As the current recession deepens and the financial sector continues to sputter, commentators draw analogies to the Great Depression. In particular, former President George W. Bush is likened to the “do-nothing” Herbert Hoover, while the charismatic new President Barack Obama is the modern incarnation of FDR. The American public is told day after day that deregulated markets caused the stock market crash in 1929 and that deregulated markets also caused our current troubles with the housing bubble. Obama’s supporters claim that he will deliver us a “new New Deal” to once again rescue capitalism from its own excesses.

This typical view completely misreads the historical record. Yes George W. Bush was like Herbert Hoover in that they both expanded the size of government, and they both responded to an economic crisis by crippling the free market. Their bungled responses actually made the situation worse, and yet, perversely, the “free market” got blamed.

Far from getting the U.S. out of Depression, FDR’s New Deal prolonged it. Most people agree that central planning doesn’t work and that it’s better to let private entrepreneurs steer the economy rather than a few “experts” in Washington. This wisdom is just as true during a severe economic slump. By any measure, the U.S. recovery from the Great Depression under Roosevelt’s leadership was the slowest and most agonizing in U.S. history. We can only hope that President Obama abandons his plans to give us a repeat performance.

Hoover Was No Liquidationist

In order to place the failure of the New Deal in its proper context, we first need to explode the myth that Herbert Hoover was a proponent of “hands off” when it came to the economy. On the contrary, Hoover did just what a modern progressive would have recommended. The fact that his policies led to disaster proves that government intervention to “fix the economy” is a foolish approach.

Immediately following the stock market crash in late 1929, Hoover began organizing meetings with the country’s major business leaders. He urged them to resist the natural inclination to look after their own bottom lines by laying off workers and slashing wages. Hoover subscribed to an “underconsumptionist” theory of economic depressions: Hoover thought that laying off workers was part of a vicious cycle where each round of layoffs would destroy the purchasing power of consumers and thus cause businesses even more pain.

By all accounts, Hoover’s high-wage policy was “successful,” meaning that businesses really did behave different during the early 1930s from all previous downturns in American history. For example, on January 1, 1930, the American Federationist—a labor union publication—ran an editorial praising the President’s conference for giving “industrial leaders a new sense of their responsibilities. … Never before have they been called upon to act together.”

Hoover thought he was helping workers by insisting that employers maintain wage rates as the economy imploded. But in fact, this disastrous policy is what led to the horrific unemployment rates that kept rising as the years rolled by, reaching the incredible rate of more than 28 percent in March 1933.

Anyone who has taken Economics 101 can understand what happened in the early 1930s: When the market price of something—in this case, labor—is supposed to fall and yet the government places an artificial floor under the price, the result is a surplus. With their sales collapsing and other prices falling, businesses needed to cut their costs. If the president of the United States told them they couldn’t reduce their wage payments, the only solution was to hire fewer workers. Consequently, there were more workers looking for jobs than there were employers looking for workers. If a business has unsold inventory piling up, the solution is to cut prices. By the same token, if the nation has more and more labor power piling up unhired, the solution is to cut wage rates. But Hoover warned business leaders to avoid this obvious remedy.

Besides his intervention in the labor markets, Hoover also behaved as a textbook Keynesian and did what he could to prop up “aggregate demand.” In consultation with Treasury Secretary Andrew Mellon, Hoover pushed through a one-point reduction in income tax rates after the stock market crash. Further, he massively boosted government spending by 42 percent over his first two years. Hoover inherited a budget surplus from Calvin Coolidge, and yet the (fiscal year) 1933 federal deficit had risen to a peacetime record of 4.6 percent of the nation’s GDP.

Modern-day Keynesians argue that Hoover’s deficits weren’t big enough. That is a debatable proposition, but the important point is that by no means was Hoover a small-government man. It is true that he tried to close the budget deficit in 1932, but this was achieved through a small cut in spending and an enormous increase in tax rates. For example, from 1931 to 1932, the tax rate on the top income bracket jumped from 25 percent to 63 percent.

Contrary to most of the rhetoric we hear today, what the Hoover presidency really teaches us is that the federal government has no business trying to fight an economic downturn. Hoover did the same types of things that are being recommended today: He interfered with market prices, he massively increased the deficit, and he imposed enormous tax hikes on the highest income brackets. These policies gave us the worst economy in U.S. history, and they will be similarly disastrous in modern times.

FDR: A Continuation of Hoover

FDR’s New Deal only prolonged the crisis. Roosevelt was not the antithesis of Hoover; most of FDR’s programs were just extensions of initiatives that Hoover himself began.

