The New Deal: Reputation and Reality
Jim Couch, University of North Alabama
Conventional wisdom regarding the Great Depression blames laissez-faire policies for the economic collapse and credits Franklin Delano Roosevelt’s New Deal (the government’s massive response to the downturn) with aiding the stricken masses and ultimately, saving American capitalism. Current supporters of a more active public sector frequently point to the New Deal as a blueprint for the good that can be accomplished whenever government inserts itself into the private sector. Greedy business owners had caused the catastrophe; noble public servants would end it.
While critics of the Roosevelt administration’s efforts have always existed, they were relegated to far-right status. The late Senator Daniel Patrick Moynihan probably summed up this idea best when he said, “Look, there’s this particular fringe, and their one fundamental problem is they simply never accepted the New Deal. Didn’t Franklin Roosevelt settle this issue once and for all? I mean, do we really have to go over it again?”
The New Deal merits exploring again because the forces that shaped the programs and their real impact on the economy are, for the most part, grossly misunderstood. Previously undiscovered and reliable data coupled with more sophisticated methods of analysis have enabled researchers to better unravel what really happened. And critics are no longer on the fringe.
Scholarly research into the period such as Gene Smiley’s Rethinking the Great Depression—A New View of its Causes and Consequences, Jim Powell’s FDR’s Folly—How Roosevelt and His New Deal Prolonged the Great Depression and Harold Coles and Lee Ohanian’s “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis” effectively argue that government policies both exacerbated the downturn and short-circuited the economy’s self-correcting mechanism.
I would like to think that my book, The Political Economy of the New Deal, coauthored with William F. Shughart II of the University of Mississippi, contributes to a more complete understanding of the activities undertaken by the Roosevelt administration during the collapse. Our work examines the role of politics in shaping the responses formulated by the New Dealers to the crisis. Without question, the Great Depression provided an unparalleled opportunity for the federal government to demonstrate that it could and should play a larger role in the market economy.
Before I proceed, some background is necessary to place the issue in its proper historical context.
The Great Depression
As one observer put it, the Great Depression is to economics what the Big Bang is to physics. The economic collapse, along with the government’s response to the downturn, is among the most studied events in American economic history.
Hungry men standing in long soup-kitchen lines, songs like Yip Harburg’s “Brother Can You Spare a Dime?”, runs on banks and hobos riding the rails in search of work have become symbols of the era. The collapse was unprecedented in its severity leaving, at its trough, a quarter of the workforce unemployed. The collapse was likewise unprecedented in its length. As Gene Smiley explains, “It [the 1930s] is the only decade in the history of the United States in which there was no economic growth. Income per person in 1939—adjusted for changes in the general level of prices, or real income per person—was less than in 1929.” Economists Richard Vedder and Lowell Galloway shed additional light on just how unique the event was: over the past one hundred years for which data are available, the annual unemployment rate has reached double-digit levels on just 17 occasions. Ten of them occurred during the Great Depression.
Simply obtaining food became a priority for the unemployed millions—especially those who had exhausted their credit—with urban dwellers breaking up land throughout the cities in an effort to grow a few crops. Inadequate nutrition was a real problem, especially in the South.
No discussion of the misery wrought by the Great Depression would be complete without commenting on the South. A government survey of the region asserted that the lack of proper diets was on many occasions accompanied by deplorable housing. Old shacks without running water with little to protect the inhabitants from the elements were not uncommon. Death rates from malaria and typhoid were much higher than in other parts of the country and limited access to healthcare providers only served to compound the problem. The condition of the region was recognized by the administration and Roosevelt called the South the nation’s number one economic problem.
The Roosevelt Administration
With the inauguration of Franklin Delano Roosevelt on March 4, 1933, the nation witnessed what many have called an explosion of activity by the federal government. FDR’s acceptance speech of the Democratic nomination for the presidency included the phrase, “I pledge you, I pledge myself, to a new deal for the American people.” Two words from that phrase became the collective title for all the government’s efforts to bring a halt to the collapse during the period.
An effective communicator, Roosevelt talked directly to the people through what became known as his fireside chats. He explained that his programs would bring about relief, recovery and reform. Commenting on the first of FDR’s chats which addressed the banking crisis, humorist Will Rogers stated, “The president took a complicated subject like banking and made everyone understand it, even the bankers.”
