Recently liberals have taken offense to the claim that the capitalist economy recovered from The Great Depression with the military build-up to World War II and not from the effects of Franklin Roosevelt’s New Deal. While economic historians largely agree that military spending was decisive in lifting the capitalist economy well beyond pre-depression levels, few deny that some New Deal programs were effective in improving employment, expanding consumption and increasing production. Both crediting the New Deal and accepting the decisive turn spurred by government spending for World War II are compatible and complementary claims.

What has the liberals so agitated is a recent article by one Amity Schlaes, a right-wing flack who has makes it her task to demonize all effective government action directed towards economic activity. She wrote an editorial in December of 2007 that appeared in The Wall Street Journal, rehearsing her thesis developed in her then recently published book on The Great Depression. Few paid attention because New Deal policies seemed irrelevant to most of the pundits with a commercial megaphone. Her subsequent defense of Bush’s economic policies and her denial of the unfolding economic collapse were vulgar and ideological driven. She has returned as an “expert” to revisit her attack on the New Deal in a recent Washington Post commentary.

Understandably, some liberal economists leaped to the defense of a Democratic Party icon. In the narrow and barren field of battle between Republicans and Democrats such a defense is, I suppose, commendable – but not at the expense of truth and a deeper understanding. Dean Baker, a liberal economist who does a fine job of skewering mainstream economic writers and pundits, cites the growth rate during the New Deal as evidence that Roosevelt’s policies brought on recovery. From 1933 until 1939 the US GNP grew by almost 48% in constant dollars — an impressive number especially with the over 5% decline in 1938. Yet we must note that despite this increase, the economy didn’t stabilize at a 1929 level until 1939. Perhaps more telling, the GNP growth per capita only surpassed the 1929 figure in 1940. Arguable returning to pre-crisis levels after 10 or 11 years does not constitute a recovery, especially when we look at the gains made with the war-time economy. In the next six years, GNP (always in constant dollars) grew persistently, achieving an increase of nearly 70%. Per capita, that growth amounted to 59%, far exceeding the 42% of the period from 1933-1939. These growth rates were won with a huge displacement of much of the conventional labor force into the military.

Amity Schlaes’ nonsense aside, the reason that the capitalist economy recovered and expanded so rapidly after 1939 rests solely on the magnitude of government spending from that point further. Throughout the New Deal period, deficit spending never exceeded $4.5 billion (1936) in any year. After 1940, the annual deficit never fell below $6.2 billion and reached nearly $60 billion in 1945. The total gross US debt was a bit over $40 billion in 1939 and exploded to $258.7 billion at the end of 1945! And it is the magnitude of government spending that stands at the heart of the critique of the New Deal process. Peace time government spending under Roosevelt was simply too little to decisively lift the economy out of stagnation (One might note that the numbers do suggest that peace time government spending appears to be a vastly more efficient use of public funds than war-making — another reason for disappointment with the Roosevelt administration). An awareness of these facts stands behind Paul Krugman’s trenchant critique of the Obama stimulus program as far too little in scope.

But as I have pointed out many times, a recovery for the capitalist economy is not the same as a recovery for the people’s economy, a distinction lost on most liberals romantically and dogmatically attached to the New Deal.

How did the people’s economy fare with the New Deal programs?

Unemployment figures are, perhaps, the most telling measure of the health of the people’s economy. While unemployment peaked at 24.9% of the civilian labor force in 1933, it was still 17.2% in 1939, an unconscionably high rate (19% in 1938). Not surprisingly unemployment dropped dramatically with conscription, falling below 1929 levels in 1943. Obviously government employment for killing is not an admirable way to restore jobs, but there is no reason, in principle, that productive jobs could not have been expanded equally for peaceful uses — except for deference to the private, profit-making sector.

Earnings in key industries like manufacturing, mining, construction, and transportation recovered to 1929 levels in 1941/1942, excepting transportation which returned to 1929 levels in 1937. But here again the picture is complex. Annual earnings in some industries actually began retreating before the “crash,” mining in 1926 and construction in 1928.

One notes a curious trend that defies markedly the general trend of Great Depression statistics. The index of output per employee follows a rather smooth upward curve from 1926 on throughout The Great Depression when viewed as a rolling average (It only dropped below the 1928 index in 1932 and 1933). Assuming that there were no major labor saving innovations and widespread overcapacity existed in this period, this index of labor productivity serves as a rough measure of the rate of exploitation. Thus, we must conclude that labor exploitation intensified unrelentingly during this period despite the militancy and organization of the US working class. One might go further and say that the New Deal did little to appreciably shift the balance of power between capital and labor beyond some welcome legislative initiatives. It is worth noting that labor productivity (and exploitation) is again on the rise with the current deepening crisis. Few economists delve into what this means for working people.

Incarceration in State and Federal institutions leaped dramatically in 1929 and grew persistently until 1941, a feature of all eras of grinding poverty. Likewise, the suicide rate peaked in 1932 and remained above historic levels until 1941.

