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Unemployment During the New Deal Era by James K. Galbraith

The view that the New Deal was too small and accomplished little, that only WWII ended the Depression, is very widely held. But it is not correct. It is based on a mis-reading of reconstructed unemployment statistics from that time, which treat the workers actually employed by the New Deal as though they were unemployed. Which they were not.

In fact, the New Deal accomplished a huge amount, both in specific construction projects and in providing employment to the American people.

I am going to turn over my microphone, not for the first time, to Marshall Auerback, and quote at great length from his paper entitled "A New New Deal." Those wishing to get the whole paper should contact Marshall at mauer1959@aol.com

EXTENDED QUOTATION FROM MARSHALL AUERBACK, "TIME FOR A NEW NEW DEAL" MANUSCRIPT USED WITH PERMISSION.

On Inauguration Day, 1933 (then March 4), there were machine-gun nests at the corners of the great government buildings in Washington, for the only time since the Civil War. All banks in 32 states had been closed sine die. Six other states had closed almost all their banks. In the other 10 states and D.C., withdrawals were limited to 5 per cent of deposits, and in Texas to $10 a day. The New York Stock Exchange and Chicago commodity exchanges had also been closed indefinitely. The financial system had effectively collapsed, and was threatening to take the life savings of millions of people and what was left of the world's financial system with it.

In a fever of activity, Roosevelt guaranteed bank deposits, made the federal government a temporary non-voting preferred shareholder in thousands of suddenly under-capitalized banks - more than half the banks in the country - refinanced millions of residential and farm mortgages, tolerated cartels and collective bargaining to raise prices and wages, increased the money supply, effectively departed the gold standard, repealed Prohibition of alcoholic beverages (wrenching one of America's largest industries out of the hands of the underworld), and legislated reduced working hours and improved working conditions for the whole work force. In the next two years, in what became known as the Second New Deal, he set up the Securities and Exchange Commission, created the Social Security system, and broadened the powers of the Federal Reserve to equal those of other national central banks.

The Hoover agricultural policy had been to dump surpluses abroad, lend foreign governments the money to buy them, and then pursue them aggressively when the debtor countries defaulted. Roosevelt had farmers vote, by category of what they produced, on agreed production cutbacks, assuring sustainable agricultural prices, and compensated farmers for the production they had curtailed. The more extreme supply-side revisionists now claim that Roosevelt should not have stabilized food prices and financed, through public works projects, flood and drought control and rural electrification, because it would have been better to starve these people off the land and to the cities, where, a generation or more later, they would have had higher standards of living. This is the logic of the so-called Austrian School of Economics, taken to its logical and perverse extreme.

Apart from the fact that the resulting human misery would have been morally and politically unacceptable in the U.S., the already militant farm unions would have disrupted the nation's food supply. This policy would have put Roosevelt in the same general category of agrarian reform as Stalin and Mao.

The key to evaluating Roosevelt's performance in combating the Depression is the statistical treatment of many millions of unemployed engaged in his massive workfare programs. The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown.

It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country's entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.

Even pro-Roosevelt historians such as William Leuchtenburg and Doris Kearns Goodwin have meekly accepted that the millions of people in the New Deal workfare programs were unemployed, while comparable millions of Germans and Japanese, and eventually French and British, who were dragooned into the armed forces and defense production industries in the mid-and late 1930s, were considered to be employed.

This made the Roosevelt administration's economic performance appear uncompetitive, but it is fairer to argue that the people employed in government public works and conservation programs were just as authentically (and much more usefully) employed as draftees in what became garrison states, while Roosevelt was rebuilding America at a historic bargain cost.

If these workfare Americans are considered to be unemployed, the Roosevelt administration reduced unemployment from 25 per cent in 1933 to 9 per cent in 1936, up to 13 per cent in 1938 (due largely to a reversal of the fiscal activism which had characterized FDR's first term in office), back to less than 10 per cent at the end of 1940, to less than 1 per cent a year later when the U.S. was plunged into the Second World War at the end of 1941. The reasons for the discrepancies in the unemployment data that have historically arisen out of the New Deal are that the current sampling method of estimation for unemployment by the BLS was not developed until 1940, thus unemployment rates prior to this time have to be estimated and this leads to some judgment calls.

The primary judgment call is what do about people on work relief. The official series counts these people as unemployed. Economists of a market fundamentalist bent love to denigrate FDR's record on unemployment. Christopher Westley, for example, argued in "The Roosevelt Nobody Knows": "By the midpoint of FDR's second term, the failure of the New Deal policies was evident to all but the truly delusional. The unemployment rate again reached levels associated with the hated Hoover, while the public's tolerance of the pretentious New Dealers and their endless attempts to control the economy waned."