The crisis, coupled with the popularity of the incoming president and a belief that laissez-faire policies had led to the economic calamity, presented a window of opportunity for members of the Roosevelt administration for a more activist public sector. New Dealer Stuart Chase crowed, “Why should Russians have all the fun of remaking a world?” Harry Hopkins, who subsequently headed the largest of the New Deal agencies, told his fellow New Dealers, “Boys—this is our hour. We’ve got to get everything we want—a work program, social security, wages and hours, everything now or never. Get your minds to work on developing a complete ticket to provide security for all the folks of this country up and down and across the board.”
And work they did. New Deal programs and legislation addressed issues ranging from housing to banking to agriculture to transportation. Myriad alphabet agencies were created to carry out the work. The administration managed farming through the Agriculture Adjustment Act (AAA), industry through the National Industrial Recovery Act (NRA), financial markets through the Securities and Exchange Commission (SEC) and provided employment opportunities to the jobless through the Federal Emergency Relief Administration (FERA), the Civil Works Administration (CWA), and the Works Progress Administration (WPA), among other agencies.
The New Dealers themselves were predominately Ivy League educated and represented, without question, the best and the brightest. They have been called articulate, humane, alert and profound; a group of people completely dedicated to public service. On the other hand, one less than enthused pundit remarked, “They came to Washington to do good, and stayed to do well.”
They certainly did not lack confidence. While tackling the complexities of American agriculture, they remained undaunted but sometimes embarrassed. New Deal historian Arthur Schlesinger reported that one New Dealer, attending a meeting to work out a macaroni code, forcefully demanded an answer to what the code would do to macaroni growers. Another on a field trip saw his first firefly and exclaimed, “Good God! What’s that?”
Roosevelt, who was more of a politician than a deep thinker, seemed to be motivated by a desire to do something, even if policies often worked at cross purposes. Jim Powell reports, “When an adviser gave FDR two different drafts of a speech, one defending high tariffs and the other urging low tariffs, FDR told his adviser: ‘Weave the two together.’” One agricultural program, the AAA, sought to curtail production of farm products while another, the RA (Resettlement Administration) provided funds to expand production. The AAA paid farmers not to plant; the Bureau of Reclamation brought water to otherwise unusable arid sections of the country to expand arable farmland. An undistributed profits tax was placed on corporations to increase dividends and thereby stimulate consumption; the social security act reduced consumption by decreasing disposable income. The AAA attempted to increase food prices relative to those of farm inputs; the NRA attempted to increase the prices of manufactured goods like farm equipment. The Reconstruction Finance Corporation was created to basically do the same thing that the Federal Reserve was designed to do. In reality, the New Deal represents a collection of special interest policies that competing factions promoted. Making rhyme or reason of it is difficult at best.
Attempting to bring some organization to the plethora of programs, historians often refer to a First and a Second New Deal. I examine the major programs of the First New Deal next.
The First New Deal
For the new president, restoring farmers’ purchasing power was the key to recovery. Thus, his attention was first focused on the farm crisis. In devising a plan, Roosevelt called on Oscar G. Johnson, manager of the one of the largest plantations in the world, Mississippi’s Delta and Pine Land plantation, for assistance. The administration’s first attempt at restoring the agricultural sector was the AAA, which attempted to raise agriculture prices through government created scarcity. As a part of the act, almost a third of the 1933 cotton crop was plowed under and between 5 and 6 million young pigs destroyed. Both measures proved to be controversial—especially the slaughter of the pigs at a time when many people were hungry. Schlesinger notes that the criticism annoyed Secretary of Agriculture Henry Wallace: “people seem to contend that every little pig has the right to attain before slaughter the full pigginess of his pigness.”
As might be expected, the programs benefited large plantation owners but created terrible problems for share-croppers, tenant farmers and farm laborers. Taking acres out of production provided an economic incentive for planters to evict and dismiss the rural poor.
