Unemployment During the New Deal
by Mike Kimel
Unemployment During the New Deal
Cross posted with the Presimetrics Blog.
This is not the post the post I was planning to write this weekend, but frankly every time I post something that touches on FDR, people get ahold of me with the same canard: unemployment in the U.S. was somewhere around 20% all through the 1930s, which is a sign that the New Deal failed. It’s something repeated at length by the Glenn Becks of this world, but also by a lot of supposed scholars.
Now, there’s a reason I haven’t written this post in the past and wasn’t planning to do it any time soon; it’s been done before, and well enough that there isn’t much for me to add. I think the first time it was done was back in 1975 as a working paper Michael Darby (sorry this is behind a paywall – as is the later version published in the JPE). In blogs, Eric Rauchway at The Edge of the American West covered the topic very well (distilling down some of the post-Darby work in the process) a couple of years ago. I’ll be drawing extensively from the Rauchway piece in this post, including stealing both of the graphs that appear below.
So to begin, as Rauchway noted, there was a time that everyone knew that unemployment in the 1930s looked like this:
Figure 1
The reason everyone knew that was because those were the figures Stanley Lebergott published in
Enter Darby. He reached the conclusion that people who are building infrastructure (roads, dams, sidewalks) and getting a regular paycheck for that labor should not be considered unemployed. (Go figure!) And if you’re inclined to argue that point, consider this – what exactly do you think the unemployment figures would be for China today if you counted everyone who worked for a company controlled by the PLA or some other government agency as unemployed? What would the unemployment rate be in Singapore if anyone working for a government owned company was considered unemployed? And how realistically do you think those figures would reflect the situation in China or Singapore?
So Rauchway includes this second graph, showing both the Lebergott figures for unemployment and Darby’s corrected version.
Figure 2.
Big difference, eh? Of course, unemployment was relatively high all the way through the start of World War 2. The Great Depression caused a huge hit on the economy, and the Dust Bowl didn’t help. It is not a surprise that it took six years for the unemployment to drop in half, and that even that figure was elevated. But the reason the unemployment rate was dropping from its high of 24% (picture how bad the economy has to be for unemployment to get that high) was that some serious real economic growth had set in. In five of the eight years from ’33 to ’40, real GDP grew by more than 8% a year! In terms that the folks who criticize FDR’s performance would understand, that’s about a percent faster than Reagan pulled off during his best year.
So while the unemployment rate remained high from ’33 to ’40 (the private sector wasn’t hiring the unemployed, much less competing with the government for the services of those who worked for the WPA), the thing we should be looking at is the rate at which the unemployment rate changed. Otherwise, we have to conclude that GW did a better job on the economy than any other President, never mind the lukewarm growth rate intro leading up to the Great Recession finale. After all, the peak in real GDP per capita (so far) came during his term.
In five of the eight years from ’33 to ’40, real GDP grew by more than 8% a year! In terms that the folks who criticize FDR’s performance would understand, that’s about a percent faster than Reagan pulled off during his best year.
Consider Reagan Averaged 4.9% defict as % of GDP from ’82 through ’86, high of 5.88 in ’83. FDR’s high was 4.76 in ’36.
http://www.usgovernmentspending.com/federal_deficit_chart.html
Reagan’s GDP growth was less than the total of inflation + population growth. Reagan’s success is a myth.
New Deal Denialism is all too real.
Cheers!
JzB
jazzbumpa,
New Deal Denialism is all too real.
Look at unemployment. FDR can’t touch Clinton or Bush.
I’m sure this point has been discussed here before, but I’ll go it again, just for good measure…
It is the change in the jobless rate that tells us about improvement or deterioration in the economy, and by extension, about the success of policy. When the jobless rate falls from 25% to 15%, that means the economy is doing better. Even the chart that leaves out lots of employed people shows a vast improvement in economic conditions.
There is room to quibble, of course. One ought to look at the participation rate and the number of people employed, but on the basis of just the first chart of the jobless rate, something good started happening around 1933, about a year after something good started happening in the second chart, which includes those employed by the government.
