Transcript Introduction to the New Deal

Introduction to the New Deal
Vaughan / Economics 639
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New Deal
• Domestic programs enacted between 1933 and 1938 under leadership of
President Franklin D. Roosevelt (FDR).
• Many historians distinguish between first and second New Deal:
– First , 1933–34 (includes “100 Days”)
– Second, 1935–38 - more “liberal” (i.e., focused on social justice) and controversial.
• Programs addressed Great Depression with what historians call "3 Rs.”
– Relief for unemployed/poor;
– Recovery of economy; and
– Reform of financial system to prevent another depression.
• Many historians (David Kennedy, Stanford, for one) believe FDR felt social
reform was more important than economic recovery.
• Consensus of economic literature is most “recovery” programs were
ineffective or counterproductive.
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Key Parts of First New Deal
(from Macro/Finance Perspective)
• Bank Holiday (1933)
• Suspension of Gold Standard (1933-34)
• Glass Steagall Act (1933)
– Separation of commercial / investment banking
– Creation of FDIC
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Securities and Exchange Commission (1934)
Agricultural Adjustment Act (1933)
National Industrial Recovery Act (1933)
Tennessee Valley Authority (1933)
Other Jobs/Public Works Programs
– Civilian Conservation Corps (1933)
– Public Works Administration (1933)
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Key Parts of Second New Deal
(from Macro/Finance Perspective)
• Social Security Act (1935)
– Social Security
• Payroll taxes started 1937
• Benefits first paid 1940
– Unemployment Compensation
– Aid to Dependent Children
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Banking Act of 1935
National Labor Relations Act (Wagner Act, 1935)
Works Progress Administration (1935)
Fair Labors Standards Act (1938)
Tax Hikes
– Increased progressivity of income tax (1935)
– Undistributed corporate profits tax (1936)
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Closing Thoughts
• In many respects, New Deal built on foundations
laid by Hoover administration.
– Hoover’s top advisors drafted plan for reopening sound banks
after holiday.
– Hoover established Reconstruction Finance Corporation (RFC) in
1932 to help recapitalize banks.
– Hoover established Federal Home Loan Bank (FHLB) System in
1932 to provide liquidity to thrift institutions.
• FDR not a Keynesian.
– Remained committed to budget balancing (though it was
not as important as many other goals).
– Deficits during 1930s did not provide material AD stimulus.
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Closing Thoughts
• Why did return to pre-Depression trend take so long
(1941/42)?
– New-Keynesians:
• Initial contraction was deep.
• Fiscal stimulus was virtually nonexistent.
• Fed doubling of reserve requirements and tax increases interrupted
recovery with “Roosevelt Recession” of 1937-38 (AD↓).
– “Equilibrium” Economists:
• “Frictions” from New Deal policies slowed or stymied recovery (AS↓).
Consensus: All played a role, except maybe lack of stimulus (still
under debate). Recent research has focused on
macroeconomic “drag” from New Deal policies.
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Closing Thoughts
FDR Macro/Finance Policy Successes
• Bank Holiday / Licensing
– Restored confidence in banking system
• Creating FDIC
– Permanently put an end to “runs” and the attendant
reduction of the money supply.
• Leaving Gold Standard
• Creating SEC
• Jobs programs/public works (?)
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Impact of New Deal Jobs Programs
Joblessness during the Great Depression
Bureau of Labor Statistics (BLS) Unemployment Rates, 1929-1943
Annual Average, with / without (corrected) Federal Emergency Workers Counted as Unemployed
25.0%
24.9%
23.6%
Recession Years
21.7%
22.5%
Official BLS Unemployment Rate
Corrected BLS Unemployment Rate
20.6%
Minor Tick = 1 Percentage Point
20.0%
20.1%
15.9%
19.0%
17.2%
16.9%
16.0%
15.0%
15.3%
14.6%
14.3%
14.2%
12.5%
10.0%
9.9%
9.9%
11.3%
9.1%
8.7%
8.7%
9.5%
Peak Post-WWII Unemployment,
November/December, 1982 = 10.8%
6.0%
5.0%
3.2%
4.7%
3.2%
Data Sources
1.9%
3.1%
Darby , JPE (1976)
Federal Reserve Bank of St. Louis (FRED)
1.8%
0.0%
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
Minor Tick
= 2.5 Years
Difference between blue and red lines is impact of New Deal jobs programs.
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Closing Thoughts
FDR Macro/Finance Policy Failures
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National Industrial Recovery Act
– Promoted higher prices/wages and lower output when GDP needed to grow and prices/wages
needed to be flexible.
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Banking Act of 1935
– Gave newly created Board of Governors power to set reserve requirements (which was used
disastrously in 1936-37).
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“Atmospherics” – anti-business/anti-wealthy rhetoric, frenetic
introduction/abandonment of new policies, Supreme Court Packing, etc.
– Created policy uncertainty and insecurity about property rights.
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Agricultural Adjustment Act
– Paid farmers not to produce when people were hungry.
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Miscellaneous Macro/Finance “Drags”
– Tax increases.
– Labor unrest following Wagner Act.
– Introduction of Federal minimum wage.
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Final Point
• Macro/Finance policies are characterized as successes
or failures here based solely on short-term
contribution to recovery.
• Some “failures” may be considered successes from a
long-term social justice standpoint.
– Social Security, for example
• Some “successes” caused major problems later.
– Moral hazard in deposit insurance ultimately cost federal
government billions in the 1980s.
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