CONSERVATIVE FANTASIES AND EMPIRICAL FACTS ABOUT THE GREAT DEPRESSION AND THE NEW DEAL
The Great Depression and Franklin D. Roosevelt’s New Deal policies to combat it are fading from living memory. Anyone who voted for Roosevelt in the 1932 or 36 elections is now more than 100 years old. Even people who were children then, but old enough to understand what was happening, are now in their 80’s or 90’s. Conservatives have taken this opportunity to try to rewrite history so that it conforms to their fantasies. In various ways and forums they contend that the New Deal did no good, or more bizarrely, that it prolonged the Depression, that 1937 was the worst year, and that the Depression was really ended by World War II. We shall look at these assertions in the light of empirical data and historical facts.
One comment I heard from a conservative was “We don’t know what would have happened if Roosevelt had not been elected and the New Deal had never existed.” The implication is that any recovery seen in the 30’s might have happened anyway. Of course we never know what might have happened had the world been different, but that statement, besides being trivially self-evident, is not an argument for or against anything. It is more a psychological defense mechanism that allows the speaker to avoid the obvious conclusions recommended by the evidence. What we do know is what did happen and the sequence in which it happened.
What Did Happen.
After the stock market crash of October 1929, the country went into a disastrous depression characterized by four consecutive years (1930-33) of negative GDP growth and rapidly increasing unemployment. President Herbert Hoover, believing in the conservative idea that “natural” market forces will take care of everything and government intervention can only harm, did nothing. The nadir in GDP growth was reached in 1932 (-12.9%) and the zenith in unemployment in 1933 (24.8%).[1] Figure 1 shows annual average values for both GDP growth rate (right vertical axis) and unemployment rate (left vertical axis). Because the numbers are annual averages they are plotted in the middle of the pertinent years. Franklin Delano Roosevelt was elected president in November 1932 and took office in March 1933. He and the newly elected Congress immediately began passing legislation designed to bring he economy back and unemployment down, in a whirlwind of activity known as the “100 days”. It may be assumed that New Deal spending could have had no effect until the second half of 1933, so that is where I inserted a line indicating the start of the New Deal. As can be seen from Figure 1, what happened next was a dramatic turnaround, with four consecutive years (1934-37) of positive GDP growth and falling unemployment.
Figure 1
1937 and 1938 – The Worst Years?
There is an obvious change in 1937. Although the GDP growth rate was still positive, it fell from a spectacular 13% in 1936 to 5% (a figure we would be quite happy with today) in 1937. In 1938 the growth rate went negative again, and the unemployment rate went up, both for the first time since 1933. Although neither the unemployment nor the GDP growth rates were the worst for the Great Depression years, conservatives seize on the figures for these years to bolster their argument that the New Deal did no good (or even did harm).
What conservatives never tell you is that New Deal spending was cut back sharply by FDR at the beginning of 1937 (a red line in Figure 1 marks that point), in the belief that the Depression had been beaten and in the hope of balancing the budget as conservatives had been stridently demanding. “He cut back relief, ordered PWA to stop building and RFC to stop lending, and even talked about postponing new post offices and road building for which money had already been appropriated.”[2] The result of this “budget balancing” was a collapse of the recovery. It was very disheartening to both the government and the people in general because they had thought that the bad times were over. The budget still ran a deficit for 1937 because of the poor economy. In April 1938, Roosevelt asked Congress for the money to restore the New Deal spending cuts[3] (a green line marks that point). Lo and behold, 1939 and 1940 resumed the recovery of 1934, 35, 36: unemployment came down again and the GDP growth rate rebounded into positive territory, above 5%. Although conservatives try to use the down years of 1937 and 38 to prove the uselessness of The New Deal, quite to the contrary, those years and the subsequent ones prove the effectiveness of New Deal spending.
Consider the sequence of events: within a year of the start of The New Deal, GDP growth went from negative to positive and the unemployment rate fell year by year. Then within a year of New Deal spending cuts, GDP growth went negative again and unemployment started back up. Then within a year of restoration of spending, GDP growth was positive again and unemployment was decreasing again. Anyone who can look at that history and conclude that The New Deal did no good is prejudiced to the point of total irrationality. It was almost as if FDR had heard the conservative comment to the effect that we don’t know what would have happened had there been no New Deal and decided to show what would have happened by his 1937-38 cutback.
