The Great Depression, Pt. II

In Part I of this series, New Deal Democrat and I looked at the years 1929 - 1933. These years saw a decline of 25% in the chained GDP figures; a failure of 20% of commercial banks, a drop in personal income from $90 billion to $50 billion and a drop in the level of industrial production from 60 to 30. The contraction was the most severe of the last 100 years. Let's take a look at years 1934 - 1940 to see how the economy performed.

''At the end of February, we were a con-geries of disorderly panicstricken mobs and factions. In the hundred days from March to June we became again an organized nation confident of our power to provide for our own security and to control our own destiny.'' - Walter Lippman, 1933

Above is a chart from 1929 - 1940 of total US GDP in chained 2000 dollars. Notice a very important point: the US economy had increased in size from 1934 to 1937 to its 1929 level. In other words, the US economy wiped out the total losses of the 1929 - 1933 contraction in 4 years.

If you don't want to believe the graph, here is the raw data for Real GDP by Year:

1929 $865.2 Billion
1930 790.7
1931 739.9
1932 643.7
1933 635.5
1934 704.2
1935 766.9
1936 866.6* In 1936, real (inflation adjusted) GDP surpassed that of 1929!
1937 911.1
1938 879.7
1939 950.7

Not only that, but by the end of 1936, Industrial Production had also returned to its 1929 peak:

Auto sales in 1936, at 4,616,000 cars and trucks, of which 3,807,000 were passenger cars, surpassed the 1928 level of 4,599,000 cars and trucks, trailing only the 1929 sales of 5,651,000 cars and trucks.

The reason for this is a rapid rate of growth:

The economy grew 10.8% in 1934, 8.9% in 1935, 13% in 1936 and 5.1% in 1937.

And by 1937 the unemployment rate was back under 10%:

(Note: the dotted line is the official current calcuation of the Historical Statistics of the United States that counts workers employed in government makework/infrastructure jobs; the solid line, commonly used by New Deal doubters, is an outdated, former series) that treated such workers, who earned a paycheck, as unemployed!)

Here's the reason for the difference in umemployment readings:

These estimates for the years prior to 1940 are intended to measure the number of persons who are totally unemployed, having no work at all. For the 1930's this concept, however, does include one large group of persons who had both work and income from work--those on emergency work. In the United States we are concerned with measuring lack of regular work and do not minimize the total by excluding persons with made work or emergency jobs. This contrasts sharply, for example, with the German practice during the 1930's when persons in the labor-force camps were classed as employed, and Soviet practice which includes employment in labor camps, if it includes it at all, as employment

Consider these achievements in the face of the claim by the right wing noise machine that FDR extended the Great Depression. These claims are entirely false based on the above data. In fact, it was a mere three years before the economy had again increased to its 1929 level, indicating something was indeed working.

Let's sum up some key points made in this series so far:

1.) The US economy lost roughly 1/4 of its GDP from 1929 - 1933. In other words, FDR started in one of the deepest economic holes faced by any new administration.

2.) By the end of his first administration he had returned the country to its 1929 level of GDP. He did this with a rapid rate of economic growth as evidenced by the raw GDP growth numbers and decent employment growth.

Here's an explanation from Paul Krugman on what happened.

In 1934 and 1936, the GOP made many of the same arguments against the New Deal that the right-wing echo chamber is parroting now. Those arguments were considered by the electorate and their verdict was overwhelming: in a rare occurence, the incumbent Democratic party increased its seats in both the House and Senate in the off-year 1934 election, and FDR won a landslide re-election victory in 1936.

Stay tuned for parts III and IV.

Comments

[realpolitic]

Dugan, this article explains the reasons behind the fall in private investment that FDR inherited. It was a much more complex set of circumstances than your argument that his policies resulted in a lack of private investment.