According to the Bureau of Labor Statistics, the annual unemployment rate did not fall below double digits until 1941. Recall that FDR was first elected in November 1932, and his celebrated “hundred days” began in March 1933. Unemployment rates did begin falling almost immediately after his inauguration, but the fall was much slower than it had been in previous U.S. depressions. And then, after bottoming out at 14.3 percent in 1937, it jumped back up to 19 percent in 1938.

Of course, FDR hagiographers respond that things would have been even worse were it not for the New Deal. For example, William Leuchtenburg writes, “The havoc that had been done before Roosevelt took office was so great that even the unprecedented measures of the New Deal did not suffice to repair the damage.”

To test this theory, we can compare U.S. and Canadian unemployment rates. Although Canada did not suffer to the same degree as its neighbor, even so things got pretty ugly, with Canadian unemployment hitting 19.3 percent in 1933. But Canada recovered from its slump much more quickly than the U.S. did (under Roosevelt’s leadership). During the Hoover years (1929–1933), American unemployment on average was 3.9 points higher than Canadian unemployment. Yet during the peacetime heyday of the New Deal (1934–1941), American unemployment was 5.9 points higher than Canadian unemployment.

Under the New Deal, the U.S. economy suffered the most lingering and agonizing recovery in its history. What’s more, the U.S. economy recovered more slowly than other economies during the 1930s. Modern historians and economists can argue about the various causes for this poor performance, but in no way can they continue to credit FDR and the New Deal for “getting us out of the Depression.”

Why Was the New Deal So Disastrous?

As a whole, the New Deal was a giant cartelization scheme. It allowed big businesses to work in combination with big labor unions and draw up standard “codes” governing most industries. This crippled innovation, reduced output, and made goods more expensive. Many are familiar with John Steinbeck’s famous passage in The Grapes of Wrath where the impoverished protagonists watch with helplessness and growing rage as perfectly good food is purposely destroyed in order to raise prices. But they may be shocked to discover that it was not market forces but government orders that led to this result. For example, the Agriculture Department paid $100 million to cotton farmers to plow under 10 million acres of farmland, and the government also paid farmers to slaughter 6 million baby pigs.

Modern Americans also fail to appreciate the force needed to implement Roosevelt’s “compassionate” programs. After all, FDR wasn’t making suggestions to businessmen; his programs (such as the National Recovery Administration, or NRA) laid out new rules from Washington, and any malcontents had to be knocked into line. John T. Flynn lived through the period and was a caustic critic:

The NRA was discovering it could not enforce its rules. … Only the most violent police methods could procure enforcement. … [Enforcement police] roamed through the garment district like storm troopers. They could enter a man’s factory, send him out, line up his employees, subject them to minute interrogation, take over his books on the instant. Night work was forbidden. Flying squadrons of these private coat-and-suit police went through the district at night battering down doors with axes looking for men who were committing the crime of sewing together a pair of pants at night.

More generally, FDR and his New Dealers created what economic historian Bob Higgs calls “regime uncertainty.” Nobody knew what the rules would be one month down the road—just as investors today have no idea what Treasury Secretary Tim Geithner or Fed Chair Ben Bernanke will announce about the financial sector or mortgage-backed securities.

The huge tax increases and government cartelization—not to mention the ever-shifting rules—caused investors to walk away from the U.S. economy during the 1930s. For example, in 1938 net investment was negative $800 million. This means that businesses didn’t even invest enough back in their operations to even replace the machinery and goods-in-process that were worn out during the year. With such lackluster investment, it is no surprise that the nation’s hordes of unemployed could not be integrated back into productive niches in the economy.

The Myth of War Prosperity

Those who preach the virtues of massive government “stimulus” spending point to the apparent ability of World War II to “pull us out of the Depression.” In this typical view Roosevelt was on the right track during the 1930s with his big government programs, but he just didn’t have the courage (or the political support) to do it right. We are told that only the threat of Nazi Germany and imperial Japan gave the U.S. government the excuse to spend enough money to restore full employment.

This common explanation is also dead wrong. For one thing, it is no virtue to “cure unemployment” by shipping millions of able-bodied men overseas to fight and die. As Higgs points out:

Between 1940 and 1944 unemployment fell by … 7.45 million … while the armed forces increased by 10.87 million. Even if one views eliminating civilian unemployment as tantamount to producing prosperity, one must recognize that placing … 146 persons … in the armed forces to gain a reduction of 100 persons in civilian unemployment was a grotesque way to achieve prosperity even if a job were a job.

