old nostrums that were previously successful in getting us (and them) out of one crisis or another. The financial meltdown of 2008 thus led to a revival of Keynesian public-spending remedies and the dream of replaying FDR’s New Deal. So strong is the hold of the New Deal over the liberal imagination that few people stop to consider how different the world is today from the one that Franklin Roosevelt faced when he took office in 1933 at the very bottom of the Great Depression.
It was not surprising, following Barack Obama’s election in 2008, to hear liberal pundits and Democrats in Congress calling for another New Deal and a rerun of Roosevelt’s “first hundred days,” but even more ambitious this time. One influential columnist called our new president “Franklin Delano Obama,” while lamenting that the original New Deal was far too modest and lacking in vision to achieve reform on the required scale. Shortly after the election, an issue of Time magazine carried on its cover an image of the president-elect’s face merged into a famous photo of FDR in a convertible, wearing a fedora and a wide smile. Accompanying the image was an article titled “The New New Deal,” drawing parallels between Roosevelt’s leadership during the Depression and the opportunities now arrayed before Obama. Many said (with much relief) that the financial collapse combined with Democratic electoral sweeps marked the end of the Reagan–Thatcher era with its focus on free markets, open trade, and low taxes.
President Obama and his advisers have been of two minds about these associations with FDR, at times embracing them to burnish his image as a reformer and at others rebuffing them out of concern that he may not be able to fulfill the hopes thereby ignited. They did, however, adopt the concept of a New Deal–type stimulus package including funds for public works programs, “clean” sources of energy, and other projects designed to stimulate consumer demand and create new jobs. The Wall Street Journal reported, “President-elect Obama is promising to intervene in the economy in ways that Washington hasn’t tried since the 1970s, favoring some industries and products while hobbling others.” It is sobering to recall that the policy experiments of the 1970s, which gave us a decade of alternating recession and inflation, were modeled on the New Deal. There was little reason to expect that they would work any better today.
The New Deal metaphor in wide circulation today is based on a misconception: the belief that the kind of interventions that were effective during the Great Depression are the right medicine for dealing with a financial crisis and a stagnant economy today. This misconception rests in turn on a faulty analysis of the recent past: the notion that the market-oriented policies of the past quarter century were a great mistake and should be replaced by a more coordinated set of policies that (it is argued) will yield more stable growth and a fairer distribution of income. Thus the New Deal metaphor is now invoked as a call to overturn the free-market revolution of the 1980s, just as the New Deal threw overboard the Wall Street–favored policies of the 1920s. Such hopes are based on a fairytale version of the New Deal and a highly ideological interpretation of recent history.
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The New Deal was erected in an unprecedented calamity, with the American economy at a near standstill. Between 1929 and 1933, unemployment rose from 3 to 25 percent of the workforce, national output fell by more than 30 percent, the dollar value of U.S. exports fell by more than two-thirds, the stock market dropped close to 90 percent, and more than a third of the nation’s banks failed. The Great Depression, as it came to be called to distinguish it from the mini-depressions of the 1870s and 1890s, was a catastrophe on a scale far beyond what anyone previously thought was possible. No one knew what to do about it, certainly not Franklin Roosevelt, who had campaigned on a platform calling for a balanced budget.
When FDR took office, things were about as bad as they could possibly get, and there was little reason to worry about what we would today call “downside risk.” Thus, Roosevelt took an experimental approach to the crisis, adopting various contradictory policies in the hope that some of them might work to reverse the slide. He also had more room to maneuver than is the case with policymakers now, operating as he did in an environment in which the federal government spent (in 1932) only about 3 percent of GDP, by contrast with today’s 20-plus percent. There were no social programs to speak of. The economic collapse removed the traditional political restraints on federal spending, while international factors of trade and exchange rates did not significantly restrict Roosevelt’s options after he took the United States off the gold standard. Thus there was much room to increase federal spending, and, by blaming the rich for the catastrophe, FDR had a justification for raising their taxes.
At that time, however, the federal government did not command a large enough share of the economy to “prime the pump” with Keynesian-style deficits. (That would come later.) Since most workers were employed on farms or in factories, they could be diverted in a time of high unemployment to public works programs, building roads, bridges, and schools. FDR did not have to worry about putting hordes of unemployed investment bankers, lawyers, or accountants back to work; nor did he have to worry about environmental regulations or cumbersome permitting rules of the kind that hold up road and bridge building today. Any public works program proposed on the model of Roosevelt’s Works Progress Administration would now have to be tailored to the characteristics of the unemployed in a service economy, to the current regulatory environment, and to the objections of public sector unions.
Some of the most constructive and long-lasting features of the New Deal are those that today’s would-be reformers ignore when calculating its achievements—most particularly, the broad financial reforms that FDR implemented during his first hundred days. He moved quickly in 1933 to address the failures in the financial system that were obvious sources of the continuing deflation and downward spiral in the economy, immediately declaring a bank “holiday” (to stop bank panics) and removing the United States from the gold standard to free the Federal Reserve from its deflationary restrictions. In short order, Congress approved a series of reforms that created a system of deposit insurance, brought more banks under the supervision of the Treasury and the Federal Reserve, established standards of transparency in the public sale of securities, and built a wall of separation between commercial and investment banks in order to curtail the speculation with bank deposits that many saw as a cause of bank failures. Roosevelt also effectively devalued the U.S. dollar in relation to gold, raising the exchange value from $21 to $35 per ounce. In combination, these measures stopped the slide and re-established the banking system on a stronger and more stable foundation. Most of them continue to function today as underpinnings of the financial system (save for the split between commercial and investment banks, which was repealed in 1999).
At the same time, many of the New Deal measures most favored by reformers today were either unhelpful or counterproductive in addressing the economic crisis. FDR’s farm programs, designed to raise prices by cutting agricultural production, may have helped some farmers, but they did not promote farm exports nor did they help consumers with tight family budgets. In a misguided effort to raise prices, New Deal functionaries destroyed meat and produce and took cropland out of production even as hungry Americans stood in bread lines. The National Industrial Recovery Act (NIRA), designed to bring unions and corporations together to set prices, production levels, and working conditions, proved to be a bureaucratic tangle as businessmen tried to use it to guarantee profits, unions to drive up wages, and government officials to expand public power. Through its complex codes, NIRA succeeded not only in raising prices—a dubious achievement—but also in sowing confusion throughout the economy as to what business practices were and were not permitted. It was soon declared unconstitutional by the Supreme Court and FDR never tried to revive it.
The main elements of the so-called Second New Deal—the Social Security Act, the National Labor Relations Act, and the Revenue Act of 1935—added new burdens to business in the form of payroll taxes, higher corporate taxes, and collective bargaining for labor unions. Whatever their long-term benefits, these measures did not improve the climate for investment and job creation in the 1930s. The NLRA, predictably, led to more union organization and to a spike in industrial strikes. The passage of these measures was accompanied by a good deal of antibusiness rhetoric, which was not helpful either. Indeed, the Revenue Act, because