Now, as to comparisons with Clinton and Bush (elder or younger – doesn’t really matter) FDR presided over a 10% decline in the jobless rate, Clinton a 4% drop and Bush 3.9% or so rise. FDR could beat Clinton or Bush even if his legs didn’t work…which…I guess…
Uh oh, that’s what I get for focusing on everything but Kimel’s last paragraph. Of COURSE this has been discussed here….
Ah, Bretton…you can do better.
Kharris,
Your correct. The drop is what counts. Though to be fair to both Clinton and Bush a drop of 10% would put them in negative territory. Even if Obama was suddenly infused with the combined knowledge of all the economist that ever lived I don’t think we could get negative unemployment.
I thought that economists have always said there was a bottom to the unemployment rate that you couldn’t really get under even in a fully performing economy (like 4-5%). So once you got to that range, short of drafting people into the army or some-such, you couldn’t push it farther down.
Mike do you know what is consider the standard full employment unemployment number?
As for comparing FDR with Reagan, I would think that pre-World War II US/World economy was just a little different than Reagan’s economy 45 years later. Your comparing apples with lunar landers again.
Islam will change
And in two side-notes, they counted 14 and 15 year olds in the unemployment rate at the time, and you had to be “seeking work”, not “actively seeking work” like today to be counted as unemployed. You have to wonder what the unemployment rate was for 14 – 15 year olds back then, and what our unemployment rate would be today if all the discouraged workers were counted as unemployed. It would probably be higher than U6, and maybe even up to that 25% level.
Buff,
The argument is that FDR was a total failure. Please don’t change the subject. What happened after 45 has no application to the era 32 to 40. The world changed and WOW!
Bretton –
Context matters, rather a lot.
Cheers!
JzB
Buff
I think the “Non Accelerating Inflation Rate of Unemployment” has generally been discredited, except of course among those who failed to notice. I got a little annoyed myself with the real Samuelson who thought it was because the workers were refusing to take jobs until they were offered more than they were worth.
And i think you are working a bit too hard denying the achievement of Roosevelt.. that is, if i even understand what you are saying. Times was hard, really hard. really, really hard, during the Great Depression and Roosevelt pretty much invented the cure. Unless of course you prefer the Hitler cure.
Reagan, I think, with as little partisanship as I can manage, came in during a period of high inflation (that had begun under Nixon, not Carter as conventional wisdom remembers it), and “malaise” (also a word that showed up in textbooks before Carter was elected). He, Reagan, engineered a recession to cure the inflation, and a PR program to cure the malaise. None of which is necessarily bad. Unless you were one of those without a job during the Reagan recession, and unless you count the lingering effects of the PR campaign.
Clark
maybe. but i don’t see the breadlines or tramps.
the fallacy of the “unemployment rate” as seen by anti-FDR, and possibly by you, is that it is circular reasoning: the cure for “unemployment” was for the government to hire workers. as long as you don’t count people working for the government as employed, you can pretty much make up your own reality.
dilbert
yeah, the world changed. and the rich got richer even as the poor got richer. but the rich of course knew they had done it all by themselves, and if the poor had not taken their money with the government gun the rich would have gotten even richer. it’s just that simple. it stands to reason. if the other guy got more, they must have gotten less.. there is absolutely no connection between ending the great depression and the general high level of prosperity we enjoy today… even if it is not always as high as we would like, and certainly not growing at ever increasing rates. the whole point, after all, is to get higher and higher.
the thing is that during the depression the people who still had money still had money, far more than they needed. eventually “the markets” would have come around and they would have gone back to making more money in the same old way and that would have been fine with them. but having poor people around who don’t know their place, well, that is just intolerable. traitor to his class, that’s what he was.
but the people who are not rich, but only wannabe, now find themselves with more money than their grandparents ever dreamed of. so much that they are now taxpayers. which means they are the victims of all this social engineering. it’s got to stop.
