Did the New Deal work?

Currently a strong effort is being made to discredit the New Deal by opponents of public works, unemployment insurance and other government programs to revive the economy in recession.

The case against the New Deal is that unemployment never fell to pre-1929 levels until the coming of World War Two.  But by other economic measures, the New Deal was in fact a success.  The top chart above measures Gross Domestic Product in terms of by what percentage it was higher than its low point in March 1933.  The bottom chart above measures industrial production by what percentage it was higher or lower than in October 1929 when the Great Depression began.

The two charts showed that economic recovery began when President Roosevelt took office, and faltered only in 1937 when he decided that his economic recovery program had achieved its goal and did not need to be continued.  Full recovery came in the run-up to World War Two.

Now it is impossible to be certain to what degree recovery was due to the New Deal and to what degree it was due to the natural swing of the economic cycle.   The only way you could have proof one way or the other would be to have two timelines, one with a New Deal and one without, which is impossible outside science fiction.   The case for the New Deal is that economic recovery started to falter in 1937 with President Franklin Roosevelt started to curtail government spending and return to a balanced budget.  The only way you could convince me that the New Deal was futile would be to show me a nation that brought about economic recovery through economic austerity.

Here is a chart showing the rise and fall of employment during the 1920s and 1930s.  Raw employment numbers give an overly favorable impression, because a certain amount of job growth is needed just to stay even—that is, just to keep up with population growth.  Even so, the chart shows that the U.S. economy did generate millions of new jobs during the New Deal period.

Here is the perspective of Charles W. McMillion, former associate director of the Johns Hopkins University Policy Institute and a former contributing editor of the Harvard Business Review.

The official U.S. Business Cycle Dating Committee established that the downturn that began in August 1929 ended in March 1933 with the remarkable economic expansion that started within days of FDR’s bold—if trial and error—New Deal programs.  By any normal definition, the Great Depression had ended by late 1936, with all major indicators surpassing their previous peaks.

A second cyclical downturn officially began in May 1937 when FDR, always a fiscal conservative, mistakenly thought the economy had become self-sustaining and slashed public spending programs to balance the budget.  These harsh and premature spending cuts caused another severe recession that ended after 13 months in June 1938.

Even in this severe downturn, annual GDP did not fall back below its 1929 peak.  And although many suffered and most economic measures did fall back below their 1929 levels, not one fell anywhere close to its March 1933 low.  For example, although industrial production fell sharply in the 1937-38 recession, at its low point, in April 1938, it remained 49 percent above its level of March 1933.

When the economy again contracted sharply in late 1937 and early 1938, FDR quickly reversed course and rapid growth immediately began again. GDP soared by 10.9 percent in 1939 and industrial production soared by 23 percent. … …

Despite the new record peak in the number of jobs by late 1936, because of population growth and because more people were encouraged to seek jobs, the unemployment rate did remain very high until public spending programs truly exploded with the start of World War II.  But even here, it was again vastly expanded government spending, this time to fight the war, that ended high unemployment. … …

Myth and ideology aside, the data show that from 1933 through 1936 the New Deal produced double-digit annual growth in GDP, production, after-tax income and private investment, with strong consumer spending and job growth exceeding their peaks in the 1929 bubble.  The Great Depression ended by late 1936.

While a new, severe recession began in May 1937 because FDR prematurely slashed public spending on New Deal programs, rapid growth quickly resumed in late 1938 when funding was restored. … …

Today, the U.S. and the world again face extreme crises similar to those in the early days of the 1930s.  The largely unregulated private financial and commercial sector has utterly bankrupted itself.  … …

But history has shown that crisis can bring people together in common, public purpose or it can set them against one another. Our circumstances are far too dangerous to leave uncorrected the antigovernment disinformation and myths from the 1930s, and in our own generation.

Click on The “FDR Failed” Myth for McMillion’s complete article for Campaign for America’s Future, which was the source of the top two charts.

Click on Learning from the New Deal’s Mistakes for more on what the New Deal actually did.  [Added 1/31/12]

Tags: Franklin Roosevelt, Great Depression, Gross Domestic Product, New Deal