The impact of new deal spending and lending during the great depression.

• Author: Fishback, Price V.
• Position: Research Summaries

The Great Recession of the 2000s has led many policymakers and scholars to invoke Franklin Roosevelts New Deal as a source of ideas for how to deal with our current problems. Over the past 15 years, I have worked with Shawn Kantor and a number of other co-authors to examine the economic consequences of a variety of New Deal spending and loan programs.

The Great Depression led to a dramatic change in attitudes toward federal spending and regulation. Between 1929 and 1932, real GDP declined by 25 percent and unemployment rates rose above 20 percent. In response, Herbert Hoover and Republican Congresses nearly doubled federal spending from 3 to 5.9 percent of peak 1929 GDP and established the Reconstruction Finance Corporation (RFC) to lend to local governments for poverty relief and to aid troubled banks and businesses. Meanwhile, real tax revenues declined from 4 to 2.4 percent of 1929 GDP by 1932 and the federal budget reached a deficit of 3.5 percent of 1929 GDP. Seeking to balance the budget, Hoover and Congress held spending constant and raised a wide range of taxes in their last year in office.

Promising a New Deal to combat the problems of the Great Depression, Franklin Roosevelt and a Democratic majority in Congress were elected in a landslide in 1932. Inundated by a broad range of problems, they offered dozens of new programmatic and regulatory fixes. Many new programs involved large increases in funding; real federal outlays increased from 5.9 percent of 1929 real GDP in 1933 to nearly 11 percent by 1939. The deficit fluctuated but the budget never got too much further out of balance because real tax revenues expanded by roughly the same amount. (1)

The grant and loan programs covered a wide variety of issues. About half of the grants went to federal funding of poverty relief, largely delivered as work relief with limited work hours and hourly earnings of less than two-thirds of the earnings on traditional government projects. Seventeen percent went to veterans. Another 18 percent financed the building of roads and large public works, paying workers regular wages. To offset the lost income of farm owners, the Agricultural Adjustment Administration (AAA) used 11 percent of the grants to pay farmers to take land out of production and thus limit output and raise farm prices. The majority of loans went to farmers for mortgages and crop loans or to the Home Owners' Loan Corporation (HOLC) to purchase troubled mortgages and refinance them.

To gauge the impact of these New Deal programs, we compiled and digitized panel data sets for cities, counties, and states from a variety of sources. Many of the datasets used in the published papers can be found at my website at the University of Arizona (https://econ.arizona.edu/faculty/fishback.asp). New data sets will continue to be posted there as we publish papers that use them. We analyze the data using the econometric methods developed for panel data sets with multiple observations for each location. The analysis usually identifies the impact of a particular New Deal program by focusing on changes over time within the same locations while holding constant changes at the national level, such as changes in the money supply or in national regulations that vary from year to year. In some cases the identification comes from deviations from time trends within the same locations while controlling for the national changes. In nearly every setting, we need to deal with feedback effects from the economy to the New Deal policies, and with potential inability to control for relevant factors that are correlated with the New Deal policy as well as the outcome being studied...