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Economics 134
Spring 2013
Christina Romer
David Romer
LECTURE 14
The New Deal
March 7, 2013
Announcements
• Midterm exam is next Tuesday (March 12th).
• You will not need a blue book.
• Last year’s midterm is on the class website.
• Review sessions are listed on the website as
well.
I. OVERVIEW OF THE NEW DEAL
What do we mean by the New Deal?
• Wide range of actions taken by Roosevelt to
deal with the Depression.
• Included government spending, financial
rehabilitation, industrial and farm policies,
and safety net and labor legislation.
• Characterized by an activist approach to
generating recovery.
Government Spending on Relief
• Civil Works Administration (CWA) (November 1933)
Provided millions of jobs in the winter of 1934
• Civilian Conservation Corps (CCC) (April 1933)
Hired young people to build parks
• Works Progress Administration (WPA) (May 1935)
Hired unemployed to work on a vast array of public
investment projects, including roads, bridges, dams,
art, etc.
Financial Rehabilitation
• Reconstruction Finance Corporation (RFC) (Jan. 1932,
expanded under Roosevelt) Recapitalized banks
• Federal Deposit Insurance Corporation (FDIC) (passed
June 1933, took effect in 1934 and 1935) Provided
deposit insurance
• Home Owners’ Loan Corporation (HOLC) (June 1933)
Bought distressed mortgages and modified them.
Programs to Raise Prices
• Devaluation and monetary expansion
• National Industrial Recovery Act (NIRA) (June 1933)
Set up codes of conduct for business to limit
competition and establish minimum wages.
(Declared unconstitutional in May 1935)
• Agricultural Adjustment Act (AAA) (May 1933)
Paid farmers to limit production to raise farm prices
Social Safety Net and Labor Legislation
• Social Security Act (August 1935) Established both
old-age insurance (pensions) and unemployment
insurance
• National Labor Relations Act (Wagner Act) (May
1935) Encouraged collective bargaining
• Fair Labor Standards Act (June 1938) Prohibited child
labor, set maximum hours and minimum wages
II. SIZE AND LIKELY IMPACT OF FISCAL ACTIONS IN
THE 1930S
Federal Receipts, Expenditures, and Surplus
(as a percent of GDP)
20.0%
15.0%
Expenditures
10.0%
5.0%
Receipts
0.0%
-5.0%
Surplus
-10.0%
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941
A negative budget surplus is a budget deficit.
Key Fiscal Actions
• 1932 tax increase
• Start of New Deal Spending (mainly in 1934)
• Veterans Bonus 1936
• Start of Social Security taxes in 1937
• Increase in spending and taxes in 1941 related
to World War II
High-Employment Surplus
• What the surplus would be at full
employment.
• In the interwar era, the main piece of the
surplus that was sensitive to the state of the
economy was tax revenues.
• The change in the high-employment surplus is
a measure of the change in fiscal policy.
Change in Federal High-Employment Surplus
(as a percent of GDP)
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941
A negative number is an expansionary change in fiscal policy;
positive is contractionary.
Size of the New Deal Fiscal Expansion
• Moderate in an absolute sense; small relative
to the size of the problem.
• For comparison, the change in the highemployment surplus in 2009 was -4.2%.
• New Deal fiscal policy varied between
expansionary and contractionary.
Analytics of Roosevelt’s Fiscal Actions
LM0
r
0 – πe0
IS1
IS0
Y0 Y1
Y
Y
IS1 corresponds to a moderate overall fiscal expansion.
Could fiscal actions have had unusually
large effects working through confidence?
Roosevelt’s First Inaugural Address
This great Nation will endure as it has endured, will revive and
will prosper. So, first of all, let me assert my firm belief that the
only thing we have to fear is fear itself—nameless,
unreasoning, unjustified terror which paralyzes needed efforts
to convert retreat into advance. …
Our greatest primary task is to put people to work. This is no
unsolvable problem if we face it wisely and courageously. It can
be accomplished in part by direct recruiting by the Government
itself, treating the task as we would treat the emergency of a
war, but at the same time, through this employment,
accomplishing greatly needed projects to stimulate and
reorganize the use of our natural resources.
Roosevelt’s First Inaugural Address
I am prepared under my constitutional duty to recommend the
measures that a stricken Nation in the midst of a stricken world
may require. These measures, or such other measures as the
Congress may build out of its experience and wisdom, I shall
seek, within my constitutional authority, to bring to speedy
adoption.
But in the event that the Congress shall fail to take one of these
two courses, and in the event that the national emergency is
still critical, I shall not evade the clear course of duty that will
then confront me. I shall ask the Congress for the one
remaining instrument to meet the crisis—broad Executive
power to wage a war against the emergency, as great as the
power that would be given to me if we were in fact invaded by
a foreign foe.
