truth? That's what Keynes once said, ¡°In the long run, we are all dead.¡±
funny wrote:
I guess the same thing will happen to you.
I did not expect someone would get so low. a record on cafe.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
Chill out man, I don't think he meant any disrespect. ;-)
(Not that he needs anybody to defend him, his contrarian nature takes him too far sometimes.)
funny wrote:
I guess the same thing will happen to you.
I did not expect someone would get so low. a record on cafe.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
Ohoh, I take back of what I just said then. ;-)
touche wrote:
You stupid low life wimp can't face the truth? That's what Keynes once said, ¡°In the long run, we are all dead.¡±
funny wrote:
I guess the same thing will happen to you.
I did not expect someone would get so low. a record on cafe.
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
good, good,
keep breaking your own record of lows
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
This is not a place for you. Go to your mom's.
funny wrote:
good, good,
keep breaking your own record of lows
- Re: The truth about stimulus and the Depressionposted on 02/11/2009
You must think your dirty month can scare away others
Ever heard of " a dirty month indicates a dirty mind"
- Re: The truth about stimulus and the Depressionposted on 02/12/2009
What an insight! Mustn't you parade your idiocy in front of all of the people?
It's too easy to skin a little skunk like you.
funny wrote:
You must think your dirty month can scare away others
Ever heard of " a dirty month indicates a dirty mind"
- Re: The truth about stimulus and the Depressionposted on 02/12/2009
in the little up-side-down world of yours, I guess you are imaging you're the king
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