It’s so out of context to argue about the FDR GDP growth rate versus Ronald Reagon GDP growth rate. Just look at the unemployment numbers. I bet you the unemployed didn’t really cared about the “Awesome” 8% GDP growth rate. All they care is about the food on the table…
This is not a criticism of FDR’s performance, but please look at the “real” picture. Number can look good on paper, but reality sucks…
coberly,
I’m not denying FDR’s successes. I just don’t see how you can compare FDR economy with Reagan’s. There is a difference, I can say both were a success for their time. I just can’t compare GDP (or unemployment rates) of the two and say FDR was better. That’s comparing apples to lunar landers again.
Islam will change
dilbert,
I sure am not making the argument that FDR was a total failure – and that’s even counting the fact that I am distantly related to Hoover (wife’s side of the family). So don’t count me in with the FDR failed group.
coberly,
i read your reply three times, and my coberly translater blew a transister…I just can’t figure what your saying…
Islam will change
Of course Pax…but I fail to see the point for the post. I had thought context was relatively clear on the starting point overall. The numbers were great but started at a low point.
Today’s unemployed won’t care as much either about this comparison…but then people’s perceptions affect votes. So the one with best advertizing wins until they don’t. Still fighting the battle on ‘stimulus’ and ‘fiscal responsibility’ as if there are only two positions to take…for or against.
The last thirty years have seen a well financed bit of advertising.
cob-It would be interesting if you could compare and contrast the New Deal and what you term the “Hitler cure”.
We’ve found the solution!
We can hire half the unemployed to dig holes and the other half to fill them up. Kind of like splitting Cool Hand Luke in two.
Since:
GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X − M)
and salaries to gov’t employees don’t count as transfer payments, but as G, we get the added benefit of boosting GDP as well.
Well done cactus.
oh, hell, Buff
all comparisons are invalid. but you gotta compare something. Reagan set my teeth on edge, but he apparently did some things right, and the rest is arguable. Now, Obama is setting my teeth on edge.
Come to think of it, so did Carter. But not for the reasons everyone else thinks.
little john,
aside from the obvious?
buff
it was a rant in irony. hard to pull off.
jed
i can’t tell if you are trying a rant in irony to show me how it’s done. but in general i have learned to distrust smart boys with equations and no clue about how the other half lives.
your experience in the army with digging holes and filling them really is not how government works.
or maybe i souldn’t tell you about the bridges you drive over that were inspected by a government worker to keep the contractor from cheating on the concrete and steel.
So, tell me
what you mean by a “transfer payment.”
Is it a transfer payment if you run over your neighbor and the insurance company pays the bills?
Do you tell the cop that arrests you for drunk driving that he is getting a transfer payment (welfare)?
Is the money that goes to defense contractors transfer payments?
It is quite remarkable how much ignorance you can hide in a single equation.
Yeah. Something detailed.
Coberly,
And after the War everybody went to work in the War machine factories. If FDR didn’t have that ramp up, everybody would have had to work for the government, and would have led to economic collapse.
During the period of FDR Recovery debt shot through the roof.
The point of Keyensian spending was to build an infrastructure that complimented or open my paths for industrial growth.
In these times the Keyensians might have a point to reinvested in a Green Infrastructure, but thats not whats happending. Two issues in play are the technology is still infant, and we don’t have the manufacturing status we used to enjoy, so there is very little areas to actually invest in growth.
The main issue is what does the first spike in unemployment mean. Does it mean that the economy was not going to be successful without a ramp up for war?
Reason
it’s easy to find a quote from someone who agrees with you. just as it’s always easy to find reasons to agree with yourself. real thinking begins when you find reasons to disagree with yourself.
jimi
while it is entirely possible that post war prosperity had something to do with “military industrial Keynesianism, it seems that it is just as likely it had something to do with consumers with money in their hands. something that could never happen under the old “free enterprise” system.
i don’t know that the current recession can be cured, or can only be cured, by building green infrastructure. doesn’t seem like a bad place to start. i would have thought that had a better chance than giving money to bankers. or soothing the troubled minds of bond traders.
you’ll have to tell me how the roosevelt debt compares to the Reagan debt.
me, i think we already got enough. we just don’t know how to spend it.
little john
aside from the obvious?