Higgs goes on to demonstrate that the rapid rise in “inflation-adjusted GDP” during the war years is a statistical illusion. The private component of the nation’s economic output fell sharply during World War II. The huge GDP numbers were thus driven by the government’s military purchases. But $1 billion spent by the military is not measuring true economic output in the same way as $1 billion spent by consumers in the private sector. Military procurement officers are notoriously careless with money, because they face much different incentives from executives running a private corporation.

No Coincidence

In truth, the American economy did not truly recover from the ravages of the Great Depression until the year 1946, when the federal government drastically cut its spending and relaxed its onerous controls on the private sector. Inasmuch as Roosevelt was dead at that point, we can safely put to rest the claim that “FDR got us out of the Depression.”

The New Deal/World War II episode was a horrible period in which the federal government came the closest to outright central planning that the U.S. has ever experienced. It is no coincidence that this period also displayed the worst economic performance in U.S. history. What Hoover and FDR teach us is that the federal government only makes things much worse when it tries to “fix” the market economy during a severe downturn.

Nothing is quite as important in economics as correcting the record about the New Deal and the Great Depression, because it is the economic event that has determined the way most economists are taught to manage economic downturns. This historical record is now being highly distorted by a relative handful of economists and ideological analysts.

In sum however, the anti–New Dealers—as I call those who claim the New Deal worsened and prolonged the Great Depression and was, according to some, even its first cause—don’t have a leg to stand on. Robert Murphy’s piece is an excellent example.

FDR to Blame?

Even for the anti–New Dealers, it’s hard of course to blame Franklin Delano Roosevelt’s New Deal for the Great Depression, because FDR took office four years after it got underway. By the time FDR was president in 1933, the nation’s gross domestic product (GDP) had fallen by 30 percent and its industrial production by more than 50 percent; unemployment had risen from about 3 percent to nearly 25 percent. Crushing by any standard.

So to blame the New Deal on FDR—and New Deal–type policies—you have to do some deft twists and turns. Here’s what the anti–New Dealers therefore claim: Herbert Hoover, who was president in the early 1930s, was really a mini–New Dealer. He started, they say, a bunch of public spending programs that drove the economy into depression, drove unemployment sky high, and allowed businesses to fix prices as well.

To Heck with Friedman

There are many interesting if confused notions twisted up here. But one of the most ironic is that conservative economists, led by Milton Friedman, had not said this. Friedman blamed the recession essentially on enormous bank failures, made far worse by bad monetary policy on the part of the Federal Reserve.

Now most economists agree that hundreds of bank failures and the seizing up of the credit system were a principal cause of the Great Depression—not Herbert Hoover’s quite modest government spending programs. But this wouldn’t set up the argument. To heck with Milton Friedman. Not a word of it from Murphy.

In fact, in 1929 and 1930, the federal budget was in surplus. In 1931, it fell into a mild deficit. In 1932, the deficit rose substantially, not principally due to government spending but due to the dramatic collapse of government tax revenues as the national income fell off the cliff. Murphy wants to blame Hoover’s spending so badly that he just ignored this.

Where Was the Bottom?

The next step in the misleading anti–New Deal case is even harder to fathom. FDR’s genuine New Deal deepened and/or prolonged the Depression. So you’d think when FDR took office, declared a bank holiday, started new public works and public jobs programs, and embarked on new social programs and financial regulations, the economy would have fallen even further or, at worst, stayed in the cellar.

Now not all of FDR’s programs were ideal. Even Keynesians admit that, especially allowing business to cartelize and raise prices as was done under the National Recovery Act. But guess what? The increase in government spending did work, as did a change in Federal Reserve policy as the nation unhinged itself from a pure gold standard. (The Fed was habitually too tight in protecting its gold reserves.)

What did the economy do? Stagnate? By 1936–37, GDP discounted for inflation was back to its old 1929 high. So were private capital investment and industrial production. Wasn’t the New Deal supposed to make matters noticeable worse, not better? Could anybody have deduced such gains from Murphy’s essay?

What About Unemployment?

Here’s the retort of the anti–New Dealers. The unemployment rate dropped only to 14 percent from more than 25 percent. A cut in the rate by more than 10 percentage points is pretty good in my book, especially given that the policy was not aggressive enough. But here’s the further relevant fact: Most economists now agree that the 14 percent was an incorrect measure of unemployment. Back then, the data did not include the jobs created by the federal programs.

