Did New Deal end Depression? History says deficit spending works

You know, there have been so many errors -- in some cases they've been deliberate distortions -- about the impact of President Franklin D. Roosevelt's innovative New Deal policies on the U.S. economy, that we should take a moment to analyze the facts of history.

Accordingly, we cite the late, great Governor of the State of New York, Al Smith, who frequently said, "Let's look at the record." Did FDR's New Deal end the Depression?

October 1929: U.S. stock market crashes

In October 1929, the U.S. stock market crashed. It was a cataclysmic, life-altering, bearish event that contracted the U.S. economy and ushered in the Great Depression. The U.S. president at the time was Herbert Hoover (R-California).

None of the policies Hoover undertook produced economic recovery during his term. The Depression spiraled deeper and deeper, and the unemployment rate reached a staggering 23.5% by the end of 1932. It was the worst economic period in the United States in the modern era.

Further, it's important to underscore that Hoover was president of the United States for three years after the Great Depression started, and U.S. GDP declined every year, from $865 billion in 1929 to $643 billion in 1932. The U.S. unemployment rate also increased every year under Hoover after the stock market crashed, from 3.1% in 1929 to 23.5% in 1932.

In sum, Hoover's inaction, inadequate policies, and grave mis-steps led to massive suffering, misery, unemployment and destitution in the United States -- and many economists would argue that most of the suffering and unemployment was needless: they could have been avoided with the correct public policies. Hoover's strategies were an economic disaster for the American people and for the United States.

Hoover's failed policies and the Great Depression led to the election of President Roosevelt (D-New York), who implemented the New Deal; fiscal stimulus to jump-start the economy; and other reforms, including programs to address the enormous poverty and destitution taking place in the country.

FDR's New Deal, during which Social Security was started, transformed the United States' often harsh and sometimes brutal pure capitalist system into what we call today mixed capitalism -- capitalism with a social safety net -- and it was then, and remains today, an economic and civilizational advance.

Further, as with President Obama's ascendancy, FDR's strong-handed leadership and New Deal policies represented a '"safety value" that saved corporate capitalism in the United States: it gave policymakers a chance to reform and save the corporate capitalist system. FDR's New Deal relieved economic and social pressures that, if not addressed, would have increased, and led to the election of candidates seeking even bigger changes to the system in the 1930s. Nearly every American has hope that President Obama's policies and reforms will, similarly, relieve our modern economic pressures in the years ahead.

New Deal, 1933-37: Large GDP growth

During the initial phase of the New Deal (1933-37), the U.S. economy grew at a compound annual rate of about 9%, with GDP rising from $635 billion in 1933 to $911 billion in 1937.

We'll repeat that so that FDR naysayers -- including certain U.S. Senators -- can identify the statistic: During the New Deal's initial phase, U.S. GDP increased from $635 billion in 1933 to $911 billion in 1937.

In late 1937, FDR felt pressured from Republicans to balance the budget for fiscal 1938, so he attempted to do so -- reducing fiscal stimulus elements and making other changes to the New Deal. And guess what happened in 1938? That's correct: the economy contracted, with GDP falling to $879 billion in 1938.

FDR returns to New Deal philosophy

In late 1938, FDR then was able to turn back Republican pressures, and returned to his fiscal stimulus instincts, newly confident that it was working and had expanded GDP, and rigorous GDP growth resumed through 1940.

Federal government spending for World War II (1941-45) then drove U.S. unemployment down to as low as 1.5%, as the nation mobilized to defeat the Axis threat of Nazi Germany, Fascist Italy, and Imperialist Japan.

The record, specifically U.S. unemployment rates for the period, clearly shows the positive impact of FDR's New Deal policies on the U.S. economy:

  • 1929: 3.1% (Hoover is president; U.S. stock market crashes, October 1929)
  • 1930: 8.7%
  • 1931: 15.8%
  • 1932: 23.5%
  • 1933: 24.8%, (FDR becomes president, New Deal begins)
  • 1934: 21.6%
  • 1935: 19.9%
  • 1936: 16.8%
  • 1937: 14.2% (Republican Party pressures to balance federal budget; FDR decreases New Deal spending.)
  • 1938: 18.9% (U.S. economy contracts after New Deal spending was reduced and taxes were raised. FDR subsequently encouraged -- and succeeded in securing -- resumption of the New Deal.)
  • 1939: 17.1%
  • 1940: 14.5%
  • 1941: 9.7% (World War II spending begins.)

Fiscal Stimulus/Economic Analysis: The New Deal increased U.S. GDP and resulted in a substantial decrease in U.S. unemployment, both during its initial phase (1933-37) and after FDR turned back 1937-38 Republican pressure to balance the budget (1939-41). The fiscal stimulus provided by the New Deal worked. That's the record, and don't let anyone tell you otherwise.

If anything, FDR's New Deal spending was too small in the early years: had a larger stimulus been passed, U.S. GDP would have increased more and unemployment would have declined to lower levels.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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