Analysis: FDR's policies get New Deal of criticism from revisionists
March 8, 2009 5:00 AM
A Works Progress Administration crew builds a new farm-to-market road along Knob Creek in Tennessee in March 1936.
By James O'Toole Pittsburgh Post-Gazette
British Prime Minister Gordon Brown came to Washington last week sounding the call for a global New Deal in the face of the world's financial crisis.
His allusion to the policies of the revered President Franklin D. Roosevelt came as economists and historians were engaged in a renewed debate on the legacy of his signature domestic program. While he and the New Deal have been hailed by Democrats and many historians as saviors of American capitalism, a strain of revisionist thinking is willing to give him credit for his leadership in World War II, but argues that his administration's policies actually prolonged the Great Depression.
In the context of Washington's struggle to navigate new financial straits, the stakes in the debate have been lifted beyond a president's reputation. Almost all sides in Washington and world markets are looking at the era for lessons on how to proceed now.
In his former life as a scholar, Federal Reserve Chairman Ben Bernanke focused much of his research on the lessons of the Great Depression.
"But one of the good things about reading history is you learn a good deal," Senate Minority Leader Mitch McConnell asserted last month. "And, we know for sure that the big spending programs of the New Deal did not work. In 1940, unemployment was still 15 percent. And, it's widely agreed among economists, that what got us out of the doldrums that we were in during the Depression was the beginning of World War II."
Mr. McConnell vastly overstated the degree of unanimity on that view. The New Deal's defenders probably still outnumber its critics, but the revisionist view has reached new prominence in recent years.
The resolution of the argument may be impossible, as it depends in part on speculation on what might have happened if alternative policies had been followed. It also depends on a common definition of just which policies constituted the New Deal -- a consensus that the contending voices have yet to reach.
Mr. Roosevelt came to power in 1933 confronted by economic stagnation, bank runs, and unemployment of roughly 25 percent. In his first inaugural address he promised action, and he delivered, in a variety of different and sometimes contrary directions.
Perhaps the most prominent voice among the FDR skeptics is Amity Shlaes, author of "The Forgotten Man: A New History of the Great Depression."
Her work, a lightning rod for praise and criticism when published in 2007, blames Roosevelt administration policies for the fact that American unemployment remained stubbornly high and the stock market depressed throughout the 1930s.
"It's not about whether someone was good or bad, but whether the policies worked," she said in an interview last week.
One prime target, in her book and in more recent commentary, is the National Industrial Recovery Act, which sought to combat fears of deflation by setting up codes of competition and wage policies governing hundreds of industries. The act was declared unconstitutional in 1935, but Ms. Shlaes and other critics blame it for stifling recovery through a heavy hand on the marketplace.
"These codes distorted the economy by artificially raising wage and prices, restricting output, and reducing productive capacity by placing quotas on industry investment in new plants and equipment,'' the economists Harold Cole and Lee Ohanian wrote in a recent Wall Street Journal essay, "How Government Prolonged the Depression.''
Roosevelt critics also note that after the nation began to shake off the worst ravages of a downturn that started in 1929 and lasted through the spring of 1933, the Roosevelt administration presided over another sharp downturn that began in the spring of 1937, after the administration raised taxes and cut some spending out of concern over budget deficits.
"You have to get yourself into real contortions to say that the New Deal worked," Ms. Shlaes said.
Mr. Roosevelt's defenders respond that the New Deal was not perfect, but that it was, on the whole, a creative and effective response to an economic threat and one that laid the foundation for the growing prosperity of the post-war era. If the economy's progress was halting in the '30s, they argue, it could have been much worse without the steps that the Roosevelt administration put in place.
The administration proclaimed a bank holiday as it took office -- allowing banks to be strengthened and reopened and eventually curtailing runs by panicked depositors. Congress passed the Glass-Steagall Act strengthening regulation and curtailing speculation by banks.
The public's confidence in a ravaged banking industry was also buttressed by the creation of the Federal Deposit Insurance Corporation to put the faith of the federal government behind their deposits. The confidence of investors was shored up by the creation of the Securities and Exchange Commission.
The administration also established relief agencies such as the Civilian Conservation Corps and the Works Progress Administration, building public works and providing millions of jobs and paychecks to idled workers. And it created the Social Security system to sustain retirees and disabled workers.
The relief agencies are gone, but most of the rest of those initiatives remained part of the nation's economic infrastructure through decades of rising prosperity.