Now, you say, they were right. Those were artificial jobs. But here’s the illogic of the argument: Anti–New Dealers usually claim that public jobs eat into private jobs—in other words, they reduce them. This was almost certainly not the case in the 1930s, but let’s say it’s true. Then let’s include the public jobs that allegedly displaced the private jobs and net the difference. You know what the unemployment rate was when you count public jobs? It was 10 percent.

World War II

Probably secretly knowing the 1933–37 performance was pretty good—FDR was re-elected in a landslide, remember—the anti–New Dealers then try to blame the 1937–38 slide in the economy on, well, the New Deal. In fact, FDR abandoned deficit spending, even cutting federal salaries in order to try to balance the budget in 1937, just what the predecessors of today’s anti–New Dealers wanted them to do. (Murphy admits Hoover raised taxes in the early 1930s, an especially anti-Keynesian strategy, in order to try to balance the budget.) Fed officials then raised interest rates for fear inflation was about to return. And what happened? The unemployment rate soared again, just as Keynes would have forecast.

And here’s the final twist: Government did not get us back on track in the 1940s, they say; military conscription and big defense programs did. War spending is government spending on a massive scale. And so military Keynesianism finally got us completely out of the Great Depression. If the anti–New Dealers were being forthright, they would argue that all this government intrusion should have made the American economy so inefficient that GDP would have fallen or at least risen slowly—but instead it soared.

What should have been undertaken in the 1930s was much more aggressive Keynesianism. The budget deficit under FDR topped 5 percent of GDP a couple of times, yet the drop in national demand reached 30 percent. The deficits weren’t big enough until the war to get unemployment way down. Friedman’s approach, which I think is highly over-simplified, would have also been inadequate. But it would have been better than just letting the markets correct themselves.

Economics 101

Murphy pulls the old “Economics 101” trick. I am not sure where he took Economics 101, but what they also teach—maybe it’s Economics 201—is that recessions feed on themselves. As workers lose jobs, they buy less and businesses invest less. The vicious circle spirals downward as businesses fire more workers or reduce wages—and so on.

That is the difference between macroeconomics and microeconomics. The anti–New Dealers want us to believe that economies always find bottoms efficiently. The concern is that the bottom is very painful, does long-term damage to the economy by undermining investment education and people’s dreams (not to mention careers and hope), and badly damages the foundation for future prosperity and countless lives. Keynesians and New Dealers wanted to ameliorate those losses; so did Friedman.

And what about all those New Deal public works programs? The U.S. increased the number of roads and bridges by 60 percent, points out economic historian Alexander Field. The single most important source of economic growth—total factor productivity—rose strongly in these years partly due to the new infrastructure and partly to new commercial technologies. Social Security and unemployment insurance were created. Serious new financial regulations were as well.

Boom!

All these set the stage for the extraordinary boom in prosperity that followed World War II. It wouldn’t have happened that way without the roads and bridges, dams and highways, electric facilities, and new school houses. All that occurred even as unions gained power and middle-class wages rose, which anti–New Dealers also of course claim caused the Great Depression. Why weren’t they an impediment in the 1950s and 1960s? And under the new financial regulations, there wasn’t a serious banking crisis again until the 1980s, when Reagan-style deregulation began to undo so much of what was accomplished.

FDR made mistakes. But on balance, thank goodness for the New Deal.

In his response to my original salvo against the New Deal, Jeff Madrick points out some gaps in my arguments, which I will try to answer below. However, I must implore Madrick to debate me rather than his generic concept of “the anti–New Dealers.”

For example, Madrick ridicules those who inconsistently criticize the New Deal while crediting the military spending of World War II with ending the Depression. Madrick is right that such Roosevelt critics are being hypocritical, but what relevance does this have to our debate? After all, I had a section entitled “The Myth of War Prosperity.” This debate will work only if Madrick addresses my arguments; I can’t be held responsible for the contradictions of others.

In the present essay, I address some of Madrick’s main points and then conclude with a list of objections that Madrick must address if he wishes to salvage the legacy of Roosevelt’s New Deal.