Another chief component of the First New Deal was the National Industrial Recovery Act (NRA). The New Dealers believed that national planning was in order to better coordinate the activities of business and industry. Relieved of the necessity to pursue profits, these planners could ensure that business behaved in a manner consistent with social goals. Thus, codes of conduct were established for industry to adhere. The codes basically exempted the signers from anti-trust laws and amounted to a government price-fixing scheme. Firms were encouraged to maintain the prices of their goods and to keep wages from falling. In addition, production quotas were established. If the code was signed, then the business could display the Blue Eagle with the slogan, “We Do Our Part.” If a firm refused to sign, they were viewed as unpatriotic and consumers were urged to boycott such “slackers.”
In addition to creating codes of conduct, the National Industrial Recovery Act established the Public Works Administration (PWA). That agency was charged with undertaking construction projects “where the employment situation had become serious.” Among the better known structures completed by the PWA were the 100-mile causeway from Florida to Key West, the Grand Coulee Dam and the Triborough Bridge in New York City.
The Subsistence Homestead Division of the Department of the Interior sought to relocate the rural poor to planned communities. Communities typically were designed to accommodate from 25 to 100 families. Cooperative ownership arrangements were imposed so that the residents shared livestock and farm implements. Cooperative stores and, in some locations, cooperative factories were built and run. The socialist experiment was a complete failure. New Dealer and Columbia economics professor Rexford Tugwell held the homesteaders culpable because of their stubborn adherence to individualism. Indeed, Historian George Tindall reported the thoughts of one resident, “I believe a man could stay around here for five or six years and save enough money to go out and buy him a little hill farm all his own.”
Unfortunately for the New Dealers, the homestead movement caught the eye of First Lady Eleanor Roosevelt. She became involved in the Reedsville, West Virginia planned community. Some 50 prefabricated houses were ordered and shipped to the West Virginia site. While the units apparently were quite attractive, they were designed for summers on Cape Cod and were completely unsuitable for the harsh winter months in the mountains of West Virginia. Unwilling to replace the units, Mrs. Roosevelt brought in a team of New York architects to retrofit the houses to adapt to the local climate—at a substantial price tag. Whenever critics sought to point out waste and abuse with the New Deal, Reedsville was always at the top of the list.
Among the more popular of the New Deal agencies was the Civilian Conservation Corps (CCC). Jobless unmarried men between the ages of 18 and 25 were sent to camps where they performed various conservation activities. In addition to lodging and meals, each worker was paid $30 per month, three-fourths of which was sent home to the young man’s family.
The Second New Deal
The Second New Deal, which historians say began in 1935, reflected a leftward shift in the Roosevelt administration. Frustrated that the Supreme Court had ruled his AAA and NRA unconstitutional, Roosevelt pushed through legislation that launched the American welfare state. The Social Security Act established social insurance for Americans and produced the New Deal’s most enduring—and most expensive—legacy.
Perhaps the best known of all New Deal programs, the Works Progress Administration (WPA), was likewise a product of the Second New Deal. In fact, for many, the WPA is synonymous with the entire New Deal. The legislation authorizing the WPA requested a lump sum of money that was to be allocated at presidential discretion. Senator Arthur Vandenberg of Michigan led a vocal opposition to the bill:
It is probably the largest single appropriation ever made in the history of the world. It far exceeds any previous total normal budget of the whole government of the United States. In other words, it is a grant of power to the Executive to spend more than the equivalent of an entire annual budget. (US House of Representatives 1935a, p#2017)
Roosevelt estimated that the new agency would employ some 3.5 million workers and insisted that the work undertaken would be useful, that projects would be labor- intensive and that the funds would be targeted to those regions of the country in the most distress. While the WPA was a federal program, states and localities were expected to contribute to WPA projects, but no explicit matching formula was ever adopted.
The WPA, in addition to providing work for the unemployed, can point to a number of accomplishments. Through June of 1938, some 280,000 miles of roads and streets were repaired and paved, almost 30,000 bridges constructed, 153 airfields built and 4,383 school buildings were erected.
Nevertheless, the agency often was criticized because of the lack of effort of those on its payroll. The symbol that best came to represent the WPA was that of a worker leaning on a shovel. It was sometimes pejoratively referred to as “We Piddle Around.”