Data from the New Deal period paint a mixed picture of the effectiveness of New Deal programs. They surely show a praiseworthy concern for maintaining a life-sustaining minimum: life expectancy tended to increase after 1929, during both the Hoover and the Roosevelt administration. Food consumption per capita, in many cases remained relatively stable and adequate, though fish and potato consumption curiously never returned to earlier levels, even in 1946.

But does this constitute recovery?

Liberal economist Charles McMillion thinks so. He argues that “… the programs of the New Deal… restored the health of the nation’s economy” in an article that circulated widely in left and labor circles on the internet (The “FDR Failed” Myth, In fairness, McMillion’s target is the ranting of Amity Schlae and her reactionary economic views on government spending. Nonetheless, good intentions do not trump historical accuracy and perspective. His admiration for FDR blinds him to a credible interpretation of the pertinent data. He boldly states that “The official US Business Cycle Dating Committee established that the downturn that begin in August 1929 ended in March 1933 with the remarkable economic expansion that started within days of FDR’s bold — if trial and error  –  New Deal programs.” Putting aside the credibility of his “official” source, this interpretation is sheer nonsense. If the recovery began in March 1933  –  the month of Roosevelt’s inauguration — then he surely had nothing to do with it. It would require divine intervention to accomplish recovery within days or, even weeks, after he assumed the Presidency. We don’t hold even Obama to these high standards. Moreover, McMillion conveniently ignores the fact that the March “recovery” was followed rather quickly by a precipitous decline — two-thirds of the gains won after March were lost by November of 1933.

Three acts were passed in March of 1933: The Emergency Banking Relief Act (providing, among other things, for the purchase of preferred stocks in banks), the Credit Act (securing military pensions and reducing government employee compensation) and the Unemployment Relief/Public Works Act (enabling public works employment, compensation, housing, medical attention, etc.). These acts, especially the last one, were credible programs which were to be fully implemented far past when McMillion dates the beginning of the recovery. The annual increase in public spending in 1933 was nearly identical to the increases in 1931 and 1932 during the Hoover administration. Likewise, the annual increase in social welfare expenditures in 1933 was on a par with the prior three years.

So what caused the brief recovery that McMillion alleges began in March of 1933?

If we are to take the “official” date of the expansion seriously, then surely we must give Hoover credit for turning the tide! After all, he signed the Emergency Relief and Construction Act on July 21, 1932. The act provided $300 million to the states for “relief of destitution” in loans payable beginning in three years. In addition, the sum of $322,224,000 was allocated for public works infrastructure improvements with repayment beginning in 1938. Of course claiming this act as the cause of recovery is as ridiculous as McMillion’s claim about FDR’s 1933 overnight miracle.

Also, McMillion constructs a chart tracking GDP over the period from 1929 to 1941. He hopes to show that growth was steady and strong between 1933 through 1941 with the exception of the widely acknowledged mini-depression of 1937. This, he believes, would show that the recovery began in 1933 and made steady, briefly interrupted progress. Curiously, the left axis of his graph is expressed in percentages with no explanation of what these percentages represent. Normally, such a graph would have GDP or GDP growth as the left axis, but McMillion opts for mysterious percentages instead.

In any case, McMillion believes that he demonstrates that New Deal programs conquered The Great Depression, by locating the US entry into World War II on December 7, 1941 at the very end of his graph of rapidly accelerating GDP, suggesting that the declaration of war signaled the era of the World War II economy. This is either naive or historically blind. Military spending accelerated from $928 million in fiscal year 1937 (ending June 30) to nearly $6.1 billion in fiscal year 1941 (ending almost 6 months before the Japanese attack). The Roosevelt administration began the military buildup far earlier than McMillion dates it. Thus, a true picture of recovery from The Great Depression must include the pre-war buildup.

I adduce reasons why liberals might be hostile to locating the recovery with the war economy in a previous blog entry (A Shallow Debate, Suffice it to say, the war time economy  –  with centralized planning, production, and distribution; massive government employment; price and income controls; etc — was too suggestive of a socialist economy. For liberals, therefore, it is convenient to sustain the New Deal myth.

It takes nothing away from the merit of Roosevelt’s administration to say that the war-time economy shows that it could have done far more if the leaders were not obsessed with rescuing capitalism. New Deal policies were limited politically and ideologically from shifting the balance of power from capital to the working class. They were reformers first and foremost with no revolutionary commitment to fundamentally alter or tame capitalism. Even a casual read of the New Deal centerpiece — the NIRA  –  demonstrates this limitation of vision.

One must conclude that Roosevelt did much to rescue capitalism and, importantly, he understood that mass support for capitalism required a retreat from the worse excesses of laissez faire policies, policies that left the fate of millions to a cruel, heartless marketplace that enriched the few. But the question remains: Is capitalism with a more humane face the best we can do? Today, the question is again urgent. Should we “save” a socially and morally backward system of organized and systematic selfishness and mindless acquisitiveness?

I believe its time to look at the other option: socialism.

Zoltan Zigedy