"The chain of causes of the Great Depression thus leads back to the restrictive monetary policies of the Federal Reserve System. Those policies led to fear of bank collapses which caused the money multiplier to decline thus leading to a decrease in the money supply. This decrease in the money supply led to deflation which raised the real interest rate to extraordinary levels. This drastically discouraged investment purchases causing the level to decline by about 90 percent. Businesses found they were not selling as much as they had been producing. This led to cutbacks in production and layoffs of the labor force. The decline in employment then resulted in reduced incomes and consequently reduced consumer purchases leading to further cutbacks in employment and reductions of income. "

http://www.sjsu.edu/faculty/watkins/dep1929.htm

[realpolitic]

Alarmed by Roosevelt's plan to redistribute wealth from the rich to the poor, a group of millionaire businessmen, led by the Du Pont and J.P. Morgan empires, plans to overthrow Roosevelt with a military coup and install a fascist government. The businessmen try to recruit General Smedley Butler, promising him an army of 500,000, unlimited financial backing and generous media spin control. The plot is foiled when Butler reports it to Congress.

http://www.huppi.com/kangaroo/Timeline.htm

[DuganS1]

Note that WPA workers (3.3 million) who were only part time workers.

"The WPA employed 3.3 million in November 1938. The goal was to pay the local prevailing wage, but to limit a person to 30 hours or less a week of work."

"The goal of the WPA was to employ most of the unemployed people on relief until the economy recovered. Harry Hopkins testified to Congress in January 1935 why he set the number at 3.5 million, using FERA data. At $1200 per worker per year he asked for and received $4 billion."

"By 1936 over 3.4 million people were employed on various WPA programs. Administered by Harry Hopkins and furnished with an original congressional allocation of $4.8 billion, the WPA made work accessible to the unemployed on an unparalleled scale by disbursing funds for an extensive array of programs. Hopkins argued that although the work relief program was more costly than direct relief payments, it was worth it. He averred, "Give a man a dole, and you save his body and destroy his spirit. Give him a job and you save both body and spirit."

Does this type of hiring signify a recovery as Bonddad implies?

[realpolitic]

Of coursr, it did. It is only your conservative ideology which says that it did not. These men had a job and spent their earned money on consumption, when they would have otherwise been standing in bread lines or living in Hoovervilles. These men and women also built the nation's infrastructure. The TVA brought electricity to Tennesse and other nearby states. The WPA "built many public buildings, projects and roads and operated large arts, drama, media and literacy projects. It fed children and redistributed food, clothing and housing. Almost every community in America has a park, bridge or school constructed by the agency."

[BruceMcF]

Regarding the question, note the obvious point from the figure above that under Hoover's policies, unemployment increased continuously, while under FDR, the unemployment rate declined even excluding work relief employment.

Indeed, roughly two out of every five workers unemployed under four year's of Hoover's policy found regular employment under four year's of FDR's policies, and another one out of five gained employment in public works and job guarantee programs.

When FDR succumbed to the conventional wisdom and balanced the budget, nearly half that ground was lost again, requiring another two years to claw back. However, productivity was rising (as one would expect after a number of years of substantial effective infrastructure investment), so manufacturing production recovered far more strongly than employment.

Hoover: collapse. FDR: recovery. FDR balances the budget: relapse. FDR returns to stimulus: recovery from the relapse.

Those are the facts, and they are not in dispute.

[DuganS1]

FDR in a fire side chat in October, 1937 said that business played a large role in triggering the recession (there was another leg of the depression from mid-1937 thru mid-1938) by withholding investment funds. To motivate businesses to invest he said "Most business men, big and little, know that their govt neither wants to put them out of business nor to prevent them from earning a decent profit. " Roosevelt later claimed,"Capital is essential." And said that corporate "directors are belligerently asserting their right to employ their property as they saw fit."

It appears to me that FDR was admitting that a lack of private investment was a real problem and that it take private capital to actually employ workers to keep the economy strong. Why is it Bonddad is trying to argue that private capital investment was strong, when FDR said the lack of investment was a real problem?

[Bonddad]

It would be really helpful if you read the piece and the information it contained. Note the chart in 2000 chained dollars which shows domestic investment returned to1929 levels by 1937. Like it or not, those are the facts.