"Imagine how much worse the financial crisis would be if the New Deal hadn't insured most bank deposits," New York Times columnist and Nobel Prize-winning economist Paul Krugman wrote last year. "Imagine how insecure older Americans would feel right now if Republicans had managed to dismantle Social Security."
But that prosperity remained elusive throughout FDR's first two terms.
Economic progress in those years, many economists agree, also was inhibited by wrong-headed policies by a Federal Reserve board that saw the road to recovery paved by tight monetary policies and high interest rates. Mr. Roosevelt's steps to balance the budget after his 1936 re-election also were a product of the balanced-budget orthdoxy he shared, though didn't always observe.
Mr. Krugman is a harsh critic of Roosevelt revisionists, but he wrote that President Obama "should learn from FDR's failures as well as from his achievements: the truth is the New Deal wasn't as successful in the short run as it was in the long run. And the reason for FDR's limited short-term success, which almost undid his whole program, was the fact that his economic policies were too cautious."
When the perceived failings of the New Deal are invoked in the context of the current economic debate by figures such as Mr. McConnell, they are raised as a cautionary tale on the excesses of deficit spending. They argue that the massive stimulus measure and short-term budget red ink proposed by the Obama administration represent a repeat, on a gargantuan scale, of what they characterize as the mistakes of the 1930s.
But liberal Democrats such as Mr. Krugman contend that it is a rewriting of history to portray the early Roosevelt years as a festival of Keynesian excess. The British economist John Maynard Keynes is seen, for good and for ill, as the author of the most influential intellectual justification for deficit spending.
In his "General Theory of Employment, Interest and Money," he wrote that the market was not a self-correcting mechanism and instead could reach equilibrium at an unacceptably low level of economic activity. In such circumstances, he argued, the government should be ready to spend money to compensate for the lack of demand generated by the private sector. That work was published in 1936, just as the Roosevelt administration was poised to enact a fiscal belt-tightening that defied its central prescription.
Bruce Bartlett, an adviser to both President Ronald Reagan and George H.W. Bush, though a sharp critic of the second President Bush, wrote in an essay in Forbes Magazine last month that one problem with Mr. Roosevelt's early economic policies was that his deficits were not large enough to compensate for the dearth of private spending in the Depression economy.
Mr. Krugman, an advocate of robust stimulus spending by the Obama administration, wrote last year that "what saved the economy was the enormous public works project known as World War II, which finally provided an economic stimulus adequate to the nation's needs."
Ms. Shlaes, who is also a skeptic on much of the Obama response to the current economic crisis, said that the unique circumstances of the war years -- with factors such as rationing, price controls and heavy regulation of business -- make them an unreliable guide for future policies. She observed that one of the factors that most set the stage for the nation's post-war prosperity was the fact that the American economy emerged largely intact in a world of rubble.
To resolve this argument with absolute confidence, you would need to journey into a wilderness of what-ifs. What would have happened if the New Deal Brain Trusters had used a lighter hand on the economy, allowing business freer rein to find its own recovery?
Without the New Deal's relief efforts and new regulatory structures, in a time when communism and fascism were rampant, would a shaken public have continued to have confidence in the American brand of capitalism?
Scholars on all sides enlist powerful arguments on those and other questions about the New Deal. But history does not disclose its alternatives.
Mr. Roosevelt himself wasn't always the best guide to the direction he had in mind for the country. More focused on means than ends, the New Deal was often more a series of pragmatic experiments than a coherent package of complementary programs.
In 1932, Mr. Roosevelt stood in Forbes Field blistering the Hoover administration for failing to maintain a balanced budget and promising to correct that lapse.
"Four years later," Jonathan Alter wrote in "The Defining Moment, FDR's Hundred Days and the Triumph of Hope," "when Roosevelt was running for re-election, the country was still in the Depression and the Republican candidate -- Alf Landon -- cited Roosevelt's Forbes Field speech in every address that he gave, accusing the President of having misled the public and having failed on his promises.
"Outraged, Roosevelt ordered his staff to book an engagement at that same Forbes Field and to get out that old speech so that he could go before the people and demonstrate -- point by point -- how he had done precisely what he said he would do," Mr. Alter wrote. "After reviewing the speech, Roosevelt's advisers came back and said, "Mr. President, we've canceled the trip to Forbes Field. And if anyone asks you about a speech there in 1932, deny that you ever gave it."
FDR did come back to Forbes Field in 1936, defending what looked like fairly modest deficits and pledging that his policies were leading to a path out of governmental red ink.
"Compare the scoreboard which you have in Pittsburgh now with the scoreboard which you had when I stood here at second base in this field four years ago,'' he urged.
Historians and economists still argue over that score.