Was the New Deal too small?
A lesson from Great Depression, historians say, is that Roosevelt didn't spend enough to jolt economy into recovery.
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The consensus is "bad theory and bad evidence," says Robert Higgs, a senior fellow at the Independent Institute, a libertarian think tank in Oakland, Calif. Government spending in the 1930s crowded out potential private investment, he says.Skip to next paragraph
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Government infrastructure projects "are inherently wasteful because they are designed with political objectives in mind," he says "The [Works Progress Administration], which was probably the major New Deal infrastructure building program, was an enormous vote-buying scheme for Democrats."
Some conservative economists also argue that injecting massive government spending now will only make the deficit worse without providing the promised stimulus. But other economists point out that during the first three years of the Depression, when there were far fewer major spending programs, gross domestic product (GDP) continued to plummet.
Timing is key, because the scale of today's problem looks much smaller than the Depression. While today's 6.7 percent unemployment rate looks bad from a modern perspective, it's practically vibrant compared with the 24.9 percent in 1933, when the Roosevelt administration came into office. At last measure, today's GDP is down half of one percent after increasing during the first half of the year. In 1933, it had declined almost 30 percent from its 1929 peak.
That's why some analysts conclude that some infrastructure spending now may work as an effective stimulus. "The standard objection to public works spending – that it takes too long to get going and arrives after the economy has already begun recovering – really doesn't seem operative this time," says Mr. Smith.
Others disagree, and contend it could take many more months than predicted to get projects started because of the complications of contracting out the projects.
"There are some practical realities that don't support the expectation of 'Oh, just give us the money and we can go,' " says Richard Little, director of a public finance institute at the University of Southern California. "Over time we will start to see some projects rolling out and once that momentum builds up we'll see more of it. The only problem is that it's like mobilizing for war, once you get all geared up, don't cut the money off."
Today's crisis is also different because of the size of the federal deficit. Republicans in Congress are balking at increasing it even more. Here the New Deal does not offer much help.
"When Roosevelt came in there was some deficit spending in the 1930s, but he was committed to a balanced budget so the deficits were never extraordinary," says Margaret Rung, director of the Center for New Deal Studies at Roosevelt University in Chicago.
In the 1950s and 1960s, the last time there was a major investment in infrastructure, the US economy was thriving and deficit was negligible.
Obama acknowledges that a projected trillion-dollar deficit is problematic. But on NBC's "Meet the Press" over the weekend, he argued that the need to stimulate the economy outweighs immediate concerns about the deficit.
That has prompted many people to hope that today's stimulus package will work better than Roosevelt's did in the Depression.
"In the long run, you have to hope that the recovery is robust enough to deal with this enormous deficit which has been run up – which is scary and has repercussions beyond the immediate fiscal health of the country," says Professor Rung.