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Not Normal on the New Deal
Readers will not be surprised to know that I am not normal. Indeed, I have not been normal for a long time as this post from 4 years ago attests:
Roosevelt and the Great Depression
I was amused to see Conrad Black writing with shock:
Jim Powell of the Cato Institute (cited approvingly in a recent column by Robert L. Bartley) argues in a new book that FDR actually prolonged the Depression!
Of course, Powell is correct. Imagine, increasing the power of unions to strike and raise wages during a time of mass strikes and mass unemployment. Imagine thinking that cartelizing whole industries thereby raising prices and reducing output could improve the economy. Not everything Roosevelt did was counterproductive - he did end prohibition (although in order to raise taxes) - but plenty was and worst of all was the uncertainty created by Roosevelt's vicious attacks on business. (See, for example, the work of Bob Higgs especially this important paper and historian Gary Dean Best's overlooked classic Pride, Prejudice and Politics.) Business investment failed to recover because business people legitimately feared a regime change like that which had occured in Germany and Italy. Sound extreme? Roosevelt himself threatened/promised this in his first inaugural:
...if we are to go forward, we must move as a trained and loyal army willing to sacrifice for the good of a common discipline, because without such discipline no progress is made, no leadership becomes effective. We are, I know, ready and willing to submit our lives and property to such discipline, because it makes possible a leadership which aims at a larger good... I assume unhesitatingly the leadership of this great army of our people dedicated to a disciplined attack upon our common problems....in the event that the Congress shall fail to take one of these two courses, and in the event that the national emergency is still critical, I shall not evade the clear course of duty that will then confront me. I shall ask the Congress for... the power that would be given to me if we were in fact invaded by a foreign foe.
Posted by Alex Tabarrok on January 12, 2007 at 07:10 AM in Economics | Permalink
Comments
Alex,
I paraphrased this entry over at DeLong's cite and he deleted it. I too am not normal.
Posted by: Mike at Jan 12, 2007 9:43:00 AM
Not sure how much FDR had to do with the end of Prohibition: Congress proposed the constitutional amendment before he took office, and after that it was in the hands of the states. But perhaps he did some stumping.
Posted by: Ted at Jan 12, 2007 10:04:10 AM
But business investment in the U.S. actually rose steadily between 1932 and 1937, so that before the 1937 recession it was something like 8 times what it had been in 1932? How does that fit with your theory about scaring off investors?
Posted by: K. Williams at Jan 12, 2007 10:19:10 AM
Gary Dean Best's work an overlooked classic? I'm sorry, but I've read all three of Best's works on the New Deal and I find them to be embarrassingly slap-dash and tendentious. And I say that as someone who is sympathetic to his criticism of New Deal historiography!
Posted by: History Grad student at Jan 12, 2007 10:19:28 AM
If FDR scared investors so bad how come the stock market was soaring during the new deal--
it more than doubled in the first three years of the New Deal.
Posted by: spencer at Jan 12, 2007 10:22:34 AM
K. Williams - yes, compared to the absolute trough investment increased but not enough to bring the economy back. The key is that as late as 1941 real gross private investment had not recovered to 1929 levels. See the Higgs paper.
Posted by: Alex Tabarrok at Jan 12, 2007 10:28:07 AM
I'll say it again,WPA = Wealth Pissed Away
Posted by: indiana jim at Jan 12, 2007 10:37:13 AM
That's it! Your off Brad's Christmas card list!
I've given quite a few copies of Powell's book away as gifts.
That the major bookstores would even put such a sacrilegious title on their shelves actually surprised me though. Certain institutions in America are just not supposed to be questioned.
When the instance of the Japanese-American internment comes up, we usually hear it as a dark moment for America, or how America did this thing to their own people. You have to read or watch for a bit to get to the role of FDR.
Whereas certain other benighted administrations are always directly linked to whatever their faults may have been, regardless of how short the snippet or sound-bite.
Posted by: Ray G at Jan 12, 2007 10:59:55 AM
'I paraphrased this entry over at DeLong's cite and he deleted it.'
Welcome to the club. I pointed out Cole and Ohanian's paper to him over two years ago, and he deleted that at the time (but not before a few people responded to it, and which comments remain to this day).
The question being what exactly is normal to a guy who is so intellectually insecure that he can't stand that someone knows something he doesn't?