The WPA’s wage policy probably was its most controversial aspect. Senator Clark of Missouri pointed out the following:
The project was a dam across the Mississippi River, one end of he dam being in Illinois and the other end in Missouri. The men were engaged in doing precisely the same work, that is, clearing timber on precisely the same project, except that part of them happened to be on the Illinois end of the dam, and the other part on the Missouri end of the dam. A discriminatory ratio was set up of 64 cents an hour on the Illinois side, as against 40 cents an hour on the Missouri side, on the same project, for doing precisely the same work. (US House of Representatives 1938a, p# 921)
The Political Economy of the New Deal
All told, FDR distributed billions of federal dollars across the nation. The administration strongly argued that funds flowed where need was the greatest. And while need certainly varied from state-to-state—Roosevelt himself acknowledged that conditions in the South were alarming—the administration insisted that they were well aware of regional variations. Historian Searle Charles reported that the administration undertook “the most thorough study ever conducted . . . of the economic resources of the states in an effort to determine where federal money should go.” One New Dealer put it this way, “We are intimately in touch with the States and conditions in the States.”
Despite the administration’s claims that need was addressed—some contemporary observers began to challenge this notion. Georgia Senator Richard Russell complained: “I could no longer justify the confidence which the people of my State have shown in me by sending me to this body did I not protest against the many evident discriminations against the South in the administration of these various funds” (US House of Representatives 1939, p. 916). He continued, “the manner in which these funds have been distributed to date has a tendency to make the rich States richer, and to make the poor States and the poor people of those States poorer.”
Historian James Patterson disagrees with Senator Russell, asserting that “the correlation between relief received and state need seems to have been fairly close.” Searle Charles, who believed the administration’s efforts to uncover need were “thorough”, also believed that funds were fairly distributed: “there was actually a high correlation between the amount states were allocated and their population.”
When Senator Russell’s alleged that the South had been overlooked, Senator Ellison Smith of South Carolina pressed Russell to explain why the distribution had been unequal and, in particular, asked whether he believed politics played a role. Russell responded, “I had not intended to touch upon any political aspects of this question.” Smith asked, “Why not? The Senator knows that is all there is to it.”
Public Choice Economics
A fundamental assumption of economics is that self-interest motivates agents interacting in private markets. The public choice model extends this assumption to the actors in the public sector as well: politicians strive to maximize their chances of election or reelection, pressure groups attempt to extract favors from government and bureaucrats work to maximize the sizes of their agencies’ budget. Consistent with the assumption of self-interest, a vote-maximizing politician would rationally channel money and jobs to key electoral constituencies. Small, cohesive special interest groups are better able to secure favorable policies and programs from the government. In return, they supply political support for politicians that cater to their demands. Such behavior is especially likely in a geographically based system of representative democracy where political favors are delivered to narrow, well-organized groups but whose costs are spread diffusely over taxpayers in general.
Nobel Laureate George Stigler advises how to determine the true purpose of government’s actions. “The theory tells us to look, as precisely and carefully as we can, at who gains and who loses, and how much, when we seek to explain . . .” a policy outcome. Regarding the New Deal, one obvious winner was FDR.
Anecdotal evidence of the administration’s willingness to use New Deal dollars for political purposes was provided by Harry Hopkins when he supposedly boasted, “We shall tax and tax, and spend and spend, and elect and elect.”
Of course, the nature of presidential elections in America shapes political strategies. Presidents are not chosen by the popular vote but instead on the basis of the electors chosen by the voters in each state. The candidate receiving the majority of a state’s popular vote wins all of that state’s electoral votes—thus, 51 percent of the vote is as good as a landslide. This means that votes cast in excess of the minimum winning margin in one state are less valuable than votes which enable the candidate to capture a majority in another state. In short, some states are more important electorally than others.
One would expect FDR to allocate largesse where the marginal political return was the highest. Thus politically safe constituencies will tend to be ignored, everything else the same. The same region with the greatest need—the South—was also home to the most loyal supporters of the administration. For victory, Roosevelt needed urban voters and union members to turn out. In addition, certain western swing states were critical to FDR’s reelection hopes in 1936 and 1940.
Whether President Roosevelt pursued his own self-interest by attempting to spread funds where votes would be decisive or whether he distributed money to those with the most need as he claimed was a matter of conjecture and speculation until the discovery of a set of detailed reports produced by his administration.
An analysis of New Deal expenditure patterns was made possible with the discovery of documents produced by a somewhat obscure federal agency. The discoverer, Leonard Arrington, declared, “Prepared late in 1939 by the Office of Government Reports for the use of Franklin Roosevelt during the presidential campaign of 1940, the 50-page reports—one for each state—give precise information on the activities and achievements of the various New Deal economic agencies.”
