May 18 2009|10.50 AM UTC

Stan Reybern

The New Deal vs. Obama’s Economic Recovery Act

Category: Personal FinanceTags: , ,

Many a comparison has been made between the American financial climate of the 1930s and our current economic state. Although we are not yet in a situation as dire, there has been a great deal of controversy over the measures proposed and enacted by our president to prevent it from becoming so. FDR’s New Deal helped to bring the country’s economy back to health, and Obama’s American Recovery and Reinvestment Act has its sights on the same goal. Here we take a look at the two plans head-to-head to see some of the similarities, differences, and what we can learn from the past in our attempt to reverse the path of this troubled economy.

(Click image to enlarge)

NEW DEAL V. RECOVERY ACT

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{ 6 comments… read them below or add one }

Matt May 18, 2009 at 2:28 pm

“FDR’s New Deal helped to bring the country’s economy back to health,…”
No, it made it much much worse. Look at the crash of 1920-21, it barely made the history books because the government reduced taxes and let the economy sort itself out. The New Deal did exactly the opposite and we were mired in the great depression for almost 20 years. The fact that Obama is doing the same thing means we aren’t going to recover for a while. When we do it will be in spite of his efforts rather than because of them.

Reply

Rick May 18, 2009 at 5:56 pm

Actually, that’s not at all true, Matt. First, we should probably clear up whose ‘new deal’ it was. While FDR took credit for it, the overwhelming majority of the ideas came from Marriner Eccles, a banker from Utah who FDR recruited to chair the Federal Reserve. FDR simply packaged Eccles’ ideas up and called them the “New Deal”.

Secondly, and more importantly, the programs suggested by Eccles were indeed the correct approach. What Eccles proposed was, for all intents and purposes, Keynesian Economics. He simply proposed these ideas 3 years before Keynes wrote the book.

The problem with the New Deal program was not that it was a bad idea. Its main problem was that it was so different from the classical view of economics that the Republicans refused to support it. FDR had great difficulty getting radical legislation passed through congress with a strongly entrenched opposition party.

Nonetheless, it was clear that by 1935, the economy was slowly recovering. Then, in 1936, FDR finally caved to Republican pressure and decided to balance the budget. This was a HORRIBLE mistake, and it undid all of the forward progress of Eccles’ programs from the previous couple of years. To make matters worse, FDR further hamstrung the program by requiring Eccles to raise interest rates.

Between balancing the budget and increasing interest rates in 1936, FDR managed to undermine everything, and the economy plunged back into a depression. It did not recover again until WWII began, and the US shifted into manufacturing overdrive to become the arms dealer of Europe.

Those who only look at the situation from a superficial vantage point will be prone to leaping to erroneous conclusions. The fact is, Eccles’ plans (i.e the New Deal) were absolutely the correct actions to take. It was only when FDR caved in to Republican pressure and got cold feet that things went south again. If he would have stuck to his plan in the face of substantial opposition, the Depression would have ended sooner.

My point, of course, is not to confuse FDR’s failure to stick to the plan with the idea that the plan was wrong in the first place. If FDR was guilty of anything, it was that he didn’t quite have enough confidence to stick with a winning plan when everyone else told him Eccles was wrong.

(Oh, and by the way, for those who say that Keynesian Economics doesn’t work, it should be pointed out that Nazi Germany used it to stunning advantage in the early 1930′s. By 1936, they had dragged themselves out of a worse depression than the US was in, and were ready to challenge the entire world. And after WWII, the US used Keynesian models to produce a 25 year economic boom. It does indeed work)

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Anonymous September 23, 2011 at 11:35 pm

I thought that the Germans had hyper inflation due to keynesian economics. Also, there were a lot more going on in the 20′s and 30′s than is mentioned above. Although a well written thought, it is a simplistic point of view.

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Amina May 18, 2009 at 8:44 pm

Matt-
In the 1920′s, when President Harding “reduced taxes and let the government sort itself out,” Americans did enjoy an unbelievable amount of economic prosperity. However, this was short lived, as this was the same prosperity that led to the stock market crash of 1929 due to unstable investing. Basically, the Great Depression represents the failure of laissez-fair economics. Surprisingly, the New Deal was actually a fairly conservative approach, as it sought to save capitalism.

Nice infographic!

Reply

Morgan January 4, 2010 at 6:46 pm

Actually Amina and Matt are both correct.
Please read this article, you’ll all find it informative
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx

It is best to let the economy straighten itself out however after a while it cannot be let to run itself. There has to be an equal balance of government and laissez-fair ideals to correct the situation. However our government has not found that balance.

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Kristen February 25, 2010 at 9:20 am

I think we all need to take a step back and re-read through all of his plans, thus far.
Matt- you are right.

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