The New Deal didn’t rescue the US economy from the depths of the Great Depression – World War 2 did. FDR’s spending programmes marked the start of the New Deal era that dominated the US until the 1970s. It would take a decade of stagflation to reverse the disastrous effects that the emergence of the welfare state and dependency culture wrought upon the West to return to the laissez-faire policies that previously coincided with record living standards growth before the 1930s.
Background
The Great Depression started with the Wall Street Crash of 1929.
Subsequent monetary policy failures turned what would’ve been a mild recession into an economic catastrophe. The failure to enact more expansionary monetary policies to support falling aggregate demand within the US economy led to a sharp monetary contraction. A shortfall of nominal spending translated into fewer jobs as businesses were forced to lay off staff amidst a lack of demand, creating a vicious cycle of further unemployment and a deeper recession.
Franklin Roosevelt
Franklin Delano Roosevelt was subsequently elected in 1933 as Americans blamed the Republican Party under Hoover for the sluggish recovery and the prolonged depression. Hoover’s interventionist fiscal policies, raising taxes and tariffs during a period of economic decline, placed a further stranglehold on the supply side of the US economy, making the wedge on economic activity that is evident with higher taxes even greater. Franklin Roosevelt decided to take this interventionist approach to far greater heights as he adopted Keynesian economic policies through his New Deal programme. Unfortunately, in many ways, the New Deal failed to live up to its promise and couldn’t get the US economy on the right track during the Great Depression.
The New Deal policies were ambitious and far-reaching, focusing on the “Three Rs” of relief, recovery, and reform. It attempted to address widespread unemployment, provide assistance to those hardest hit by the depression, and introduce policies to prevent similar economic catastrophes in the future.
New Deal Policies
Work Programmes
FDR introduced federally backed work programmes such as the Civilian Conservation Corps and the Tennessee Valley Authority to provide guaranteed employment from the government
Welfare
FDR established the beginnings of the US welfare state through the Social Security Act of 1935 – a pension system that taxpayer contributions would fund.
Financial Reform
Through the Emergency Banking Act and the departure from the Gold Standard, Roosevelt placed heavy regulations on the financial sector and ushered in a new monetary framework.
Labour Reform
The National Industrial Recovery Act and the Fair Labor Standards Act led to far greater labour regulation, with FDR similarly introducing the first US minimum wage in 1938 as part of the latter legislation.
Failure
The New Deal failed to generate substantial economic growth by limiting the supply side of the US economy. This is because the work programmes of FDR’s Democratic Party led to an inefficient allocation of resources. Workers that the US economy had displaced during the start of the 1930s were placed into occupational roles that didn’t fully utilise their skillset. A private-sector-led recovery, through aggressive monetary stimulus in the aftermath of the WSC of 1929, would’ve achieved this, providing much-needed liquidity for the private sector that suffered a shortfall of demand as real interest rates rose sharply above the real interest rate during the 1930s from contractionary monetary policies. As the New Deal programme displaced workers from roles that suited their abilities, the recovery could have been swifter as excessive intervention stymied the supply side of the US economy.
Similarly, the demand side of the US economy failed to recover as additional public spending crowded out private-sector expenditure. FDR continued Hoover’s legacy of raising taxes to take resources out of the private sector and into the public sector’s hands. The revenue Act of 1935: Increased the top marginal income tax rate from 63% to 79%, with the wealth Tax Act of 1935 imposing an additional tax on the wealthiest Americans. As such, any increases in Aggregate demand from this increase in spending were matched by a subsequent fall in private-sector spending. The multiplier effect that is commonly associated with government spending programmes was non-existent as additional spending only deprived the private sector of resources, leading to the aforementioned supply-side problem of a misallocation of resources – especially given that business leaders opposed the New Deal agenda during the 1930s, thereby not stimulating further business confidence. To effectively increase Aggregate demand and nominal spending within the US economy, the Federal Reserve needed to enact an aggressive monetary stimulus, dropping its interest rate below the rate consistent with full employment within the US economy.
Ultimately, FDR’s New Deal failed to induce a swift economic recovery, with Roosevelt using Hoover’s interventionist agenda as a springboard for more government intervention. The swath of regulation succumbed to the economy’s supply side, hurting businesses that drive economic growth through even higher costs – amidst a shortfall of demand. The large spending programmes through the numerous work programmes introduced only took resources away from the private sector and into the less efficient public sector, leading to an inefficient allocation of resources as labour and capital were allocated according to what the government thought was optimal, as a pose to the price mechanism and private sector actors. It would take until WW2 for the US economy to recover, with a surge in demand from hugely expansionary policies to support foreign military intervention by the US.
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