Praising FDR’s Spending While Ignoring Hoover’s

One of my main arguments is that Herbert Hoover instituted a “New Deal-lite.” Hoover has a reputation for being a laissez-faire president, but that is simply preposterous, as I document in my book. As I mentioned in my previous essay, Hoover ran unprecedented peacetime deficits in an effort to fight the downturn. Yet somehow Madrick thinks I’m cooking the books, for he writes:

In fact, in 1929 and 1930 the federal budget was in surplus. In 1931, it fell into a mild deficit. In 1932, the deficit rose substantially not principally due to government spending but due to the dramatic collapse of government tax revenues as the national income fell off the cliff. Murphy wants to blame Hoover’s spending so badly that he just ignored this.

First, we need to get our timing straight. The federal budget deficit is measured according to fiscal years, which had different start dates back then. Fiscal Year (FY) 1929 ran from July 1, 1928, through June 30, 1929. In addition, at that time new presidents had to wait longer for their inaugurations. Hoover won the election in November 1928 and was not sworn into office until March 4, 1929. At that point FY 1929 had only four months left to run, so Hoover obviously had little to do with it. That is why FY 1929 should be attributed to Calvin Coolidge. In fact some presidential historians go so far as to credit Coolidge with FY 1930 as well.

To test whether Hoover responded as a good Keynesian would, we must look at the spending increases after FY 1930. (Remember, the stock market crash occurred in October 1929, falling near the middle of FY 1930.) As this somewhat official site shows, from FY 1930 to FY 1931 federal spending as a share of the economy grew from 3.4 percent to 4.3 percent. It’s true that some of that increase was the result of a shrinking economy, but nonetheless it takes political resolve to maintain even a fixed level of spending while the economy—and government tax receipts—are collapsing.

But Hoover behaved as a good Keynesian even in absolute dollar terms, because federal spending increased by 9 percent. Further, once a whole year of Depression passed, Hoover really jacked up the “stimulus”: He increased spending yet again—but this time by 31 percent! Remember, this was the bump in spending in one year (FY 1931–FY 1932) and it occurred amidst a huge drop in tax receipts. By FY 1932, the federal budget deficit as a share of the economy had now risen to 4 percent.

To give some idea of the relative profligacy in this particular Hoover year—the first year in which it would have been clear that the country was in very bad shape—consider that the deficit as a share of GDP was as high or higher in FY 1932 than in four of the eight Reagan budget years. I’m going to guess that Madrick hasn’t written articles denouncing the tight-fisted Reagan record and the Gipper’s timidity in deficit spending.

Not Keynesian Enough?

The basic Keynesian story—which Madrick clearly endorses—is that the government needs to spend money to prop up “aggregate demand” whenever the private sector falls short. Madrick argues that the New Deal was initially working until FDR chickened out and tried to balance the budget in 1937. At the same time, remember, Madrick is arguing that Hoover didn’t spend nearly enough, and that’s (at least partly) why things got so bad.

But this doesn’t make any sense, as a glance at the budget figures linked above will illustrate. In FY 1933, the last budget year attributable to Hoover, the federal deficit was 4.5 percent of GDP. Over the next three fiscal years, the federal deficit averaged 5.1 percent of GDP. Does Madrick want to argue that private demand had gotten itself into such a pickle that a deficit of 4.5 percent was consistent with 25 percent unemployment while a higher (average) deficit of 5.1 percent of GDP was the blazing path to recovery in which the economy grew at record rates? Those 60 basis points pack quite a wallop, don’t they?

The Keynesian story doesn’t fit the facts. The deficit record of Hoover is barely distinguishable from Roosevelt’s. It’s silly to say the economy tanked under Hoover because he didn’t borrow and spend enough. In the early 1930s, the market economy didn’t need any “stimulus” from the feds to recover from the previous boom, which itself was caused by government intervention into the market.

The 1937–38 “Depression within the Depression”

In light of the above discussion we can now see the weakness in Madrick’s explanation for the 1937–38 reversal of FDR’s initial (apparent) success. Madrick tries to blame Roosevelt’s belt tightening, but as we showed above, even during the allegedly “good years” when Roosevelt spilled much red ink, he was not qualitatively more profligate than Hoover had been at the height of the Depression. The huge spike in unemployment of 1937–38 must be due to something other than the fall in the deficit.

Economists have other theories besides the straight Keynesian one to explain why the official unemployment rate jumped back up to 19 percent by 1938. One popular explanation points to the Federal Reserve’s decision to double the “reserve ratio,” meaning that, for a given level of customer checking balances, banks now had to hold twice as many reserves in the form of either vault cash or reserves with the Fed. Yet there are problems with this explanation, too, because in the depression of 1920–21, the Fed had raised the discount rates to record highs, yet this “tight” policy didn’t trigger a five-year slump back then. So why was the Fed tightening supposed to be so much worse in 1937?

