The New Deal Metaphor
It's faulty, misleading, and dangerous--and a surprising number of Democrats are embracing it.
Jan 19, 2009, Vol. 14, No. 17 • By JAMES PIERESON
He also had more room to maneuver than is the case with policymakers today, operating as he did in an environment in which the federal government spent (in 1932) only about 3 percent of GDP (it's 20 percent today). The economic collapse had removed the traditional political restraints on federal spending, there were no social programs to speak of, and international factors of trade and exchange rates did not significantly restrict choices. There was thus 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 to build roads, bridges, and schools. FDR did not have to worry about putting back to work hordes of unemployed investment bankers, lawyers, or accountants. Any public works program proposed today on the model of Roosevelt's WPA would have to be tailored to the characteristics of the unemployed in a service economy and to the objections of public sector unions that hardly existed at all in the 1930s.
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 engineered during his first 100 days. FDR 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 the wall of separation between commercial and investment banks (in part to curtail the speculation with bank deposits that many saw as a cause of bank failures). In combination, these measures stopped the slide and reestablished the banking system on stronger and more stable foundations. Most continue to function today as pillars of the financial system (save for the split between commercial and investment banks which was repealed in 1999) and, indeed, they have been called into action recently to deal with the current financial crisis.
At the same time, many of the New Deal measures most favored by reformers today were either unhelpful or counter-productive 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 never revived.