III. IMPACT OF THE VETERANS’ BONUS OF 1936
Average Veteran’s Bonus was $547 in 1936
Hausman’s Evidence on Impact of Bonus
• Individual expenditure survey
• American Legion survey of members’
spending plans
• Strengths and weaknesses
American Legion Survey
Darker shades mean more veterans per 100 people.
…
American Legion Survey Tabulations
…
Hausman’s Evidence on Impact of Bonus
• Individual expenditure survey
• American Legion survey of members’
spending plans
• Strengths and weaknesses
• Cross-state evidence
• Strengths and weaknesses
Number of Veterans across States
Darker shades mean more veterans per 100 people.
1936 Change in Car Purchases per Capita
Veterans and Car Sales by State in 1936
Veterans per Capita in 1930
Car sales were higher in states with more veterans.
Hausman’s Bottom Line
• Veterans’ Bonus likely raised GDP growth by
2.5% to 3% in 1936 (actual growth was 13%).
• Reduced the unemployment rate by 1.3 to 1.5
percentage points (actual unemployment rate
was 17%).
IV. SHLAES’S CRITIQUE OF THE NEW DEAL
Key Themes of The Forgotten Man
• There were some macro shocks (though not
much emphasis on monetary ones).
• Government response made them worse.
• Hoover and Roosevelt were both bad, but in
different ways.
• Policy response delayed recovery.
How does Shlaes think policy delayed
recovery?
• Vague, broad legislation created uncertainty.
• Tax increases hurt business investment.
• Government relief dulled incentives to work.
Evaluation of Shlaes’s Evidence
• What evidence does she have?
• Is it convincing?
• How would you test her ideas empirically?
V. IMPACT OF THE NATIONAL INDUSTRIAL
RECOVERY ACT
What did the NIRA do?
π
π1
π0
IA1
IA0
Y0
Y
Y
Incorrect Analysis of the NIRA
π
π1
π0
IA1
IA0
AD0
Y1 Y0
Y
Y
Modern Analysis of the NIRA
π
π1
π0
IA1
IA0
AD0
Y0 Y1
Y
Y
NIRA may have raised expected inflation even
more than actual inflation.
r
LM0
0 – πe0(π0)
0 – πe1(π1)
IS
Y0
Y1
Y
VI. EXPLAINING THE RECESSION OF 1937-38
2.2
1.2
1
1929-01
1929-07
1930-01
1930-07
1931-01
1931-07
1932-01
1932-07
1933-01
1933-07
1934-01
1934-07
1935-01
1935-07
1936-01
1936-07
1937-01
1937-07
1938-01
1938-07
1939-01
1939-07
1940-01
1940-07
1941-01
1941-07
Industrial Production (Logarithms)
Industrial Production, 1929-1941
2.4
August 1929
May 1937
2
1.8
1.6
June 1938
1.4
March 1933
Figuring out cause of the 1937 recession is
important:
• Shlaes implies it was the result of New Deal.
• What are other explanations?
Possible Causes of the 1937-38 Recession
• Fiscal contraction
• Monetary contraction
• Change in expectations
• Supply shock
Federal Receipts, Expenditures, and Surplus
(as a percent of GDP)
20.0%
15.0%
Expenditures
10.0%
5.0%
Receipts
0.0%
-5.0%
Surplus
-10.0%
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941
Budget deficit fell substantially in 1937.
Fiscal Shocks in 1937
• End of the one-time veterans bonus
• Introduction of Social Security payroll tax (less
than 1% of GDP, but not small)
15
01/31/1929
07/31/1929
01/31/1930
07/31/1930
01/31/1931
07/31/1931
01/31/1932
07/31/1932
01/31/1933
07/31/1933
01/31/1934
07/31/1934
01/31/1935
07/31/1935
01/31/1936
07/31/1936
01/31/1937
07/31/1937
01/31/1938
07/31/1938
01/31/1939
07/31/1939
01/31/1940
07/31/1940
01/31/1941
07/31/1941
M1 (Billions of $)
Money Supply
50
45
40
35
30
25
20
The money supply fell in 1937-38 – but was that a cause of
the recession or a consequence?
Monetary Shock in 1937
• Doubling of reserve requirements.
• Sterilization of gold inflows lowered the
growth rate of the money supply.
Expectations Shock
• Roosevelt started to sound less committed to
reflation.
• This could have raised real interest rates.
Possible Sectoral Shock
• National Labor Relations Act passed in 1935.
• Led to wage increases in some industries,
particularly autos.
• This could have affected the timing of
production and sales in autos.
Bottom Line on the New Deal
• Monetary actions very important.
• Fiscal actions somewhat helpful; may have also
mattered through confidence.
• NIRA may have been helpful by raising expected
inflation.
• Policy could have also had negative effects, but do
not yet have evidence for this.
• The 1937-38 recession was more likely the result of
the winding down of New Deal policy than of overly
aggressive policy.