[realpolitic]

Dugan, you put the strangest spin on the words of FDR. Why don't you read the piece and the information on private investment and digest it. Sure, FDR would have welcomed more private investment. A deflationary spiral and lack of private investment was what FDR was repsonding to and trying to stimulate. Your nutty ideology won't let you see the facts.

[Romulus]

What a fruitless argument! The conservatives claim that FDR's policies delayed recovery; the progresives claim they hastened recovery. The only way to prove either is to turn the clock back to 1933 and try it without government intervention. I suppose that we could try it this time in 2009 without intervention but it still wouldn't prove either posisiton. While some conditions are similar other conditions are way different today. For one thing, we didn't have a standing military in 1933.

What we DO know is that the economy DID recover with government intervention, either because of it or in spite of it. What we do NOT know is whether the economy would have recovered without it. Personally, I'm not willing to take the chance that today's economy will NOT recover without a government stimulus program, especially when our infrastructure is falling apart and has been for many years. Why not rebuild our infrastructure with government funding? It needs to be done anyway.

[DuganS1]

According to the logic of Bonddad above, maybe today we should hand everyone currently on unemployment a shovel. Then we no longer have to count them as unemployed and can say the economy is recovering? That's what we did in the 1930s, why not do it now? We could get unemployment back down to 4% quickly, right?

[hansoster]

You are right on. You cannot count a one dollar-a-day make work job equal to a nine dollar-a-day private sector job.

[olephart]

Except now the one dollar a day jobs are in the private sector and the nine dollar as day jobs are at Blackwater and Halliburton.

[realpolitic]

The WPA jobs paid the prevailing wage in the area.

[olephart]

In your argument against citing U-6 as a viable measure you hand everyone three hours a week of employment and count them as fully employed. As I pointed out to you before the average work week is about 33 hours a week. You have lowered your part time designation to 30 hours from 35, that"s an improvement I guess.

[DuganS1]

How many part time workers do you know that work only three hours a week? The average work week statistic isn't important. What is important is the classification of the employee. An employee could work 30-35 hours a week and still be classified as part time. Just like a full time worker, particularly a production worker, could see their hours drop below 40 because of lower production schedules.

[realpolitic]

If the conditions were now like then it would not be a bad idea. Obama plans to spend a good deal of money on infrastructure maintanence and building to create jobs and such programs have a multiplier effect on the private sector.

[DuganS1]

The unemployment rate in 1929 with 3.2% with a government budget of $3.8 billion.
The unemployment rate as measured like it was in the 1920s was
about 20% in 1935 with $7.6 billion in federal government spending
about 17.5% in 1936 with $9.2 billion in federal govt spending
about 15% in 1937 with $8.8 billion in govt spending
about 20% in 1938 with $8.4 billion in govt spending

Counting govt relief workers as employed, even though millions of them did no real work shows unemployment at about
14% in 1935
10% in 1936
9% in 1937
13% in 1938

Conclusion: Despite the absolutely massive amount of government deficit spending and massive number of people on the government dole often doing make believe work, unemployment remained extremely high relative to the 1920s and late 1940s, in periods when govt spending was low for the (20s) and declining (late 40s).

[olephart]

"Counting govt relief workers as employed, even though millions of them did no real work"

Wrong again but at least you"re consistent. No real work? I suppose the dormitory I lived in for two years that was built by New Deal works projects doesn"t count. I suppose that the airfields, roads, dams and bridges sprang up as a result of tax cuts. Here"s a quote from a Reagan biography:

"When the father got a New Deal WPA job, the future president became an ardent Roosevelt Democrat."

You just can"t stand it can you. Try standing on your head and you"ll get a better perspective of reality.

Conclusion: Despite massive information and facts to the contrary many people believe the hyperbole and propaganda of those with a partisan agenda. Also, while the arguments against deficit spending are used here to belittle FDR"s economic game plan it is embraced wholeheartedly when touting "supply side" economics and its massive deficits. It seems that Republican "make work" of bridges to nowhere is superior to Democratic "make work" of bridges to somewhere. It should be noted that "supply side" tax cuts under Reagan yielding an initial decrease in investment in productive assets as monies were poured into tax shelters instead. Likewise under Bush II, monies were poured into Hedge Funds and were used for the most part for speculation.

