Arnold Kling

The New Deal Legacy

Arnold Kling
Politics, Economics, and Relig... Collusion in the Classroom...

The online Wall Street Journal arranged a celebrity death match between Brad DeLong and yours truly on the topic of the New Deal.


What would have happened in the U.S. without the New Deal? My father answers with one word: Fascism.

Given the climate of the time, which included intense despair alongside revolutionary fervor, a government that was seen as doing nothing could not have survived.

...deposit insurance was badly handled. But even badly-handled, it was a big improvement over none at all. In fact, that's a good thumbnail summary of the entire New Deal: badly-handled, but a vast improvement. (That is, with the exception agricultural subsidies and the National Recovery Administration. They did little good -- if any -- at immense long-run cost.)


As a boxing match, this one had very few solid punches, and a lot of cautious clinches. (alternate URL)

CATEGORIES: Economic History


COMMENTS (6 to date)
Robert Cote writes:

The USA badly handled near everything from trade to unions between WW I and WW II. The majority of the "New Deal" never got implemented. Even when passed the then court blocked or reversed. We did lots of good things. We refocused upon doing "things" and not merely making "deals." We eschewed ephemera and sought lasting value. I've hiked remote portions of the National Parks system only to encounter depression era improvements that I've never ceased to appreciate.

Honestly, any govt faced with the European/Nazi threat would have had the same result up until post WW-II.

Randy writes:

The problem with the New Deal is that, in many cases, permanent solutions were applied to temporary problems. The result is an intergenerational welfare system that is taking us in the direction of a new crisis. It is time to back slowly away from the New Deal. Once free of it, we can always use it again if it is needed again.

Brad Hutchings writes:

Might we say that your father was right in the sense that with the rise of radio, film, telephony, and television, and the production and distribution of content requiring vast sums of centralized capital, that it was only natural that they would be co-opted for fascistic or socialistic ends by governments. The people were flooded with information, but it came top-down. Perhaps we got lucky in that we had institutions in place (powerful newspapers, a Supreme Court that refused to be stacked, etc.) that resisted FDR's push for total socialism. But all that was 60 or 70 years ago, and we're still left with some remnants which should be debated in the context of this millennium.

We've come a long way in 15 years. For even suggesting that social security was a bad deal for young people 15 years ago, I was almost disowned by my Republican grandparents ;-). The righteousness with which they paid into the system and all that... I think 15 years later, they talk a lot slower. It's a debate we will eventually actually win through attrition. Patience... And no, I don't mean we just wait for New Dealers to die off in a gory sense. I do mean that their collective energy is on the wane. The argument is opening again.

Randy writes:

Brad,

It depends on whether our parents generation supports the program primarily because they believe in it or primarily because they have come to depend on it. If the latter, then the political support for it will only grow stronger as the boomers start to collect. But I do hope you are right.

Mark Seecof writes:

Near the end of that dialogue, Brad DeLong resorted to mere handwaving. He suggested we should thank the New Deal for bringing us out of the 1929 depression--but he never gave us much reason to think the New Deal actually did that. The New Deal likely retarded recovery--Roosevelt's socialist propaganda discouraged business investment, and New Deal labor regulations certainly prolonged the unemployment crisis--or the New Deal might have had a neutral effect. After all, with no "New Deal," the US economy improved just as dramatically after the 1893 depression as after the only-slightly-worse 1929 depression.

As for DeLong's take on "Victorian economics," it fails the inversion test: should we really maintain an economy of government programs to give many people their "needs, wants, and dreams" at the expense of others? Sure, in the short run, folks will labor out of habit, or because they were socialized to do so "at their mother's knee." Taxes on those workers can support a fair number of drones. But the ratio of drones to workers cannot be guaranteed. Also, every dollar you tax away from a worker reduces her ability to obtain her "wants and dreams" by that much. Why are workers' wants and dreams less worthy than the wants and dreams of the shiftless? (Remember, most people have "wants and dreams" much less rarefied and intellectual than Brad DeLong, or those of you reading this comment.) By contrast, an economy which asks most participants to support themselves will always have a fair match between producers and consumers.

(Oh, just a footnote... what is "divorce" doing next to "heart attack" and loss-of-job in DeLong's little list of things that social insurance should pay for? Talk about perverse incentives!)

Fulton Wilcox writes:

The "New Dealers" were of course concerned about Social Security looking too much like a "free lunch," so the imposition of social security taxes on payroll made costs visible. Although laudable, one unintended consequence is to focus discussion too much on the mechanics of funding the program and not enough on the fundamentals - how to supply medical care and "elder care" services.

The problem with the supposed "pay as you go" funding of Social Security is that, in fact, the funding through payroll taxes has exceeded pay as you go needs (e.g., as of 2006, by a cumulative $3.6 trillion and, by 2017, by about $7.5 trillion). The "operating government" (as opposed to the social "flowthrough" government) got "hooked" on use of social security program income "profits" to offset operating deficits. The good news is that the largest share of the U.S. government's nominal national debt is held by the social security program as opposed to "real" creditors, but because services cannot be put into inventory, this surplus is essentially meaningless from a supply chain view of "eldercare."

In 2030, the U.S. GDP islikely to be about $24 trillion (in 2006 dollars), or about $66,100 per capita, as compared to 2006's $13.5 trillion, or about $45,000 per capita. Federal Reserve Chairman Bernanke, in his January 18 testimony to the Senate, predicted that social expenditures (social security, Medicare, etc.) will increase from 8.5% of GDP in 2006 to about 15% of GDP in 2030, because of demographics plus the impact of rising medical costs. By Bernanke's estimate, "social programs" share of the 2030 GDP will be about $9.9 trillion. Translating his estimate into a per capita GDP view, social expenditures share of GDP will have increased from today's $3,800 per capita to 2030's $9,920 per capita. That level will, by today's experience, be affordable, because "non-social" GDP per capita will have increased from about $41,200 to $56,200.

Although "affordability" in 2030 is not a crisis, there are some significant practical questions. First, are the 2030 costs set in stone, with the debate merely over "who pays?" Second, is it likely that the necessary real-world resources will be in place by 2030 to support what would then be an almost $10 trillion "social program" supply chain aimed primarily (although not exclusively) at eldercare: i.e., will the needed physicians, nurses, healthcare infrastructure, eldercare assisted living infrastructure, etc be available? Third, is the problem really about social programs primarily aimed at elders or more generally a matter of rising healthcare unit costs across all demographics?

My own view is that major influencers like Federal Reserve Chairman Bernanke focus more attention on the practicalities involved - e.g. medical productivity, automation, better management of information, etc. so that the $10 trillion social subset of the economy will be as efficient and effective as possible and, perhaps, somewhat less than $10 trillion in size.

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