The documents make clear what some had asserted—the distribution of New Deal dollars was far from uniform. On a per-capita basis, people living in the western and mountain regions of the United States received substantially more dollars than did other regions of the country. As the public choice model would predict, the politically safe states of the South, in spite of their economic plight, received the fewest dollars from the administration. The difference between the top recipient state and the bottom recipient state was ten-fold. Individual programs exhibited the same pattern. For example, total AAA expenditures between 1933 and 1939 per farmer amounted to $271.32 in North Dakota; $ 212.92 in Nebraska and $129.01 in Illinois, but only $68.50 in both the agricultural dependent states of Alabama and Georgia.
Some have made the reasonable argument that cost-of-living differences accounted for the admittedly uneven distribution. While living costs were lower in the South—the labor department estimated an annual cost-of-living for residents of Memphis, Tennessee for example, to be $1,252.77, while the annual costs-of-living for residents of Boston, Massachusetts and Buffalo, New York were $1,350.50 and $1,283.81 respectively, the differences are not sufficient to explain the large cross-state variances in the allocation of funds.
Regression analysis can be used in an effort to determine what factors underlay the decisions by which funds actually were allocated across the states. The results are interesting and yield strong support for the hypothesis that politics propelled the New Deal. In short, a public choice explanation of the New Deal is strongly supported.
First examining total spending per capita, more funds perversely flowed to states where employment recovered more quickly to pre-crash levels. This rather perverse result is present in the agricultural sector as well: expenditures increased in states with more valuable farmland. The model offers support for a political explanation for the pattern of spending that emerged. In particular, holding other things equal, more federal dollars flowed to states that supported FDR more solidly in the 1932 election and which were crucial to the president’s Electoral College strategy.
A purely political model controlling for presidential reelection and congressional influence, excluding any of the “need” variables, explains over two-thirds of the variation in per capita federal spending across the states. Political considerations obviously weighed heavily in shaping the Roosevelt administration’s list of priorities.
An analysis of individual New Deal programs or combinations of New Deal programs that targeted a particular segment of the economy all yields the same result. Political variables by themselves generally explain more of the cross-state variation in New Deal expenditures that do variables measuring a state’s economic need.
New Deal apologists have argued that matching requirements—particularly those required by the Works Progress Administration—account for the spending pattern that emerged. According to this line of thought, the federal government’s intentions were compassionate and noble but intransigent state officials blocked relief efforts. States with more progressive leaders were willing to raise funds for matching purposes while other, more backward state leaders were not.
As mentioned earlier in the essay, while the WPA required a match, the amount was at the administration’s discretion and was not uniform from state-to-state. An effort was made to adopt a strict matching requirement of 25 percent of total project costs for a WPA grant. The measure was defeated, being vigorously opposed by FDR and Harry Hopkins, the administrator of the WPA, who argued that a consistent contribution would make it difficult for poorer regions to obtain much needed grants.
Uncovered in our study of the New Deal, the actual amount of money contributed by each state to WPA projects is an available statistic recorded in the Congressional Record 1939:921. The Roosevelt administration turned the Biblical admonition, “every one to whom much is given, of him will much be required” (Luke 12:48), on its head. Those states that received the largest grants tended to be those states that made the smallest matching contributions. Moreover, poorer states were systematically required to contribute larger, not smaller, amounts of money and materials in return for getting their projects funded. For example, Tennessee, a relatively poor state, contributed 33.2 percent of total WPA expenditures while the relatively rich state of Pennsylvania contributed only 10.1 percent.
A matching explanation for the pattern of spending that emerged is simply not supported. However, the public choice explanation for the behavior of politicians gains even greater credibility as we continue our examination of the activities of the Works Progress Administration.
Empirical evidence indicates that WPA grants flowed more freely to states with higher per-capita incomes. Results also suggest that grants from the organization were significantly lower in states with larger minority populations. This contrasts sharply with some of the historical accounts of the New Deal, which emphasize its color-blindness. For example, historian Carl Degler stated, “Evenhandedly distributed federal relief funds were a gift from heaven to the black man, who was traditionally hired last and fired first.”
