The Economic Effects of the New Deal

October 29, 1929, or "Black Tuesday," marks the day the U.S. stock market came crashing down, initiating the most severe economic crisis in U.S. history, now known as the Great Depression. By 1933, gross domestic product (GDP) per capita in the U.S. had fallen nearly 29%, and the average unemployment rate had risen from 3.2% to 25.2%. Amidst this economic contraction, Franklin D. campaigned for the U.S. presidency on the promise of a “new deal” for the American people. He won the 1932 election by a landslide and began a series of reforms that, while reducing income inequality failed to pull the economy out of its depressed state—it would take the Second World War for that to finally happen.

Upon taking office in 1933, Roosevelt went straight to work on implementing reforms he hoped would stabilize the economy and provide jobs and financial relief to the American people. In his first 100 days in office, he put into effect many major laws, including the Glass-Steagall Act and the Home Owners’ Loan Act. He also implemented a number of job creation schemes like the Federal Emergency Relief Act (FERA) and the Civilian Conservation Corps (CCC).

The most significant piece of legislation, however, was the National Industrial Recovery Act (NIRA). Roosevelt believed economic recovery depended upon cooperation at the expense of competition, and consequently, the NIRA was specifically designed to limit competition while allowing both prices and wages to rise. The act allowed for industries to form a cartel, under the condition these industries would raise wages and allow for collective bargaining agreements with workers. The NIRA stayed in effect until 1935 when it was ruled by the Supreme Court to be unconstitutional.

The Supreme Court repealed the NIRA because of its suspension of antitrust laws and the tethering of collusive activity with the payment of higher wages. Strongly disagreeing with the new ruling, Roosevelt managed to get the National Labor Relations Act (NLRA) passed in 1935, which, while re-instituting antitrust legislation, did strengthen a number of labor provisions. And in practice, the government largely ignored the new antitrust laws.

Under the NLRA, workers had even greater power to engage in collective bargaining and demand higher wages than under the NIRA. The new act also prohibiting firms from engaging in discriminating among employees based on union affiliation, forcing them to recognize the rights of workers in government and company unions alike. The National Labor Relations Board (NLRB) was established to enforce all aspects of the NLRA.

Following the passing of the NLRA union membership rose dramatically from about 13% of employment in 1935 to about 29% in 1939. While doing much to improve the bargaining power of the average worker, which in conjunction with a number of tax rate increases on top incomes helped to reduce income inequality, the NIRA and NLRA failed to pull the U.S. economy out of its depressed state. (For related reading, see: A Brief History of Income Inequality in the United States.)

While the economy had somewhat recovered, it was far too weak for the New Deal policies to be unequivocally deemed successful. In 1933, at the low point of the contraction, GDP was 39% below the trend before the stock market crash of 1929, and by 1939, it was still 27% below that trend. Likewise, the number of private hours worked was 27% below trend in 1933 and was still 21% below the trend in 1939. Indeed, the unemployment rate in 1939 was still at 19% and would remain above pre-Depression levels until 1943.

For some economists, the weakness of the recovery is a direct result of the Roosevelt government’s interventionist policies. Harold L. Cole and Lee E. Ohanian argue that the anti-competitive policies of linking collusive practices to higher wage payments made the recovery much worse than it should have been. For them, unemployment remained high because of the increased bargaining power of unionized workers and the high attendant wages. Ultimately, Cole and Ohanian argue the abandonment of these anti-competitive policies coincides with the strong economic recovery of the 1940s.

While the economy did experience a strong recovery during the 1940s, a different school of thought would argue this strength was due to the massive fiscal stimulus brought about by an increase in government spending for the war effort. This more Keynesian perspective would argue the policies implemented by Roosevelt were far too small to enact a fiscal-stimulus-led economic recovery.

It is a misconception to think that the New Deal was a time of great expansionary fiscal policy. Many of the New Dealers were quite fiscally conservative, which is why the social programs they instituted were coupled with significant tax increases. They believed that debt-financed spending, the likes of what the British economist John Maynard Keynes was proposing, posed more of a threat than a stimulus to the economy.

Philip Harvey argues Roosevelt was more interested in addressing social welfare concerns than creating a Keynesian-style macroeconomic stimulus package. In 1932, Roosevelt deemed the task he faced was, “not discovery or exploitation of natural resources, or necessarily producing more goods,” but “the soberer, less dramatic business of administering resources and plants already in hand…of distributing wealth and products more equitably.”

The primary concern was not increased production and economic activity, which coupled with fiscal conservatism, guaranteed any increase in social spending would be far too small to kick-start a reeling economy. On this view, it would take the increased spending from the war effort to give the economy the boost it badly needed.

The New Deal policies implemented by Roosevelt went a long way in helping to reduce income inequality in America. But, in regards to the task of reviving an economy in crisis, the New Deal was a failure. While debates continue as to whether the interventions were too much or too little, many of the reforms from the New Deal, such as Social Security, unemployment insurance and agricultural subsidies, still exist to this day. If anything, the legacy of the New Deal is that it has helped to create greater equality and welfare in America. (For related reading, see: Market Crashes: The Great Depression.)