(Bloomberg Opinion) -- The U.S. is now either in or on the verge of an economic depression. In February, more than 80% of Americans between the ages of 25 and 54 had a job; in April, that number was less than 70%, and it probably will fall even more.
And there are plenty of reasons to believe that this situation will not quickly resolve itself once the threat of the coronavirus pandemic has passed. This will be the worst economic deprivation that Americans have suffered since the 1930s. Already, the number of mothers with young children who say their families can’t afford enough food has risen almost sevenfold.
Many people reason that if the U.S. is in another depression, it’s time for another New Deal. Presumptive Democratic presidential nominee Joe Biden seems to be thinking along these lines, planning a series of bold programs to address both the short-term economic crisis and longer-term weaknesses in the system -- just as President Franklin Delano Roosevelt did almost 90 years ago. If Biden is elected and manages to follow through (and that’s a big if), the U.S. could see not just a faster recovery, but progress on issues such as climate change and inequality.
But efforts to emulate FDR’s success are hampered by a loud minority who claim that the New Deal itself was a policy mistake. One such example is conservative talk-show host Ben Shapiro, who recently argued that the New Deal prolonged the Great Depression rather than shortening it:
Shapiro cites an editorial by economists Harold Cole and Lee Ohanian, who have been advancing this revisionist idea for decades.
This minority view probably is wrong. Cole and Ohanian base their case on a particular macroeconomic theory that has been effectively discredited. Called New Classical theory, it postulates that economic fluctuations are caused by technological factors beyond government control; if there’s a depression, it’s not because of a wave of bank failures or a crisis of confidence, but simply because technological progress slowed down. This sort of model inevitably leads Cole and Ohanian to conclude that any attempt to stabilize the economy with government policy leads to distortions that can only make things worse.
But New Classical theory, which was never plausible to begin with, was long ago debunked both empirically and theoretically as a general description of how recessions work. Recent work by economic historians has found little evidence that changes in the rate of technological progress had any significant impact during the Depression.
Instead, the Great Depression was caused by a deficiency of aggregate demand. Battered by bank failures, asset-price collapses and a general loss of confidence, businesses and consumers chose to hoard their cash rather than spend it. That lack of spending, of course, made the situation worse.
The New Deal attacked this demand gap in several ways. Most important was FDR’s 1933 abandonment of the gold standard. It’s notable that the earlier a country left the gold standard, the faster its economy began to recover: Japan did the best, gold-hoarding France did the worst. When FDR ended the gold standard -- which pegged the value of the dollar to the metal -- and declared his intention to bring prices back up to pre-Depression levels, it helped alleviate the cash shortage that was plaguing the nation. It also raised expectations of recovery and reinflation, which in turn probably helped boost confidence and speed recovery.
The New Deal also used fiscal policy to stimulate growth. FDR built infrastructure across the country, including the famous Tennessee Valley Authority; this not only helped plug the hole in aggregate demand, it provided long-term economic benefits as well. The New Deal also provided work directly through programs such as the Works Progress Administration and the Civilian Conservation Corps. Economist Price Fishback, surveying the research literature, concludes that “public works and relief spending…increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality.” And a large payment to veterans in 1936 stimulated some spending as well.
If the New Deal had one big shortcoming, it was that fiscal policy didn’t go far enough -- stimulus spending should have been much larger than it was, and a turn toward austerity in 1937 probably sent the economy into reverse.
The New Deal certainly had its missteps. One of these was the National Recovery Administration, which attempted to consolidate industries into government-supported monopolies. The policy is generally considered a failure and was eventually shelved. But even here, the story is more complex than the detractors would have us believe; macroeconomists such as Christina Romer and Gauti Eggertsson have argued that by forcing up prices, the NRA helped to avert damaging deflation.
So although the notion that the New Deal worsened the Great Depression is likely to continue to be a cherished belief in certain right-wing circles and among a few contrarian economists, the vast bulk of evidence and expert opinion comes down in favor of FDR’s overall approach. The New Deal should have done more than it did, but it absolutely helped ameliorate the Great Depression. FDR’s legacy is thus a model for modern-day leaders to build on.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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