I am repeating the question, because you apparently didn’t get it.
Coberly,
it’s easy to find a quote from someone who agrees with you.
It’s not just any someone. It was FDR’s secretary of the treasury. If you look again at the chart you will see unemployment hits around 19 percent in 1938. This is why Morgenthau said what he did. Unemployment at 19 after 6 years of the new deal tells me the plan was not working.
Reason,
He may have been FDR’s secretary of the Treasury, but he is factually wrong. As are you when say unemployment hits 19 percent in 1938 – that’s the point of my post – unless you really believe that building infrastructure and collecting a paycheck for it is the same as being unemployed. You’d also have to believe that anyone working for a company owned by the Sinagaporean government today is unemployed.
kite,
Once again… if the quote is correct (and I haven’t found the original on-line) he may have been FDR’s secretary of the Treasury, but that quote is factually incorrect. Perhaps he was misinformed, or perhaps he was frustrated. But the statement in the fact was wrong, unless you doubt the figures graphed in this post.
Mike
it looks like we got a Bug in the system. i don’t have the patience to take these people by the hand and try to read to them one word at a time, especially when they post under three different names and we know them by other names as well.
but, just to say we tried:
the Secy of Treasury is “just another person” who agrees with you. I don’t care if it is Aristotle who agrees with you. Thinking begins when you learn how to disagree with yourself and then explore the implications…. that is cause and effect implications, not the implications to your political prejudices.
Mike,
Well it sure as hell is not the same as creating a job in the private sector. The infrastruture spending was temporary and increased the burden on deficit spending.
Morgenthau was simply wrong. It was working. Unemployment was way down.
Morgenthau was what we call today a deficit hawk. Worried about balancing the budget in the midst of the depression. He was on record opposing parts of the new deal before Roosevelt appointed him (other parts he strongly supported, social security primarily).
He partly got his way on spending in 1936. Spending was cut to move the budget toward balance. A deep recession visible in the unemployment graphs that are part of this post was the result. Budget balancing was then abandoned and unemployment began declining again.
The wisdom which can be extracted from Morgenthau’s quote is that people were wrong in 1939 too, even smart people high in government.
To be fair to Morgenthau it is possible there is some context to his quote that puts it less at odds with reality (maybe a more specific meaning to “it does not work”… he might have been talking about tax revenues or some projection that the deficit would quickly go away), but I have never managed to find anything more about it’s context on the internet. All I get is zillions of links to this exact quote proving that the new deal was a failure.
Coberly – not by me. I think we should put back FDR’s top marginal tax rate and restart the WPA. My point is that we may be closer to the GD’s unemployment rate than people think. I suspect part of the reason we aren’t creating work programs is that people are convinced our unemployment situation doesn’t compare because we’ve moved the goalposts and people don’t know it.
Aaron has been deleted under three names. An odd game for an adult aged person.
Sorry, I guess i didn’t get it.
Actually it was Volkert, as head of the Federal Reserve, who seriously cranked up interest rates in the late 70s. I remember racing around to lock in a 12.25% 25 year fixed rate mortgage, and a friend of mine wound up paying 19% for a similar deal. Needless to say, that killed inflation. It also killed Carter. It also killed the economy. Did I mention that it killed inflation?
No one thought that could happen, but the dynamics were simple. Borrow now, buy something, pay it back in inflated dollars. When the interest rates went up, it cost more to borrow than the inflation rate. Suddenly, people stopped buying.
Inflation started under LBJ, if I remember correctly, though people were complaining about it under Eisenhower when it was 1% or so. LBJ promised guns AND butter, and the economy did great, but prices started rising. Prices really took off under Nixon, who being a true blue, hands off the economy Republican, imposed wage-price controls for a year, but with little effect. If I remember, Ford had his Whip Inflation Now campaign, and Carter tried to fight inflation as well. Unfortunately, it took Volkert and the Federal Reserve to kick prices back into line.
