I see the history rewriters are tying to develop a new meme about FDR and the depression. They are now trying to argue that FDR scared businessmen and capitalist so badly that they were unwilling to invest and this was why the recovery was so weak and the depression lasted so long.

As usual, they take a historic fact, that investment in the recovery was weak, and blame it on the New Deal policies and conclude that the New Deal had a negative impact. As the chart below shows, real nonresidential fixed investment in the depression was very weak when you compare it to post war cycles. Note, that in the chart I have rescaled the post-war cycles so you can easily compare the differences. The data is rescaled in two ways. One, the post-war data is quarterly data while the depression data is annual data. Two, the post-war data is on the right scale and the depression data is on the left scale and the scales are set so that the magnitude of the downturns appears similar even though the depression downturn was much larger.

The argument is that the weaker depression rebound was because FDR scared investors. It ignors the possibility that other factors that normally drive investment might have been responsible. Over the years as a business economist I have concluded that three factors dominate business fixed investment. They are corporate profits, capacity utilization, and the stock market. The stock market is earnings times the market PE. So using stocks as a variable captures the cost 0f capital as the market PE is it’s inverse. But it also means the variables double counts profits. For capacity utilization I use the gap between potential real GDP published by the Congressional Budget Office and actual real GDP. Not to get into a detailed discussion, but the following chart shows how well changes in the three variables have explained changes in real nonresidential fixed investment since WW II.

So the next step is to see how well these variables explain real nonresidential fixed investment during the depression. If they do a poor job it might imply that New Deal did scare business and capitalist into not investing. There is one problem in doing an exact comparison. The CBO does not calculate a real potential GDP series for the pre-war era so I can not calculate the GDP Gap for the earlier era in the same way. But it is an easy problem to surmount. From 1900 to around 1975 trend real gdp growth in the US was 3.5%. as this chart shows. So it is easy to substitute this trend real GDP series for potential real GDP to calculate the GDP gap.

So what did I find? I find that these three variables, profits, the GDP gap and the stock market do a great job of explaining real nonresidential fixed investment during the 1930s. One of the interesting points to make is that the equation does an outstanding job of capturing the turning points at the 1933 bottom and around the 1937-38 second recession.

In two years, 1935 and 1936 actual real capital spending was right at the bottom of the one standard error band and in one year, 1937, capital spending was moderately higher then the equation implied it should have been. But it has to be obvious that overall, the three factors of profits, capacity utilization and the stock market do an outstanding job of explaining business fixed investment in the depression just as they do in the post-WW II era. On balance this work clearly implies that the argument that FDR scared businessmen and capitalist into not investing is strictly a myth that is not at all supported by the data. Compared to post WW II cycles capital spending was weak in the late 1930s, but it was weak largely because of the massive excess capacity created by the economic collapse from 1929 to 1933, not anything FDR did.