v'ܩ The New Deal Failed the First Time, Let's Try it Again
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The New Deal Didn’t Work the First Time, Let’s Try it Again

December 7th, 2008

Obama is planning a new public works project similar to that of FDR’s New Deal. He has apparently done a good job studying the history of how the New Deal was implemented. He wants to raise taxes on the rich to create jobs that are out of the scope of what the federal government is supposed to do.

Creating jobs sounds like a great idea. The problem is the government doesn’t have the money to be able do this without raising taxes or continuing to go deeper into debt. Raising taxes will not help the economy, and going deeper into debt to China is also a really bad idea.

The other problem is that the government is really inefficient. At everything. They will take your tax money and create lots of inefficient jobs. This is exactly what happened during the Great Depression. This is what extended it.

For the last few months we have had bad companies taking handouts from Washington. Now we are going to have congressmen trying to bring home the pork to their districts. They will vote for these things, create jobs in their districts, and make the recession worse. However, since the congressman in Ohio is taking federal money from taxpayers in Tennessee for his district, his district is happy with him. He will get re-elected because of this. He will continue to vote with Obama because of this. However, does this help the country as a whole, taking money from people in one place and giving it people in another while the government wastes some of it on the way?

What is going on here is that Obama hasn’t learned from history. The New Deal did not work. Don’t trust my opinion? How about Henry Morganthau, Secretary of Treasury for FDR. He said this in 1939:

We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot.

Transferring money from one person to another doesn’t create jobs. It doesn’t create more money. It just changes who has the money. Henry Hazlitt described it as the broken window fallacy:

Let’s say that we have a nice suburban area sort of like we have here in Washington, DC, out in Chevy Chase. And we have some guy there who has a nice picture window, and some kid goes by, a hoodlum, and throws a rock through that window, breaks it. And let’s say that it costs $500 to replace that window. Well, our first reaction might be: What a horrible thing. Let’s catch the perpetrator.” But what if somebody else came up and said, “Wait a minute. The window’s been broken, some time has elapsed, we haven’t caught the guy, but maybe we shouldn’t catch him to throw him in jail. Maybe we should catch him to pat him on the back. Because I’ve observed what’s happened in that house and what’s happened is this: He broke the window, but the guy who had the window broken called up the glassmaker and the glassmaker put the window in and installed it for $500. Then the glassmaker took that $500 and bought a DVD player. He also bought a couple DVDs. And then he bought a reclining chair to sit back and watch the movies, all with that $500. So that broken window has generated business and now we have more DVD sales, more reclining chair sales, and it’s generated business all around town. So isn’t this a good thing?”

Where’s the problem with this argument? The valid point here is that the guy whose window was broken also might have wanted to buy a DVD player and a reclining chair. Or he might have wanted to buy a suit of clothes and some insurance. So that guy, and the tailor, is out $500 because instead of buying a suit and a shirt, he now had to pay for the window. You never generated real business because the guy who had the window broken is out $500 and the guy who had replaced the window is up $500, but the guy who had the window broken would have also been spending $500. So there’s really no net gain.

This gets worse when the government is in the middle. When the money goes into the government before it changes hands, there is less money coming out on the other end.

If Obama can’t learn from history, we are doomed to repeat it. When FDR took office in 1933 unemployment was over 24%. In 1939, it was 17.2%. In 1943 it was 1.9%. In FDR’s seventh year in office, unemployment was still over 17%. That doesn’t really seem to me like something that worked really well. World War II on the other hand did get us out of the Depression. It made unemployment go away. The New Deal did not. I certainly do not want another world war. Obama’s New Deal is also something I could do without.

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  1. December 7th, 2008 at 06:57 | #1

    The New Deal failed, this is clearly true. Is there some possible way a similar program can be implemented that doesn’t turn into money just being shifted around?
    How about a program designed to encourage local businesses to head up small groups of people pursuing these public works projects, specifically in their area? Wouldn’t improving the area some businesses are in increase their business? If so, then it would be in their best interest to help fund these projects. I believe the problem here is that there is no way the businesses in question can trust other businesses will contribute unless they are forced. Because the ‘benefit’ will take a long while any business that loses capital in the short term by funding these projects is likely to be severely disadvantaged against his neighboring businesses that didn’t contribute.

  2. December 7th, 2008 at 07:03 | #2

    I also had a second thought. Everything is only moving money around. If you start a business you hire people but you can only fund them in so much as you can convince people to use your new product or service. The amount of available ‘resource’ is (should be) relatively static and therefore money is just being shifted around. You aren’t creating new jobs because for you to succeed people will have to divert some of this finite resource into your business instead of into another business they have decided you are superior to. This will put the other business out of business. I’ll do some more looking into this.
    It may create new money in so much as it encourages savers to spend money they haven’t been. Perhaps, that is why American savings were historically much higher than they are now. People simple had less things they wanted to spend on?

  3. Harvey Hyman
    December 10th, 2008 at 17:30 | #3

    haha, I didn’t have him as a prof, but a few of my friends did. I believe he was in the Econ Dept. I only took one Econ class, but my prof was great. He set me onto the idea that WWII didn’t end the great depression. His analogy was much like your broken window one: that just by building and destroying tanks, airplanes, guns, etc, you are depriving people of money that could be used for other, consumer goods. If building stuff just to destroy it worked to end depressions/recessions, why don’t we just do that all the time? Take tanks, planes, etc into the desert and blow them up.