[DuganS1]

I never said it was "all pretend work. I just said that a large number of those jobs was for pretend work. Again, I don't know what supply side tax cuts has to do with the conversation here.

[DuganS1]

"Work was provided for nearly a million students through the WPA National Youth Administration (NYA). The Federal One projects employed 40,000 artists and other cultural workers to produce music and theater, sculptures, murals and paintings, state and regional travel guides, and surveys of national archives."

During the tenure of the WPA, "workers constructed 8,192 parks." In addition, workers revived forests."

"The CCC was a public works program that put more than three million young men and adults to work building trails in parks, building conservation dams, building campgrounds, planting trees, draining swamps, replanting grazing land, renovating historic buildings....."

[realpolitic]

Olephart, great arguments! I wonder why conservatives are so opposed to government giving someone a hand up even in a time of crisis.

[Bonddad]

Unemployment dropped to 9% from 14% in 2 years. Considering the damage that was done to the economy that's pretty impressive.

If Bush had shown those numbers, you'd be dancing in the streets.

[DuganS1]

What does President Bush have to do with anything? Why is it you are so bent on partisanship? Like I said above, unemployment only dropped because the govt gave them jobs, often pretend jobs.

[DuganS1]

That rate only decreased because the govt put millions of people on relief based jobs.

[realpolitic]

Dugan, FDR inherited the Great Depression. He did not create it. The 1920's was a boom time that was likely built on a speculative bubble. "During the Crash of 1929 preceeding the Great Depression, margin requirements were only 10%. Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited." This overleverage created a fantastic speculative bubble. There was no SEC so the wealthy could invest in stocks creating demand for the stock then sell before the remaining public was aware. Such dealing was not illegal then.

You seem to be comparing what FDR inherited with what would have happened if there was no Great Depression, no dust bowl, no extremes of wealth, and no lack of infrastructure in the country such as electricity and running water. Of course, a government must invest to bring electricity and sewers to people's homes, with much of it completed by the 1940s. I think you are making false comparisans and then drawing false, ideologically based conclusions.

[realpolitic]

George Will is so funny. When his right-wing ideology is contradicted by real facts and figures from a Nobel prize winning economist he looks like a kid who wants to take his ball and go home. Will likes to cherry pick numbers from like 1933 when FDR entered office and then compare it to the middle of the 1937 recession so he can claim few benefits from FDR's policies. Conservatives always make incorrect polciy arguments because they do not frame the issue honestly to begin with. Their rigid ideology replaces rational thought.

[DuganS1]

But they weren't contradicted from real facts. The idea that private investment didn't go down in the 1930s is contradicted by fact. There was a net drop in private investment throughout the entire decade. Nominal private investment never reached 1929 levels until 1940. Bonddad is using "chained 2000 dollar" numbers so people don't note the lower nominal numbers. Krugman's argument was that private investment remained low because of high unemployment. Well, if Bonddad's claim of unemployment being actually lower than officially stated is correct, then it contradicts Krugman's argument (as he said unemployment was 20% during the period). Also, Krugman's idea that levels of private investment are determined by employment levels are not backed up by fact. That was an opinion he made (as seen on the video clip with Will). Private investment historically increases before employment increases, because investors anticipate recovery and increased demand. That investment then goes to hiring people. This did not happen from 1933-1939 to any notable degree. And a big reason it didn't happen was because of FDRs National REcovery ACt which fixed prices and prosecuted businesses that didn't cooperate, increased taxes making investment much less profitable, minimum wage and Wagner Act which led to higher costs and a massive wave of strikes, etc. etc.

[realpolitic]

Whenever one discusses dollar amounts between different years one must speak in temrs of real dollars or else the comparisan is meaningless. Otherwise, one thousand dollars today would be the same amount it was in 1860. i doubt it!

Dugan, your analysis is so wrong. Krugman made the argument that private investment was low because there was so much overcapacity. In other words, factories were idle because of reduced demand. People were not buying because of a deflationary spiral and banks were not lending because of the runs on banks leading them to tighten their margin requirements.