If there is another better theory of how the inflation of the 70s ended, I’d be curious to hear it.
One of the striking things about the Great Depression before Roosevelt was the sheer lack of statistics. I don’t think people realized quite what was happening at first, and when they started to, a lot of people tried to deny it.
I was reading an article in the September 1932 issue of Fortune titled “No One Has Starved” about the stress that unemployment was placing on the fragmented relief system then in place. City after city was basically running out of relief money and having to spread what aid they could more and more thinly. Mind you, the relief efforts ended the bread lines, but people were still without work.
As for numbers, so much was guess work. “The number of persons totally unemployed is now at least 10,000,000.” in the article came with a footnote saying “‘All census enumerations,’ says Commissioner Stewart, ‘have excluded the unemployables .. the ne’er do wells were not counted …'” For the source of the statistics: “The actual estimate of 10,000,000 men unemployed was made by Professor Paul H. Douglas of the Universtiy of Chicago, an acknowledged authority. ” It is rather odd to think of a University of Chicago economist sullying his hands with actual data, but these were different times.
Apparently, Senator La Follette of the Committee on Manufactures was holding hearings on the matter. The committee’s estimates were also close to 10,000,000 unemployed. The committee figured that if one ignored the 6,000,000 farmers and 1,600,000 farm laborers, that left 41,000,000 in the working population. Ten million unemployed gets you that famous “25% of the nation unemployed”.
After FDR came into office, the BLS actually tried collecting statistics, but an awful lot of things we take for granted in labor statistics were still open for discussion. If you read Lebergott, you realize what a big change this was. He built his tables from 1800 using what records he could. That included newspaper ads specifying wages, city and town estimates and a whole variety of sources which he admits are of varying quality. We might rail at the BLS, but they have some method to their madness. Similarly, we might rail at Lebergott or FDR’s people for not counting government relief jobs, but no one had a sophisticated time series to calibrate from.
If you follow the 30s, you’d see things getting a lot better by ’36. By ’39, things were doing much better, if only because of Britain’s war spending. It really made a big difference. England could only produce so much, so they bought lots of ships and trucks and guns from the U.S. By 1941, well before Pearl Harbor, the U.S. was already running a war economy. Just tracking the ads in Fortune gives the game away. In the mid-30s, there were growth businesses like radio and aviation. In the late 30s, you see the war business picking up, and by 1941 our civilian sector was effectively at war, though our military sector didn’t ramp up until ’42.
Jimi,
I don’t know… in my old neighborhood, where I lived two and a half years ago, you wouldn’t be able to go anywhere without the sidewalks and staircases built by the WPA.
And yes, it created a major deficit. But how did Reagan finance his spending again? Or are you going to argue that the Reagan economy was pretty dismal too?
Kaleberg,
I’m not railing at Lebergott. I am railing at the folks who don’t compare apples with apples today when they know better.
One might as well try to figure out the relative sizes of different continents by taking the land mass of North America based on a map drawn up in 1520 and and the land mass of Africa using a map drawn up today.
little john
that’s the nature of communication. i don’t pretend to be a scholar. certainly not an economist. but the picture of history i got from reading more than one book about the time was that capitalism had pretty much shown the limits of what it could do relying entirely on the invisible hand. i realize there are revisionists today who will blame the great depression on hoover’s efforts to do something about it, ans say that roosevelt only prolonged it with his. i remain unconvinced. for reasons having more to do with “intuition” derived from experience than any simple package of reasons, rationalizations, or theory that i could give (including my own experience writing “theories” and then trying to make them conform to more facts than the first two i thought of).
the responses of the industrialized world at that time included Roosevelt, and also Hitler. despite the sort of similarities between “command economies” that people with an axe are able to cite, most sane humans are rather more impressed by the differences between Hitler’s approach and Roosevelts. So when you ask for something detailed, in the first place you are asking the wrong person, in the second place i suspect you have an ideological agenda that has nothing to do with any kind of meaningul compare-and-contrast. It’s like, you know, “Man, if yoy have to ask, you’ll never get to know.”
