Some Honesty

Ok, time for some honesty. In an earlier post I said that Roosevelt's New Deal did not reduce the unemployment of the Great Depression. I am now not entirely sure if that is true. I suppose it depends on what the New Deal was. The New Deal Coalition, dominated the Democratic party until 1968. Social Security, the Federal Deposit Insurance Corporation, Tennessee Valley Authority, United States Securities and Exchange Commission, National Labor Relations Board all still exist today (notoriously, so too do Fanny Mae and Freddie Mac, also creations of the New Deal to underwrite mortgages). The National Recovery Administration was, of course, found unconstitutional in 1935, but many of the labour law aspects of the administration were imposed under the Wagner act in the same year. The largest aspect of the New Deal, however, was the Works Progress Administration (renamed Works Projects Administration in 1939).

So what aroused my doubts about the earlier claims (other than comments by readers)? Well, in the article I listed the unemployment figures from 1931 to 1939. It was, however, pointed out to me that this was disengnuous of me, since Roosevelt's first term did not start in 1931, but in 1933 (until 1937). From 1933 to 1937 unemployment actually [i]fell[/i], from 24.9% to 14.3%. That is actually a fall of over ten percent.

What further aroused my doubt was this film from Reason.TV (making similar claims about the New Deal as I did, but favouring a monetarist solution):



My main concern with this film is that the graph shown in the film, (2:42 minutes in) shows that unemployment clearly did fall between 1932 and 1937, during Roosevelt's first term, and following the so called First New Deal. Of course, it also rose dramatically in 1937 (not necessarily during his entrance to the second term).

So, was I wrong, did the New Deal help? Perhaps not. The historian and social theorist Robert Higgs has shown that that investment did not recover as a result of the New Deal, and, indeed, may have been deterred by "Regime uncertainty." Like wise, real output didn't seem to recover. Per Capita GDP fell under Roosevelt, as did personal consumption expenditures.

But what about unemployment? That at least seems to have been improved by the New Deal, doesn't it? Well, a problem in claiming it was the New Deal that caused the reduction in unemployment between 1933 and 1937, especially that it was the Works Progress Administration, is that the WPA was not instituted until 1935, though it extended relief programs similar to the Reconstruction Finance Corporation started by Hoover in 1932. That means that by the time Roosevelt's WPA was started up, unemployment had already fallen from 24.9% to 20.1%, a fall of 4.8% without the help of the New Deal. After the WPA started up, of course, it fell further, to 14.3%. This is a faster fall in unemployment than that which preceeded the WPA, not not really that much faster. And then unemployment rose, again, even though the Works schemes stayed in place.

So, sure, unemployment fell during the New Deal. But it might have fallen without it, and it might also have been the case that the New Deal caused the unemployment that followed in Roosevelt's second term, under the 1937 Recession, since the monetary based increased over 100% during between 1933 and 1939. Other things also increased unemployment during that second term. Commenting on the book discussed in the Reason video above, Thomas DiLorenzo writes

FDR and his advisors mistakenly believed that the Depression was caused by low prices, therefore, high prices—enforced by threats of violence, coercion and intimidation by the state—would be the "solution." Moreover, it is hardly a secret that if less production takes place, fewer workers will be needed by employers and unemployment will subsequently be higher. Thus, the First New Deal could not possibly have been anything but a gigantic unemployment-producing scheme according to standard neoclassical economic theory.


FDR's tripling of taxes, his regulation of business, and his relentless anti-business propaganda also contributed to a worsening of the Great Depression, but his labor policies were probably the most harmful to the employment prospects of American workers. In this regard the most disappointing thing about the Cole-Ohanian article is that they do not even cite the pioneering work of Richard Vedder and Lowell Gallaway—Out of Work: Unemployment and Government in Twentieth Century America—first published in 1993.


Indeed, it is somewhat scandalous that they do not cite this well-known work while making essentially the same arguments that Vedder and Gallaway do. They recite many of the same facts about labor policy: The NIRA codes established minimum wages for less-skilled and higher-skilled workers alike; employers were told that they must bargain collectively with unions, which were given myriad legislated advantages in the bargaining process, all enforced by the newly-created National Labor Relations Board. All of these policies made labor more expensive. Consequently, as the economic law of demand informs us, the inevitable result had to be less employment.

Strike activity doubled from 14 million strike days in 1936 to 28 million a year later, and wages rose by about 15 percent in 1937 alone. The union/nonunion wage differential increased from 5 percent in 1933 to 23 percent by 1940. Newly-enacted Social Security payroll and unemployment insurance taxes made employment even more expensive. What all of this means is that during a period of weak or declining derived demand for labor, government policy pushed up the price of labor very significantly, causing employers to purchase less and less of it.

Vedder and Gallaway conducted an econometric evaluation of these labor cost-increasing policies and concluded that most of the abnormal unemployment of the 1930s would have been avoided were it not for these policies. They estimated that by 1940 the unemployment rate was eight percentage points higher than it would have been without the legislation-induced growth of unionism and government-mandated employment costs. They conclude that "The Great Depression was very significantly prolonged in both its duration and its magnitude by the impact of New Deal programs" (p. 141).

Cole and Ohanian reach the exact same conclusions, but express them in the somewhat convoluted language of the "top economic journals": "New Deal labor and industrial policies did not lift the economy out of the Depression . . . . Instead, the joint policies of increasing labor's bargaining power and linking collusion with paying high wages prevented a normal recovery by creating rents and an inefficient insider-outsider friction that raised wages significantly and restricted employment . . . . the abandonment of these policies coincided with the strong economic recovery of the 1940s."

This last conclusion—that the abandonment of FDR's policies "coincided" with the recovery of the 1940s is very well documented by another author who is also ignored by Cole and Ohanian, Robert Higgs. In "Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War" (Independent Review, Spring 1997), Higgs showed that it was the relative neutering of New Deal policies, along with a reduction (in absolute dollars) of the federal budget from $98.4 billion in 1945 to $33 billion in 1948, that brought forth the economic recovery. Private-sector production increased by almost one-third in 1946 alone, as private capital investment increased for the first time in eighteen years.

In short, it was capitalism that finally ended the Great Depression, not FDR's hair-brained cartel, wage-increasing, unionizing, and welfare state expanding policies.