Did New Deal Cutbacks Harm Economy?

Sandra Elliot argues:

Liberal economist and Nobel Prize winner Paul Krugman stated on ABC’s This Week (Nov. 17, 2008) that the economy improved after the New Deal, and that it was FDR’s attempt to balance the budget in 1937 that then cut into that progress.

Robert S. McElvanie, an economic scholar at Millsaps College, says in his book The Great Depression that by 1937 production was above 1929 levels, stock prices and profits were up and many agreed the emergency had passed. But then, bowing to conservative demands for a cutback in spending and a balanced budget, FDR caused another downturn.

I posted the following reply in the comments:

It is interesting that Sandra Elliot relies on the authority of one economist with a specific agenda — Paul Krugman — yet she seems entirely uninterested in the works of economists who have actually studied the era in detail. (Elliot invokes Robert McElvaine’s book — note the correct spelling — but he is a professor of history, not economics.)

It is true that FDR slightly scaled back some public works. But that is only a tiny aspect of the story. The real reason the economy recovered somewhat in the mid 1930s was that the Supreme Court threw out FDR’s National Recovery Administration, FDR mitigated the damage of Hoover’s tariffs, and the Federal Reserve’s inflationary policy mitigated the harm of FDR’s wage-and-price controls.

The real reason the economy again tanked in 1937 and 1938 is that FDR imposed harsher wage controls in a period of renewed monetary contraction. Add to that FDR’s disastrous new taxes and his widespread persecution of businesses, and the result was a “capital strike.” Economists Richard Vedder and Lowell Gallaway calculate that FDR’s union legislation alone contributed nearly six percent [meaning six percentage points] to unemployment by 1938 (see Out of Work, page 141).

If Elliot wishes to move beyond her convenient propaganda to the facts, she might consider reading, in addition to Out of Work, Amity Shlaes’s The Forgotten Man; Gene Smiley’s Rethinking the Great Depression; Jim Powell’s FDR’s Folly; or Burton Folsom’s New Deal or Raw Deal? It is true that it took Republican Herbert Hoover to devastate the economy, generating unemployment nearing 25 percent by the time he left office. But it is also true that FDR inhibited, rather than promoted, economic recovery through the 1930s.

Here I’ll return to Elliot’s claims about McElvaine. First, Elliot neglects to mention that, even using the most generous figures, unemployment remained over nine percent. To put this in perspective, today we’re worried that “Colorado’s unemployment rate jumped to 6.1 percent in December.” Sure, the economy saw some turn-around under FDR relative to Hoover, but certainly there was no recovery.

What about industrial production? Here’s what Amity Shlaes has to say on the matter (see The Forgotten Man, page 395):

What about that oft-cited rising industrial production figure? The boom in industrial production of the 1930s did signal growth, but not necessarily growth of a higher quality than that, say, of a Soviet factory running three shifts. Another datum that we hear about less than industrial production was actually more important: net private investment, the number that captures how many capital goods companies were buying relative to what they already had. At many points during the New Deal, net private investment was not only merely low but negative. Companies were using more capital goods than they were buying.

All this tells us that while some companies were gunning their engines for the moment — that industrial production — they had little hope for productivity gains in the years ahead.

Interestingly, McElvaine runs a blog for the Huffington Post. So, like Krugman, he’s definitely a partisan in the debate. Obviously I have nothing against partisanship per se, as I’m a partisan myself, but when partisanship gets in the way of objective analysis, as it has for Krugman and Elliot, it’s a problem.