An investigation of the political forces that shaped the WPA adds support for the public choice model. States whose senators enjoyed greater seniority received significantly larger appropriations as did states whose senators voted in favor of the initial, and somewhat controversial, legislation creating the agency and providing the funding mechanism.
Evidence of the political motives of the WPA had already been adduced by economist Gavin Wright, who had studied the original documents as well. Observing funding and employment across time, it appears that the administration’s compassion for the poor and unemployed followed a 2-year cycle. Wright explains, “WPA employment reached peaks in the fall of election years and the pattern is most pronounced when employment is measured relative to indices of need.”
State Level Expenditures
Because of the richness of the data set produced by the Roosevelt administration, an analysis of expenditures within the states is also possible. Thus, it is possible to follow the flow of New Deal dollars all the way from Washington to the county level. The public choice model would predict that state level politicians succumb to the same temptation that influenced FDR, exert their influence to see that the dollars were distributed within the state in a manner that advances their well-being even if those with the greatest need of help are ignored. In short, private interests will triumph over the public interest. Peter Williams of the University of North Alabama and I explore the state of Alabama to determine if need, politics or some combination of both influenced how dollars were distributed. The results of our effort are reported in the journal Economics and Politics (“New Deal or Same Old Shuffle” Volume II, Number 2, July 1999).
Alabama provides an interesting test case in part because of its governor during the period. Bibb Graves was a staunch ally of FDR and joyfully referred to his first term in office as the “greatest public welfare program any commonwealth ever had.” He liked to be called “Bibb the Builder” because of the numerous public structures erected during his term and was particularly candid about his intentions. In a 1934 speech in Selma, Alabama, he proclaimed, “those who helped him bake the pie would help him eat it.”
Per capita total New Deal expenditures aggregated from 1933 until 1939 (a weakness of the county-level data is that it reports the total amount over the entire period so that an analysis of how the spending evolved over time is impossible) varied widely from county to county. Citizens in the county that received the largest appropriation received 3.5 times the amount received by citizens in the county that received the smallest appropriation. This disparity might be called for if need dictated such a distribution. However, just as in the case of the allocation to the states, more prosperous areas of Alabama received the lion’s share of the funds.
And as before, political considerations cannot be ignored. As the percentage of a county’s vote cast for Bibb Graves in the 1934 election increased, so did the amount of funds flowing to the county. The evidence strongly suggests that voters were rewarded for their support. Counties whose representatives were members of the Alabama legislature’s powerful House Ways and Means Committee likewise received larger appropriations. In addition, increased seniority of a county’s state congressional delegation translated into additional dollars.
Whether the allocation of dollars is examined across the states or within a state across its counties, the rhetoric of the New Dealers simply does not match reality. Reelection, not relief, recovery and reform, guided the creation of the programs and how they operated.
As an economic policy appropriate for combating the Great Depression, the New Deal most certainly failed. Wrong-headed programs designed to reduce output did just that. Threats to private property rights decreased businesses willingness to invest. Neither of these ideas are even remotely the prescription for ending a downturn in economic activity, much less a collapse. Economist Christina Romer noted that the Great Depression was not limited only to the United States but was instead worldwide in scope. Yet, she explains, “recovery occurred in 1932 for New Zealand; 1933 for Japan, Greece and Romania; 1934 for Chile, Denmark, Finland and Sweden; 1935 for Estonia, Hungary, Norway and the United Kingdom; 1936 for Germany; and 1937 for Canada, Austria and Italy. The United States . . . did not recover before the end of the sample in 1937.”
As a mechanism for building a winning political coalition, the New Deal was a remarkable success. FDR was elected overwhelmingly in 1936 and again in 1940 in part because of the votes of the constituencies that benefited disproportionately from New Deal appropriations.
As previously stated, the Great Depression was viewed as a tremendous opportunity to showcase the humanitarian heights to which an activist federal government could reach. However, viewing the actions of the New Dealers through the lens of public choice provides strong evidence that the government, at a time when suffering was real and misery widespread, pursued narrow, self-interested goals. The analysis provides important lessons for today. Evidence that ordinary interest-group politics helped shape the government’s (federal and state) responses to the century’s greatest economic crisis should help to dispel the myths underpinning demands for collectivist answers to more current perceived plights.