Introduction to New Deal Economics 639 American University

Introduction to New Deal Economics 639 / American University / Vaughan 1

New Deal • Domestic programs enacted between 1933 and 1938 under leadership of President Franklin D. Roosevelt (FDR). • Historians distinguish between first and second New Deal: – First, 1933– 34 (includes “ 100 Days”) – Second, 1935– 38 more “liberal” (i. e. , social-justice focus) and controversial. • Consensus of economic literature is most “recovery” programs ineffective or counterproductive (more later) • Many historians (David Kennedy, Stanford) believe FDR placed social reform above economic recovery 2 - 11

Key Parts of First New Deal (from Macro/Finance Perspective) • Bank Holiday (1933) • Suspension of Gold Standard (1933 -34) • Glass Steagall Act (1933) – Separation of commercial / investment banking – Creation of FDIC (Federal deposit insurance) • Securities and Exchange Commission (1934) • Tennessee Valley Authority (1933) • Other Jobs/Public Works Programs – Civilian Conservation Corps (1933) – Public Works Administration (1933) • Agricultural Adjustment Act (1933) • National Industrial Recovery Act (1933) Later struck down by Supreme Court 3 - 11

Key Parts of Second New Deal (from Macro/Finance Perspective) • Social Security Act (1935) – Social Security • Payroll taxes started 1937; benefits first paid 1940 – Unemployment Compensation – Aid to Dependent Children • Banking Act of 1935 – Reorganized Federal Reserve • National Labor Relations Act (Wagner Act, 1935) • Works Progress Administration (1935) • Fair Labors Standards Act (1938) – Included Federal minimum wage • Tax Hikes – Increased progressivity of income tax (1935) – Undistributed corporate profits tax (1936) 4 - 11

Closing Thoughts FDR not Keynesian • General Theory not published until 1936. • Remained committed to budget balancing (though it not as important as other goals). • AD stimulus from 1930 s deficits insufficient (more later) 5 - 11

Closing Thoughts Continued Why did return to trend take so long (1941/42)? • “Pro” New Deal Economists: ‒ Initial AD shock large and contraction deep ‒ Fiscal stimulus virtually nonexistent ‒ Fed doubling of reserve requirements and tax increases interrupted recovery with 1937 -38 “Roosevelt Recession” (AD↓). • “Anti” New Deal Economists: ‒ “Frictions” from New Deal policies slowed / stymied recovery (AS↓). ‒ Uncertainty (about policy, property rights) added drag (AD↓, AS↓). Consensus: All played role, except lack of stimulus (under debate). Recent research has focused on aggregate supply “drag” from New Deal policies. 6 - 11

Closing Thoughts FDR Economic Policy Successes • Bank Holiday / Licensing – Restored confidence in banking system • Creating FDIC – Permanently ended “runs” and attendant collapse of money supply. • Leaving Gold Standard • Creating SEC • Jobs Programs / Public Works (? ) 7 - 11

Impact of New Deal Jobs Programs Difference between blue and red lines is impact of New Deal jobs programs. 8 - 11

Closing Thoughts FDR Economic Policy Failures • National Industrial Recovery Act – Promoted higher prices/wages and lower output when GDP needed to grow and prices/wages needed to be flexible. • Banking Act of 1935 – Gave newly created Board of Governors power to set reserve requirements (used disastrously in 1936 -37). • “Atmospherics” – anti-business/anti-wealthy rhetoric, frenetic introduction/abandonment of new policies, Supreme Court Packing, etc. – Created policy uncertainty and insecurity about property rights. 9 - 11

Closing Thoughts FDR Economic Policy Failures • Agricultural Adjustment Act – Paid farmers not to produce when people were hungry. • Glass Steagall – Kept commercial and investment banks from exploiting economies of scope. – Put U. S. commercial banks at competitive disadvantage relative to banks in Europe and Japan. • Miscellaneous AD/AS “Drag” – Tax increases – Labor unrest following Wagner Act – Introduction of Federal minimum wage. 10 - 11

Final Points • Economic policies labeled successes or failures mostly based solely on short-term contribution to recovery. • Some “failures” successes from long-term, socialjustice standpoint. – Social Security, for example • Some “successes” caused major problems later. – Moral hazard in deposit insurance ultimately cost federal government billions in 1980 s. 11 - 11