    The war may have been necessary, but its list of positive effects probably didn’t extend to ending the Great depression (unless you count the hundreds of thousands of otherwise employable young men who were killed, thus unable to return to the labor pool [many of whom would have been unemployed or displaced other people seeking employment] and be unemployed).


    “So, the most often cited evidence of wartime prosperity, the nearly complete disappearance of unemployment, does not signify “full employment” in the usual sense. In 1940, the unemployment rate (Darby concept, which, unlike the official measure [14.6 percent in 1940], does not count those enrolled in government emergency employment programs as unemployed) was 9.5 percent. During the war, the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voilà, the unemployment rate dropped to less than 2 percent. This disappearance of unemployment reflected not, as Keynesians would have it, the beneficial effects of huge government-budget deficits or, as monetarists would have it, the beneficial effects of huge increases in the stock of money. Instead, the disappearance of unemployment reflected overwhelmingly the direct and indirect effect of the gigantic military conscription―more than ten million men were drafted and many others were induced to join the armed forces before being drafted, in hopes of avoiding service in the infantry.”
    from: http://www.hillsdale.edu/images/userImages/esomerville/Page_4496/What%20got%20us%20into%20and%20out%20of.doc

    I also question the commonly ascribed cause of the great depression “over-speculation”, and instead blame it on “over-regulation.” But that’s for another time. haha. Just be afraid every time you hear the gov’t say that we need to regulate these roguish banks and investors. We’ll probably be in this funk for another 1-2 years before we see a decent return to pre-fall levels!

    Good article, I’ll have to check your full blog out… after finals! haha

  4. Matt
    February 6th, 2009 at 13:54 | #4

    Why will this stimulus work when all others have failed?

    Bush’s $150 Billion stimulus did nothing.

    Japan tried all kinds of stimulus. Nothing.

    Look at this list of recessions: http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States and tell me which ones were ended by increased government spending.

  5. Paul
    February 6th, 2009 at 16:48 | #5

    A counter-argument:


    Is it tax cuts? Is that what will work? Didn’t work the last time around. We’re here aren’t we?

  6. February 6th, 2009 at 17:00 | #6

    What were they saying back in 2004? Here’s a UCLA study: http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx - they say FDR prolonged the depression by 7 years.

  7. lori
    February 18th, 2009 at 12:17 | #7

    Tax breaks-raise other taxes-tax breaks- raise other taxes….that doesn’t create money, it just goes in a circle….only NEW jobs will create money and in my opinion legalizing HEMP will create new jobs and bring in new taxes and keep pot out of the hands of the kids.

  8. September 12th, 2009 at 08:56 | #8

    It’s interesting to me that virtually no one argued that the New Deal failed until Obama took office.

  9. Matt
    September 12th, 2009 at 10:12 | #9


    That’s like saying no one thought Michael Jackson was a great human being until he died. Plenty of people thought MJ was great before that just as plenty of people thought the New Deal was a total sham before Obama took office.

    In each case, a major event took place that got more people adopting and/or talking about those points of view. Only you think the event that triggered all this talk was Obama taking office while everyone else here probably would agree that the worst economic crisis since the Great Depression and the government’s complete ignorance that it had a large role in creating the crisis (mostly the Bush administration and the Feds) are valid reasons to refute the glorifying claims big government supporters make about the New Deal. It had very little to do with Obama, but now that Obama thinks he’s the next FDR, when he was voted to be the next JFK, a lot of conservatives and independents are worried government will repeat its errors.

    Amity Shleas’ The Forgotten Man, which goes into great detail all the ways government made economic problems of the Great Depression worse, was a NYT bestseller long before Obama took office.

    Government can do a lot, but when it ignores the fact that it was partly responsible in creating this mess (sloppy deregulation, over regulation in some cases, very loose monetary policy, artificial demand of housing through subsidized loans, etc.), it’s destined to create a lot more problems than it will solve.

  10. DEE
    February 8th, 2010 at 09:30 | #10

    The New Deal failed? Really? The New Deal created a middle class where there had been none, tripled home ownership and saved the U.S. economy from ruin. It also ushered in 40 years of unprecedented prosperity and made the US one of the richest, most powerful industrial/military nations on the planet. Had it not been for the misguided orgy of deregulation that began in the 1980’s, we would still have heavy industry, good paying manufacturing jobs, a prosperous middle class, and a financial system that had not almost ruined us, again. Put aside your ideological prejudices, we are the agents of our own destruction. We bought into the same hustle our grandparents bought into early in the 20th century…we apparently learned nothing from their experience because we let the same mistakes almost ruin us again.

  11. February 8th, 2010 at 10:43 | #11

    The new deal spent lots of money for the sake of spending money. Much like our current administration. The new deal paid farmers to plow under their crops and leave their fields idle while people were starving. the new deal created the ponzi scheme of social security that is killing our budget now. those good paying manufacturing jobs came from Henry Ford and mass production. they had nothing to do with the new deal. they left because those factory workers became lazy and greedy. they wanted to be paid more for something that anyone could do, so we shipped the jobs to places that just wanted to work.

  12. gross
    June 8th, 2011 at 13:38 | #12

    First of all, you’re misspelling Morgenthau’s name. You’re also ignoring what he was talking about in that quote - he was referring to proposals to fund social security from general funds, and he was arguing it should be derived directly from individual income.

  13. August 13th, 2011 at 14:21 | #13

    I really am loving the blog it’s truly blown me away thank you so much!!