However, this is an instance of an ideology fundamentally hostile to the role of government in our society using history to discredit fiscal activism. If one uses the unemployment series for the 1930s excluding workfare constituents, the figures appear as follows:

This is from a series constructed by the economist, Stanley Lebergott in 1964.[1]

Here, the recession of 1937-38 almost completely wipes out any gains of the previous few years. It is almost as if the New Deal didn't do anything for anyone, much.

A lot of people looked at these numbers without reading the notes on how they were constructed and concluded just that.
Then in 1976, an economist named Michael R. Darby wrote an article with the delightfully self-explanatory title, "Three-and-a-Half Million U.S. Employees Have Been Mislaid." [2]

What Darby did was read the notes. Here is what Lebergott had to say about counting unemployment in the 1930s:

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. [3]

We would normally not consider people who painted murals for the WPA to be deemed worse off than those who "worked" in Mauthausen or the Soviet gulag. And yet, until we adjust the "workfare" discrepancy, incredibly we count such individuals as unemployed, even though their position was considerably better someone generating no income, or working in abysmal conditions in a slave labour camp.

A number of points to be made here:

(1) if one is using the unemployment data to answer the question, "did the New Deal help people," then this data absent the workfare numbers set is going to give you the wrong answer, because implies that workfare people were suffering from unemployment who in real life had a job;

(2) but what if people in emergency work acted like the unemployed--i.e., they were looking for a job and

(3) what about the "real" economy--the private industrial economy--how did it do? Now, as it happens it looks like the answer to (2) is, mainly they did not--people who had an emergency job acted as if they had a job (perhaps because they did in fact have a job) and should therefore probably not count as unemployed.

If one includes the workfare employees, one gets a very different picture of unemployment in the 1930s. Below, a graph showing the same series as the above, then a new series--from Weir's table D3, which also appears in Historical Statistics of the United States--that counts only people without jobs as unemployed.

Again, this illustrates the severity of the Great Depression, but does illustrate the crucial role played by the New Deal in terms of mitigating its worst excesses.

Indeed, rather than "distorting" the private market, the improvement in aggregate demand brought about by the provision of workfare programs, created positive feedback loops in the private sector. One can illustrate this by disaggregating the government employees from the data and showing a third line which features the private sector alone:

So again, here, we see significant improvement under the New Deal.

If anything, even the relapse of 1938 negatively validates the efficacy of fiscal policy activism. During Roosevelt's first administration lots of things were tried-- and the budget debt continued to "explode" until it got to 5.5% of GNP as employment (and profits) significantly improved over three and a half years -- but unemployment rates were still very high.

But by 1936 many brilliant economists and financial experts feared the country would go bankrupt if the government kept deficit spending. And after all, it was argued, the government deficits had "pump-primed" the economy and the private sector could now take off on its own and get back to close to the full employment level of 1928-early 1929.

Consequently, Roosevelt ran (in 1936) on a platform that he would try to reduce significantly, if not completely eliminate, the deficit in the 1937 fiscal budget -- and he sent to Congress a budget that did just that. Roosevelt won by a landslide -- but the economy fell like a landslide and in the first 9 month of 1937 the economy fell back to approximately where it was in 1932. In other words "fiscal responsibility" in just 9 months led to a landslide fall in the economy back to where it was near the bottom of the Great Depression . 9 months of fiscal responsibility had undone the good work of 4 years of deficits. [4]

After that Roosevelt began spending again. The Third New Deal in 1938 produced a massive return to workfare programs, which resumed economic progress. The Fourth New Deal was the greatest defense build-up in history, starting in 1939, including the first peacetime draft in the midst of the 1940 election campaign.

Then war expenditures came along and the need to win the war threw fiscal responsibility out the window. Throughout the war years, the government consistently ran double digit budget deficits, running as high as 30.3% of GDP by 1943:

The result was that the national debt exceeded the national income by the end of the war as the government spent over $200 billion more than it took in taxes during the war years -- [of course, the American people "saved" more than 200 billion" during the same period.] The result was full employment prosperity.

So it is fundamentally incorrect to argue that FDR's New Deal did nothing and that only the Second World War actually got the American economy out of the Great Depression. Such historical revisionism has been made popular during the past 25 years by a cadre of ideologically motivated economists and historians keen to debunk the effectiveness of Keynesian economics in favor of the neo-liberal market fundamentalist Washington Consensus.

Notes

1Stanley Lebergott, Manpower in Economic Growth: The American Record since 1800 (New York: McGraw-Hill, 1964), table A-3.

2Michael R. Darby, "Three-and-a-Half Million U.S. Employees Have Been Mislaid: Or, an Explanation of Unemployment, 1934-1941," Journal of Political Economy 84, no. 1 (February 1976): 1-16.

3Cited in Darby, 3; Lebergott, 184-5.

4Robert A. Margo, "The Microeconomics of Depression Unemployment," NBER Working Paper no. 18, December 1990.

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Unemployment During the New Deal Era by James K. Galbraith