[R-G] [BillTottenWeblog] The "FDR Failed" Myth

[Bill Totten]

by Charles McMillion

www.ourfuture.org (February 03 2009)


Contrary to the anti-government myths and ideology-driven arguments of
conservatives like Amity Shlaes, the facts show FDR's New Deal quickly
brought rapid growth to the nation's economy during the Great Depression.

The current recession will soon become the longest since the Great
Depression. The US is losing over 500,000 jobs each month, and a new
president, elected overwhelmingly, is pleading for unity and urgent
action on a scale not seen since the New Deal.

At such a moment, it is imperative to expose a dangerous popular myth
regarding the efficacy of President Roosevelt's actions: that it was not
the programs of the New Deal, but only the placing of the nation on a
wartime footing years later, that restored the health of the nation's
economy.

This belief, though widely held, cannot stand up to even the most basic
economic analysis. Yet the mainstream corporate media, which abound with
anti-government ideology, seek to reinforce this myth. Just this past
Sunday, The Washington Post featured on Page One of its Outlook section
an article by Amity Shlaes headlined "FDR Was a Great Leader, But His
Economic Plan Isn't One to Follow". Underscoring Shlaes's made-up
claims, the Post ran the continuation of her piece under the title:
"FDR's Plan Failed to Spark Real Growth".

In it, Shlaes, having passed over the anything-goes policies that led to
the financial crash in 1929 - and, to a great extent, the devastating
economic losses that occurred between 1929 and Roosevelt's 1933
inauguration - also completely leaves out any specific data on gross
domestic product, incomes, consumer spending, production, investment or
jobs even for the New Deal period she presumes to explain. Indeed, her
pitch is based entirely on emotional misrepresentation.

The basic economic facts from the 1930s - according to the Department of
Commerce, the Federal Reserve, and other official sources - are
fundamentally different from the unsupported claims put forward by
Shlaes and prominent in popular myth. The monthly data for industrial
production show a near three-year collapse under President Hoover,
ending when FDR came to office in March 1933. Production rocketed by 44
percent in the first three months of the New Deal and, by December 1936,
had completely recovered to surpass its 1929 peak.

See charts at http://www.ourfuture.org/blog-entry/2009020603/fdr-failed-myth

GDP, only available as annual averages, plunged 25.6 percent from
1929-1932, including by 13.0 percent in 1932. It stabilized in 1933, and
then soared by 10.8 percent, 8.9 percent and 12.0 percent, respectively,
in 1934, 1935 and 1936. Real GDP surpassed its 1929 peak in 1936 and
never again fell below it. After-tax personal income, consumer spending,
real private investment and jobs all reached or surpassed their 1929
peaks by late 1936.

In fact, like every decade between 1850 and 1990, the 1930s suffered two
distinct downturns. The official US Business Cycle Dating Committee
established that the downturn that began in August 1929 ended in March
1933 with the remarkable economic expansion that started within days of
FDR's bold - if trial and error - New Deal programs. By any normal
definition, the Great Depression had ended by late 1936, with all major
indicators surpassing their previous peaks.

A second cyclical downturn officially began in May 1937 when FDR, always
a fiscal conservative, mistakenly thought the economy had become
self-sustaining and slashed public spending programs to balance the
budget. These harsh and premature spending cuts caused another severe
recession that ended after thirteen months in June 1938.

Even in this severe downturn, annual GDP did not fall back below its
1929 peak. And although many suffered and most economic measures did
fall back below their 1929 levels, not one fell anywhere close to its
March 1933 low. For example, although industrial production fell sharply
in the 1937-38 recession, at its low point, in April 1938, it remained
49 percent above its level of March 1933.

When the economy again contracted sharply in late 1937 and early 1938,
FDR quickly reversed course and rapid growth immediately began again.
GDP soared by 10.9 percent in 1939 and industrial production soared by
23 percent.

Shlaes's Post article begins with a misleading, emotional story of a
young, desperate boy's tragic suicide in 1937. She does not inform
readers that FDR had reversed course and was sharply cutting - not
adding to - New Deal spending at the time this suicide likely occurred.
Rather, she uses this emotional tale to turn facts on their head,
asserting - with no actual evidence - that public spending was
ineffective and New Deal programs failed.

Like other ideological critics of government, Shlaes sites only two
economic indicators of the 1930s: the falling but persistently high
unemployment rate and the length of time required for the stock market
to recover after its bubble burst. Neither of these is used in any
serious economic or policy analysis.

Media emphasize the unemployment rate but, because it is known to be
lagging and misleading, it is not considered at all by economists in
determining the start or end of a recession or depression. This is
because people stop looking for jobs when there are none to be found and
begin looking again when conditions improve. Serious analysis, including
recession and depression dating, use the separate business reporting of
actual jobs added or lost.

Despite the new record peak in the number of jobs by late 1936, because
of population growth and because more people were encouraged to seek
jobs, the unemployment rate did remain very high until public spending
programs truly exploded with the start of World War II. But even here,
it was again vastly expanded government spending, this time to fight the
war, that ended high unemployment.

Finally, Shlaes points to the long time before the Dow Jones industrial
average regained - in 1954 - its 1929 bubble levels as a key factor
"that made the Depression Great". This is, again, Shlaes's own unique
perspective, absent from serious assessments by economists but used by
her as a basis for advocating further income and capital gains tax cuts
for upper-income Americans. Unmentioned is that these policies were
implemented by President Bush and yet, over the eight years of his
presidency, the Dow Jones industrial average fell 25 percent and the
NASDAQ plummeted 48 percent.

Myth and ideology aside, the data show that from 1933 through 1936 the
New Deal produced double-digit annual growth in GDP, production,
after-tax income and private investment, with strong consumer spending
and job growth exceeding their peaks in the 1929 bubble. The Great
Depression ended by late 1936.

While a new, severe recession began in May 1937 because FDR prematurely
slashed public spending on New Deal programs, rapid growth quickly
resumed in late 1938 when funding was restored.

Today, the US and the world again face extreme crises similar to those
in the early days of the 1930s. The largely unregulated private
financial and commercial sector has utterly bankrupted itself. I
personally believe the recent and current bailout and stimulus packages
are grossly misdirected and inadequate when compared with the remarkable
trade and industrial policy strategies being implemented elsewhere,
particularly in China.

But history has shown that crisis can bring people together in common,
public purpose or it can set them against one another. Our circumstances
are far too dangerous to leave uncorrected the antigovernment
disinformation and myths from the 1930s, and in our own generation.

_____

Charles W McMillion, president and chief economist of MBG Information
Services, is the former associate director of the Johns Hopkins
University Policy Institute and a former contributing editor of the
Harvard Business Review.

See also "An Economy for All" at http://www.ourfuture.org/economy

Campaign For America's Future
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http://www.ourfuture.org/blog-entry/2009020603/fdr-failed-myth


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