One conservative I know complained, “All that spending and not a single job was created!” Such a statement is simply a falsehood, which I would hope was based on sheer ignorance rather than sheer mendacity. Figure 2 tells the jobs story. In 1933 there were 39 million employed and in 1940, 48 million. By my arithmetic, that’s 9 million jobs created. But perhaps conservatives use a different kind of math in which 1 + 1 does not equal 2. You can see the increase in jobs (green portion of the bars) from 1934 through 1937, the decline in 1938, and then the increases again for 1939 and 40 (the increases continued after that also).
Figure 2
In fact, there is fairly good correlation between government spending and both employment and GDP growth for the years of the New Deal before the World War II, 1933 – 1941. Figure 3 is a scatterplot that shows the relationship between government spending and GDP growth, while Figure 4 shows the relationship for number of unemployed[4].
In the first case, GDP growth rate versus government spending, the correlation coefficient between the variables is 0.72 and the coefficient of determination (COD) is 0.52. This is considered statistically significant. So 52% of the increase in GDP growth rate during those 9 years could be due to government spending. I would expect such a correlation to hold only when private spending, the usual and preferred GDP growth driver, is low.
The relationship is more impressive in Figure 4, with a correlation coefficient of -0.91 and COD = 0.82, meaning up to 82% of the decrease in number of unemployed could be due to government spending. Of course, these numbers are statistically significant also.
Figure 3
Figure 4
Second World War
Another conservative argument is that World War II ended The Great Depression, not The New Deal. At least there is a modicum of truth to this assertion. But it was not the war, per se, that drove the final stake into the heart of The Great Depression. It was the huge government spending that did the trick. Conservatives would have us believe that there was something magical about the war itself that saved the economy; anything rather than admit that Keynesian economics works. Figure 5 shows the government spending, in both nominal and constant dollars, for the depression and war years. The increase in spending for the New Deal is barely noticeable on a scale that includes war spending.
Figure 5
And this was deficit spending, especially during the war years, 1942 – 1945. Figure 6 shows the surpluses and deficits during the whole period[5].
Figure 6
As can be seen, there was a small budget surplus in 1930, the only one in the 16 year period. There was a small budget deficit in 1938 (89 million in nominal dollars), but it was nearly too small to be seen on the scale used. All the New Deal year deficits put together (1934 – 1940) are about equal to the deficit in the first year of the war, 1942 (18.7 million compared to 20.5 million in nominal dollars; 24.4 compared to 22.6 in 1945 dollars). The subsequent war years had even larger deficits.
The correlation between GDP growth and spending does not hold for the entire period 1930 – 1945, mostly because the production of war material was cut back sharply in 1945 (and even some in 1944). GDP growth was -1% in 1945. But there were still nearly 11.5 million[6] people in the armed services who had to be paid, and rationing meant that there was less for them or their families to spend it on (savings rates soared to over 20% of disposable income during WW II, higher than any time since[7]). However there was still a discernible negative relationship between the number of unemployed and government spending for the whole Great Depression – World War II period. The relationship is not linear, but looks more like an exponential decay. The fitting equation is
Figure 7 illustrates.
Figure 7
This exponential decay curve fits the data with a COD = 0.73. That means that 73% of the decrease in unemployed over the whole 16 years could be due to government spending.
In view of all the data, it is clear that The New Deal failed to end The Great Depression not because it was the wrong thing to do, but rather because it was not near big enough.
Figure 8 – Inauguration Day 1933
Gary Waldman
April 2016
[1] GDP growth from U.S. Bureau of Economic Analysis, www.bea.gov; unemployment from U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D.C., 1960) - reproduced in www.u-s-history.com/pages/h1528.html
[2] Caroline Bird – The Invisible Scar (Pocket Books edition, 1967), p. 183
[3] Ibid., p. 184
[4] Spending data from Office of Management and Budget, www.whitehouse.gov/omb/budget/Historicals, Table 1.1.
Unemployed data from U.S. Bureau of Labor Statistics, BLS Technical Note: Labor Force, Employment, and Unemployment, 1929 – 1939; Estimating Methods
[5] Data from www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states
[6] See reference 4, BLS Technical Note
[7] U.S. Bureau of Economic Analysis, Table 2.1 – Personal Income and Its Disposition
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