AJ DiCintio

New Deal Not Such a Big Deal?
November 25, 2008

It is a very good thing that tall tales enjoy a special place in American culture because through their bigger-than-life characters, those simple yarns aspire to the profound purpose of great literature: to tell the truth about human experience.

Think of it. Whether recounting the life of a Molly Pitcher, Paul Bunyan, John Henry, or Johnny Appleseed, American tall tales remind us that no idea is thought, no war won, no land plowed, no steel made, no charity given, no dream achieved, and no good life built except through the intellect, imagination, conscience, blood, sweat, and tears of individual human beings.

Genuine tall tales that is — for given the human frailty that denies reality in favor of the easy way out (often called “the free lunch”), humans have succumbed to the wiles of false prophets who peddle the most outrageously stupid tall tales since Adam and Eve were duped into behaving as if they had created the universe.

What does all this have to do with the New Deal? Well, one of Alabama’s hit songs tells us that poor Depression-era Southerners believed, “Mr. Roosevelt’s gonna save us all.” And to this day a great number of Americans would agree with the statement, “Roosevelt’s New Deal got us out of the Great Depression.”

However, if we define the above assertion to mean, “A Keynesian stimulus lifted the nation out of the Great Depression,” two questions arise:

Is the statement true or false?

If false, is the claim that the New Deal nevertheless “got us out of the Great Depression” another bogus tale?

In the “Freakonomics” column (NY Times), Professor Steven D. Levitt introduces us to those two questions through a guest blog written by economic historian Price Fishback, “What Do the New Deal and World War II Tell Us About the Prospects for a Stimulus Package?”

Here is a summary of what Fishback has to say.

First, it is essential to mention that the economist makes his research quite easy to understand with a graph that plots federal spending, federal deficits, and GNP from 1930-1941 against 1929 levels for those three markers.

Immediately upon examining the graph, one notices that during the entire period, federal spending rose only modestly, allowing us ordinary folks to understand why Fishback declares that “[The New Deal] was not an example of Keynesian stimulus to the economy. Economists and economic historians have known this for the past 70 years, yet the myth lives on.”

(No wonder that John Maynard Keynes published an open letter to Roosevelt, arguing for more spending and larger deficits. And no wonder that today’s Keynesians, such as Paul Krugman, are calling upon Obama to offer a stimulus package not of a paltry few hundred billion dollars but of as much as a trillion.)

Having answered the Keynesian question, Fishback turns to whether or not the New Deal really did serve as a stimulus to the economy.

Here, again, his chart tells much of the story.

At it lowest point in ‘33, the Gross National Product had fallen 33% below the ’29 level. It didn’t regain that level until ’37 and actually slipped below it in ’38 before beginning a steady climb in ’41 with the beginning of the war.

What is Fishback’s conclusion regarding how much New Deal spending replaced the loss in the nation’s economic activity? What else is there to say but this: “We can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem.”

Interestingly, Fishback points out that much of the New Deal wasn’t even intended as a general economic stimulus but served “to help families reach a minimum level of income, [with] the average payment per hour . . . roughly 40 percent of the wage being paid on the non-relief public works projects. . .”

Moreover, he doesn’t believe such New Deal “work relief” programs are necessary today because “modern social-insurance structures of unemployment insurance and a wide variety of health, nutrition, and welfare programs are already in place . . .” Nor does he think the public is willing to pay for them.

What about New Deal programs that allowed workers to be hired by private construction companies at prevailing wages? Once again, Fishback finds that things aren’t as simple as many may think:

“Even during this period [of very high unemployment], some studies find evidence of crowding out of private employment.”

Therefore, he doesn’t recommend that approach to help the current economy to rebound because “Today, with unemployment rates below 7 percent, it is likely that such public-works spending would crowd out a significant amount of private construction.”

Having shown how increased government spending is certain to pale in comparison to the economic loss suffered by a severely damaged economy as well as having explained the ironic economic problems that government programs cause, Fishback concludes as follows about a Keynesian stimulus today:  

“[The government should] evaluate the modern public-works programs more on the basis of the specific productivity of the programs rather than as stimuli to the economy. We know that we have an aging infrastructure of roads, bridges, and dams. The costs and benefits of the replacements would be my focus in evaluating whether to spend the money or not.”

In reality, then, Fishback has laid out the choices available to the Obama administration and Congress.

They can accept the liberal idea that borrowing and spending a trillion or so to get the economy back on track is acceptable not only because it will work but also because all will be hunky-dory when the turnaround occurs and enormous, unimaginably unprecedented tax increases are needed to return the nation to fiscal responsibility.

(Anyone who doubts the statement just made about taxes has surely forgotten that in addition to the staggering cost of the Keynesian stimulus, liberals plan to borrow trillions  to provide universal health care, stabilize Medicare, create green energy, bail out the financial industry, bail out the auto industry (and others?), bail out homeowners who took mortgages they couldn’t afford, fight a new, bigger (but limited) war in Afghanistan, even help students pay for college tuition — not to mention the money it will take to “perfect this nation” and “change the world.”)

Or Obama and Congress can recognize that only fiscal responsibility adhered to now accompanied by the people’s hard work can get us of this mess.

Why does the latter option tell the truth about economic reality?

Well, for a lot of common sense, wise, truly conservative reasons as old as human history — including the following observation made by a man who didn’t know much about formal economics but knew plenty about truth:

“Yet this government never of itself furthered any enterprise, but by the alacrity with which it got out of its way. It does not keep the country free. It does not settle the West. It does not educate. The character inherent in the American people has done all that has been accomplished; and it would have done somewhat more, if the government had not sometimes got in its way.”

As news accounts about politicians reveal each day, both big shot liberals (who love centralized government in all things) and so-called conservatives (who behave as if the powerful of business are incapable of exhibiting greed and stupidity that can bring down the nation) are enamored of the elites who got us into the current financial morass.

Ironically, however, they don’t listen to the Harvard grad who wrote the lines quoted above.

But then Henry David Thoreau would be the first to tell us it’s too much to ask politicians to realize that American tall tales teach the most fundamental and enduring economic truth of all.