"The failure of so many banks, combined with a general and nationwide loss of confidence in the economy, led to much-reduced levels of spending and demand and hence of production, thus aggravating the downward spiral. The result was drastically falling output and drastically rising unemployment; by 1932, U.S. manufacturing output had fallen to 54 percent of its 1929 level, and unemployment had risen to between 12 and 15 million workers, or 25-30 percent of the work force."

In other words the output had fallen before FDR took office. You are hanging your hat on the "unemployment is a lagging indicator" argument and it is very weak. Besides Krugman was speaking of undercapacity and not unemployment.

[realpolitic]

The IRA was inteended as a business friendly act, but probably created too many rules to be functional.

"The NIRA was strongly supported by many leading businessmen, some of whom had helped draft the legislation. Gerard Swope, head of General Electric, was one of the first champions of this legislation"which legalized cartels and funded massive government spending on public works through the PWA. This increased spending was designed to restore prosperity and benefit General Electric and all businesses. Harry Harriman, president of the U.S. Chamber of Commerce and a leading supporter of the legislation, argued that "it constitutes a most important step in our progress towards business rehabilitation." "

http://en.wikipedia.org/wiki/National_Industrial_Recovery_Act

[Chaimirija]

the Republicans STILL hate FDR!

[DuganS1]

Republicans didn't hate FDR personally. They hate(d) his anti-business policies. FDR deliberately attacked business, put govt in competition with business, took their profits, reduced their incentives to invest, and even put many honest business in jail because they didn't follow his policies (NRA - requiring set prices, often higher prices than what were normally).

[realpolitic]

And FDR saved our democracy by which the business community should be thankful that we did not fall into some kind of fascism.

[dobberdoss]

Can i just make one very important point? THIS IS NOT A 1929 SENARIO! your graphs from those times & circumstances DO NOT add ANY certainty that the US will survive this financial disaster that is based on entirely different reasons for failure.

Please STOP making 1929 comparisons where there are NONE!, It is now 2009 and the world economy has a different beast to kill.

[research]

Prove it.

[Chaimirija]

disprove it

[realpolitic]

He is discussing the Great Depression and you can draw your own conclusions regarding today!

[mattjs85]

You haven't really shown us anything, as I recall the whole point of your series is to refute the "'FDR made the Depression worse' talking point from the Right Wing Noise Machine -- econ division."

Thus far it has been some shots at the Republicans of that time period and your proof is the fact that "the incumbent Democratic party increased its seats in both the House and Senate in the off-year 1934 election, and FDR won a landslide re-election victory in 1936." You do this without refuting the possibility that FDR's spending may have helped him buy votes.

You've failed to use an ounce of theory besides the left's omnipresent theory of Republicans=always wrong. Which is a fine theory, but the truth doesn't always validate it.

Finally, charts and graphs that show recovery will not alone refute the claim that FDR prolonged the depression. A prolongation and an improvement or recovery are not mutually exclusive concepts.

[KHAAANNN]

So, let me get this right; (I'm summarizing your post here)
Numbers, Charts, Graphs and History, and FACTS don't matter.
Only RUSH LIMBAUGH'S OPINION matters? Right? (get the pun? didn't think so......)
BTW - What color is the sky in your world?

[mattjs85]

Oh no! The wrath of KHAAANNN!

They don't matter when the whole series is devoid of any theory to provide a base for his arguments.

If a chart shows X% recovery under a New Deal program, what is to say that it wouldn't have been (X+Y)% or (X-Y)% if the same program was absent? There has to be a logical theory as to why, if Mr. Stewart isn't going to show it then he is just giving us a random stew of knowledge that doesn't do us any good.

[realpolitic]

Mattie, you say he offers no evidence that FDR's policies helped to pull us from the great depression and then say his charts and graphs are not important. Where is the exact fine line between an improvement and a recovery, especially when compared with Hoover's policies where things continually got worse? As usual with many on the right, your utterances make little sense.