Posted by: Patrick R. Sullivan at Jan 12, 2007 11:23:15 AM
I don't know -- I look at that graph in the Higgs paper and I see private investment rising steadily at a sharp rate after 1932, and only falling back again in 1937, which had little to do with the New Deal and a lot to do -- as Tyler has argued -- with bad monetary policy. More to the point, it seems absurd to me to argue that the uncertainty created by FDR's rhetoric was greater than the uncertainty that had been created by the massive fall in output, investment, employment, GDP, and the stock market between 1929 and 1932. If you're looking for reasons why businessmen might have been cautious about investing during the mid-1930s, the fact that they had just witnessed a good portion of the economy just go up in smoke is a far more plausible explanation than any concerns that FDR was going to turn into Stalin.
Posted by: K. Williams at Jan 12, 2007 11:24:31 AM
Roosevelt was no the ONLY factor in prolonging the Depression, but I think it is safe to say he was ONE of many.
How arrogant to disagree with DeLong on HIS website! Have you forgetten what the word "fair" means on his blog banner? Get with it.
Posted by: Jake at Jan 12, 2007 11:47:12 AM
The 1980's boom was partially the result of repealing laws (starting in the late 1970's) very similar to those passed by FDR, if not actually passed during the FDR era, like airline regulation.
Posted by: Matt at Jan 12, 2007 11:57:15 AM
I agree with DeLong.
Are libertarians normal? I don't think so.
At least they are more normal than objectivists.
Posted by: Ragerz at Jan 12, 2007 11:59:28 AM
Normal people have 100 IQs and can't name the Vice President.
Posted by: josh at Jan 12, 2007 12:08:56 PM
and can't name the Vice President
Where ignorance is bliss, 'tis folly to be wise.
Posted by: Anderson at Jan 12, 2007 12:23:55 PM
I wouldn't expect you to be "normal," Alex. I would be disappointed in you if you were:
I'm of at least five minds on the "businesses feared regime change" argument:
(1) It feels right--to some degree at least. But...
(2) Negative effects on confidence are offset by the shift of government macroeconomic policy from strongly contractionary under Hoover to slightly better than neutral under Roosevelt.
(3) The partial recovery of 1933-1937 probably did more to raise business confidence than left-wing New Deal rhetoric did to reduce it. My ancestors were burying gold and silver behind the Maine farmhouse under *Hoover*, not Roosevelt...
(4) A continuation of Hooverite policies would have produced political instability that would have had much worse effects on business confidence: think Huey Long, think Rush Limbaugh's predecessor Father Coughlin.
(5) Roosevelt's strong belief that Nazi Germany and Imperial Japan needed to be fought not only provided enormous liberty and prosperity public goods to Europe and Asia, but was also crucial to finally getting us fully out of the Great Depression: mobilization demand pushed business confidence to extremely high levels--especially with the WLB putting a lid on wage inflation. Lots of wartime allocative inefficiency, but lots of business confidence as well...
Posted by: Brad DeLong at Jan 12, 2007 1:40:45 PM
The question is not if some New Deal policies did not work or if some policies did.
The question is was the recovery weak or long.
The only way that can be answered is to compare it to some norm of what happens in other business cycles, or in some other of the many Kondratieff waves of massive downturns that have plagued capitalism since its earliest days.
Until I see some of you actually making such a comparison the claim that the new deal prolonged the 1930s depression or made the recovery weak is just rank speculation that has no basis in reality.
Posted by: spencer at Jan 12, 2007 3:57:52 PM
"My ancestors were burying gold and silver behind the Maine farmhouse under *Hoover*, not Roosevelt..."
That seems a little foolish since it was the latter that criminalized owning gold.
And throwing in Hoover and Limbaugh are transparent attempts to divert the topic. No one has argued that Hoover was any better (not that I've read anyway) and comparing Limbaugh, an ardent Zionist to Coughlin is simply dishonest and unethical to boot. You dislike the guy, so let's call him an anti-semite. Nice.
Posted by: Ray G at Jan 12, 2007 4:47:19 PM
Of course people are implicitly arguing that Hoover was better. The critique of the New Deal is that it interfered too much with the workings of the free market, preventing the emergence of market-clearing prices and therefore delaying the inevitable return to equilibrium. Hoover was far more laissez-faire than FDR -- that's why the New Deal was new -- so the implicit argument has to be that had Hoover won in 1932, the U.S. would have returned to prosperity sooner. Happy days would indeed have been here again.
Posted by: K. Williams at Jan 12, 2007 5:09:21 PM
I'm sure I would only be going over arguments already said here and elsewhere, but it does seem very likely to me that FDR prolonged the depression. The TVA and other programs like it invested vast sums of money to serve a small population at a negative margin for years. They were employing people to create parks and other services and goods that went largely unused by the people at the time. They were getting a paycheck, but there was no actual productivity with most of the work they were putting out. How does it seem logical to stop tell farmers to stop producing food when people don't have enough food to eat? It will raise prices while these people will continue to get by on newly formed government subsidies and begging.
