Dean Baker: The New Deal Worked

Roundup: Talking About History

[Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. He is a frequent guest on National Public Radio, Marketplace, CNN, CNBC and other news programs. ]

If the Washington Post had a science section it would be filled with accounts of creationism and the latest thoughts from the Flat Earth Society. This is the only conclusion that one can get from reading its treatment of economics in the Outlook section.

Readers may recall the memorable Donald Luskin piece of September 14th telling readers that the economy was just fine. In keeping with this proud tradition, the Outlook section has a front page piece from Amity Shlaes telling readers that the New Deal didn't work. According to this story, the economy would have quickly recovered from the depression, if only Roosevelt had the good sense to do nothing.

While the basic argument has the form of a no evidence counter-factual assertion (e.g. the good fairy of the market would have set things right, if only Roosevelt didn't get in the way), the discussion is contradicted by the known facts of the era. Roosevelt's New Deal Agenda lowered the unemployment rate from 25 percent in 1933 to 10 percent in 1937. None of us would be happy with 10 percent unemployment, but it is difficult to complain about policies that reduced the unemployment rate by an average of almost 4 percentage points a year. The annual growth rate over these four years averaged 13.0 percent. It is always possible that the magic of the market would have done better, but there is no reason that we should believe so.

Schlaes is correct in pointing out that things turned bad again in 1937. The Blue Dogs of the Roosevelt era won sway and got Roosevelt to cut spending and raise taxes. This threw the economy back into a serious recession, just as any good Keynesian would have predicted.

When it comes to writings on economics, the Post's Outlook section is probably best viewed as a jobs program rather than a source for serious ideas.

[For folks who think that the growth in federal spending under Roosevelt and the recovery were just coincidence, here is the annual growth in federal government spending, alongside the following year's GDP growth:

growth in federal gov spending GDP Growth

1932 2.2% 1933 1.3%
1933 23.7% 1934 10.8%
1934 34.2% 1935 8.9%
1935 1.7% 1936 13.0%
1936 51.0% 1937 5.7%
1937 -10.0% 1938 -3.4%
1938 10.4% 1939 8.1%
1939 7.2% 1940 8.8%
1940 12.0% 1941 17.1%

This is annual data (obviously quarterly would be better) and clearly monetary policy and other factors played a role, but it is pretty hard to look at this data (available at www.bea.gov) and not see a relationship between government spending and GDP growth.]

Read entire article at Washington Monthly (blog)

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