[mattjs85]

Like I said, this is where the importance of theory comes into play. Anybody making an argument has to show why their way is superior. These charts don't prove anything besides the fact that things improved.

Comparing him to Hoover also makes little sense, the debate in question is whether or not FDR prolonged the depression, not whether or not he was a better president than Hoover. Also, since FDR and Hoover both intervened in the economy, if Hoover's years got continually worse, why?

A better, though not great, way to look at this would not be Hoover vs. FDR it would be the GD vs. other panics and recessions i.e. 1819, 1837, etc.

I won't end with a cheap shot, like you did though.

[Overd0g]

True. The electorate made the wrong decisions then, and they'll probably make them again now. We, as a society, are all about pain avoidance. And by doing so, we guarantee ourselves more and more pain.

[DuganS1]

"Consider these achievements in the face of the claim by the right wing noise machine that FDR extended the Great Depression. These claims are entirely false based on the above data."

Is that seriously your conclusion, Bonddad?

The facts are clear that unemployment (no matter how measured) remained high for the duration of the 1930s and capital investment abysmally low. As FDR's own Treasury Sec. Morgenthau conceded in 1939, it's difficult to square these facts with claims that FDR's policies worked well. He at one point admitted that the New Deal had not worked because unemployment was still at 20% in 1939, after 7 years of "New Deal".

[Bonddad]

1.) Below is a link to a paper which explains why your claims about unemployment are wrong. Unemployment was not at 20% as you claim.

2.) As I mentioned in a previous thread, in chained 2000 dollars, private investment was 91.3 billion in 1929 and 91.7 billion in 1937. Investment dropped to 60.2 billion in 1938 and recovered to 77.4 billion in 1939. In other words, capital investment was not "abysmally" low.

[DuganS1]

So what then were the 3% unemployment rates in the late 1920s actually? There were still govt jobs then right? Were they actually 1%, 0.5%, 2%????

I just love how you use the chained 2000 dollar numbers to try and prove your point. In that way you rid yourself of the deflation. I guess you're afraid to put the nominal numbers in there because they'd make the data look much worse than they are. How is 60 not "abysmally low" compared to 91.7? That's a 35% drop, which is absolutely huge. The nominal numbers would make them worse.

Also note that GDP doesn't account for poverty and mal-nutrition, as we all know was absolutely rampant throughout the 1930s despite billions of dollars of deficit spending by the govt.

[realpolitic]

You say "the facts are clear that unemployment (no matter how measured) remained high for the duration of the 1930s and capital investment abysmally low." As Bonddad stated "by 1937 the unemployment rate was back under 10%," and this from a level of 25% four years earlier, a remarkale decrease. And those with government make-work jobs should be counted as employed because they have jobs and spend their paychecks on consumption as normal working people do.

Bonddad also gave the figures on private investment, which do not look bad either. i think Krugman was right that the initial lack of private investment is the result of severe undercapacity and a deflationary spiral in the economy.

[DuganS1]

So today if we hand everyone currently on unemployment a shovel, we can then count them as employed and say the economy is recovery?

[DuganS1]

No it isn't.

[Bladernr1001]

Hale,

Nothing you said here proves that FDR's programs did anything. What you described here is what happens in any economic downturn. A contraction occurs, the market reorders itself and then a new cycle begins. This has happened many many times in history without any government involvement.

Many argue that both Hoover and FDR made things worse by raising taxes, erecting tariffs and generally having the government meddle in the economy. I have seen some very strong eveidence in support of this.

[TimmySlagle]

The recovery between 1933 and 1937 was also one of the slowest, weakest recovery in American History.

[Bonddad]

Did you see the growth rates in GDP? Since when did growth of 10.8% in 1934, 8.9% in 1935, 13% in 1936 and 5.1% in 1937 become "one of the weakest recoveries in American History"?

If a supply side administration put up those numbers you'd be yelling it from the tree tops.

[realpolitic]

Slagle, you kill me, man. Your ideology blinds you to any reality other than the farthest right-wing interpretation. You argue a series of GDP increases of 10%, 8%, and 13% was a weak recovery? You have got to be kidding!