I can't quite put my arguments as succinctly as the aforementioned author who made a very good one to the contrary, but I believe FDR was a great man, but not great for the economy. Prof. Rustici, another economics professor at GMU actually dedicates a large portion of his undergraduate course to looking at FDR's effect on the Great Depression a little differently than the popular press and his monument would normally depict.
Posted by: Tim K at Jan 12, 2007 5:15:18 PM
"Of course people are implicitly arguing that Hoover was better."
No, no one is arguing that Hoover was better. They are arguing that FDR's rhetoric alone did major damage to the national economy as he openly threatened business, and that the New Deal overall prolonged the depression.
"Hoover was far more laissez-faire than FDR"
You are probably the first person to ever use the term 'laissez fair' in such a context to Hoover. His reactions to the economic downturn were text book protectionism, which hardly qualify him as laissez faire.
Perhaps you think all Republicans must be of a certain mold, and that they have always been as such. This is patently wrong of course.
The problem with arguing an implicit argument is that your own notions of right and wrong, history, economics, etc get entangled with facts. You think Hoover was laissez faire, therefore you have a weak grasp of history and economics. But this doesn't stop you from projecting your own implied argument on to what everyone else 'must' be thinking or trying to prove.
Posted by: Ray G at Jan 12, 2007 5:19:48 PM
Didn't Smoot-Hawley pass when under Hoover and go into effect when FDR took office? 60% taxes on imports do not make for a very laissez-faire piece of legislation to me.
Posted by: Tim K. at Jan 12, 2007 5:53:17 PM
No, no one is arguing that Hoover was better.
Maybe not, but you have to be arguing that something was better. You can't just say "FDR prolonged the Depression" without saying what the alternative was. And of course the alternative has to be something that had a good chance of happening. As Brad suggests, some of the alternatives to FDR might not have worked out very well.
Now you could get around this by picking one bad New Deal policy and saying, "The Depression was longer than it would have been had FDR done everything he did except X." That would be a silly argument, obviously, but the point is you have to look at the entire New Deal, not just the things you don't like. And you have to look at not just the economic picture but the social and political one as well. Maybe some of the public works projects were not beneficial on net (though the grandparents and great-grandparents of lots of today's conservatives sure liked the TVA) but it was worth something just to have people working.
One final point on the alternative against which we measure the New Deal. It is hardly fair to look back seventy years and say what policies FDR should have followed. We have, I hope, learned something about macroeconomics since the 1930's. (If not, then let's close down the nation's economics departments, since they are a total waste). The alternative to be weighed is the set of non-New Deal policies that were considered sensible back then.
So perhaps you are comparing FDR to Hoover after all.
Posted by: bernard Yomtov at Jan 12, 2007 6:15:45 PM
Ray, there were two candidates for president in 1932. If you think FDR made things worse than they would otherwise have been, you have to be arguing that if Hoover had been elected, things would have been better. (Unless, rather improbably given your politics, you're arguing that Hoover would have been worse for the economy than FDR.)
Posted by: K. Williams at Jan 12, 2007 6:32:23 PM
"Maybe not, but you have to be arguing that something was better. You can't just say "FDR prolonged the Depression"
Sure we can say FDR prolonged the depression. Even if it weren't true, our saying it in no way implies that we thought his immediate predecessor was somehow superior.
Stalin was a murderous thug, ergo, his immediate predecessor was a benevolent saint?
Extremely flawed logic.
All of the wrong statements that follow from Bernie and K.W. flow from the false premise of this implied notion of someone arguing for Hoover.
I've yet to read "If only Hoover would have won" or any such thing. We've been talking almost exclusively about FDR's flawed grasp of economics, regardless of what the protectionist Republicans around him would have done.
So if Brad says FDR was the best alternative, that may be true, but that's not the point.
Also, if this is Brad's view on it, then it is at least a partial admission of just how flawed the New Deal really was.
Sound economics had already been around, but FDR was very sympathetic to the Socialist cause, even going so far as to turn a knowing but blind eye to Uncle Joe's abuses of human rights. And so put in a position of power, he chose the collectivist, big govt as savior route, instead of a free market approach.
And so, FDR was wrong, regardless of whether or not Hoover or anyone else would have done the right thing in his stead.
I will say that Hoover or any other GOP pol would have probably been quicker to adapt to the obvious failures of the socialist measures adopted by FDR. Roosevelt was blinded by his ideological zeal, whereas any number of other politicians would have been quicker to change to a more practical economic policy. But that is highly subjective, much like the last few posts from KW & Co.
Posted by: Ray G at Jan 12, 2007 6:54:18 PM