Kaleberg
I guess that is a reply to me… though js-kit obscures the fact. And no, I think your theory is about right. I didn’t notice that Volker was working for Carter, and at the time wouldn’t have had a clue about interest rates. I did notice the Reagan recession. Started by Carter, you say?
Clark
you may well be right about the unemployment rate. but the effect it is having on people is different… except for those actually unemployed. Those fifteen year olds, for example, are now all going to college to become hair dressers. And, much as I hate to say it, that is better for them and us than having them out actively looking for work. But I would be the last to say the situation is looking good.
Kaleberg
thanks for the scholarship. i would ony add two things. after FDR we started paying government workers to compile statistiics as meaningful as they could make them. are these people on the dole? pr does it turn out that a little government work does make the economy work better?
second, whatever the contribution of the war was to ending the recession, the experience of the people was the the New Deal created immediate relief, before the war was a factor. Only by dismissing the relief as “make work” and begging the question… after all, government projects are not directly putting money into the hands of capitalists (not Directly, and too many “capitalists” are not smart enough to see “indirectly”)… can ideologues maintain that the new deal did not help the economy. maybe. but it sure helped the people. and second, part two, if making things to blow them up ends a depression, there is no reason to think that having the government make things that last… roads, power grids, schools, health care, statisticians… would not be even more effective. unless of course you define “economy” as “exculding” government work.
Dan
having been deleted myself I think I can understand AA a little. Guy thinks he has something to say, frustrating being shut out. He has the time and knowledge to game the banning. I don’t, and learned early enough there is no point. I feel a little sorry for him, and I don’t mind hearing his point of view from time to time. though i get a little tired of it when he insists.
I think I may even have agreed with him once or twice.
note that he supplied the lead in to some useful discussion of Morgenthau.
Jimi
this is frustrating. there have been a number of comments that suggest that just maybe government workers do contribute to the economy. but you don’t even acknowledge them to argue with them. you just repeat your catechism. that’s okay as the first step in an argument. it’s not very interesting when repeated with no sign that you understand the people you are talking to don’t agree with it.
it’s only deficit spending when you don’t pay for it.
I do recall a rather testy exchange on Capitol Hill wherein somebody questioned Paul Volker’s approach to killing inflation because of the pain it was inflicting on borrowers including businesses. His response IIRC was something to the effect of shrugging “Hey those are your constituents not mine”.
William Greider wrote an excellent contemporaneous history of that period btw one that introduced me to the mysteries of macroeconomic policy, called Secrets of The Temple – How the Federal Reserve runs the country. Recommended.
“the experience of the people was the the New Deal created immediate relief”
Yea, one can look at the election results as it went on to see pretty much how people felt about it.
FDR was elected president four times by wide margins (22m vs 16m, 27m vs 17m, 27m vs 22m, and finally 25m vs 22m in 1944). Note the huge margin for his second term.
The Democrats gained 54 seats in the house for the term starting in 1931 to tie for control, gained another 96 for 33-35, then another 9 for 35-37, then yet another 11 for 37-39 then finally lost a bunch in the 1938 election (on the heels of the recession induced by the attempt at budget balancing, some scandals, etc). Again massive upswing after just 1 year of the new deal, and continued momentum for a decade. By 1937-9 there were just 89 republicans in the house vs 333 democrats.
The story in the senate is similar with the Democrats gaining 8 seats in 31 then 10, then 12, then 16 and then finally loosing 6 in the 1938 election.
Note the democrats finally lost control of both houses in 1947.
Sorry buff…I can’t get your agreement back.
amateur
thanks. i have been tempted to read that a number of times, but was afraid of another book that was more about personalities than about cause and effect. now i’ll check it out.
JeffF
but they won the Presidency in 1948. any thoughts about why (to both)?