In my opinion, one of the biggest factors for the 1938 “depression within the Depression” was the 1937 Supreme Court decision to uphold the Wagner Act. After the Supreme Court’s overturning of other staple New Deal measures, this was an unexpected ruling that was very favorable to unions. The strengthened union demands meant that employers in many sectors were expected to pay more per hour of labor. By making labor more expensive with unemployment already in the double digits, it’s no wonder that the economy was further crippled.

Questions for Madrick

In the interest of brevity, I’ll close with some short questions for Madrick. Unless he answers these, his defense of the New Deal remains very weak:

• If the New Deal was such a great success, why did Canadian unemployment rates fall more quickly than the U.S. rates once Roosevelt was sworn in? (I explained this in more detail in my first essay.)
• Madrick explains the 1933–37 fall in unemployment by Roosevelt’s moderate deficits, he explains the 1937–38 spike in unemployment by Roosevelt’s (temporarily) small deficits, and finally, he explains the conquering of unemployment by the massive deficits of the war years. But the Allied victory and consequent slashing of military spending meant that from FY 1945 to FY 1947 the federal budget was transformed from a deficit of 21.5 percent of GDP into a surplus of 1.7 percent of GDP. There was an official recession after the war, but it lasted all of eight months. The economy very quickly rearranged resources in light of the new peacetime channels of demand, and the U.S. experienced a tremendous postwar prosperity. How is this possible? If the 1938 “depression within the Depression” occurred when Roosevelt cut back on deficit spending, why didn’t Truman’s enormous budget cuts plunge the economy into the Great Depression II? Isn’t a better theory that the economy doesn’t need central planning from Washington, D.C., and can figure out what to produce without political oversight?
• Whatever Madrick thinks of the (in)adequacy of Herbert Hoover’s efforts to revive the sinking economy, surely Hoover did more than all previous U.S. presidents when they were faced with depressions (or “panics”) when they were at the helm. Yet these earlier presidents somehow managed to skirt disaster even though they did much less to “help” the economy than Hoover did after the stock market crashed on his watch. Isn’t it obvious that laissez-faire policies work and allow the economy to recover quickly, while aggressive interventionist policies—such as those launched by Hoover and then amplified by Roosevelt—give rise to a decade or more of economic stagnation?

It Doesn’t Add Up

There’s no way around the simple facts: Hoover and Roosevelt ran the largest (peacetime) deficits in U.S. history when their predecessors had largely been “do nothing” presidents who sat back and let the market fix itself. And yet during the Hoover and Roosevelt years, the U.S. experienced by far the worst economic disaster and then the most sluggish economic recovery of its history. The government screws up everything it touches. Does Madrick really believe the bureaucrats did a good job patching up the economy after the election of 1932?

As a reminder, Robert Murphy and many others who think like him want to pin the Depression on Hoover for creating a budget deficit and trying to get businesses to hire more or fire fewer workers. He calls it a version of Keynesianism and/or progressivism even while conceding that Hoover raised taxes in 1931. No Keynesian would do that, but never mind.

He never mentions Federal Reserve policy either in his first piece or his response to me, in which I mention it rather prominently—as do most economists, especially Friedmanites. Fed policy was very tight in those first few years. In addition, linking the dollar to gold led to tighter monetary policies than necessary. Again, never mind.

But here’s, as they say, the takeaway: Roosevelt incurred bigger deficits than Hoover and the Fed loosened monetary policy, and beginning in 1933 we had a very strong recovery. If Murphy’s right, why? And this recovery occurred despite Roosevelt’s making some of Hoover’s errors by allowing cartelization of prices. Moreover, Roosevelt was labor friendly.

Despite these grotesque errors in Murphy’s view, the unemployment rate fell from 24 percent to 14 percent. If we include public jobs, and there is every reason we should (because the anti–New Dealers say it stole jobs from the private sector, so on those grounds we should add them in), the unemployment rate fell to 10 percent.

Murphy says the recovery should have been stronger. Well, why did it occur at all? Hoover, he says, led to the steep Depression decline. Second, in the early ‘30s there was an extraordinary confluence of extreme circumstances: a huge bank failure, a stock market crash, a housing crash, and a worldwide crash. This was not recession as usual, and it would not be recovery as usual.

Murphy loves to play the Canada card, apparently. Canada recovered faster—but their problems were also less severe. And they recovered only moderately faster that FDR’s America.

Then Murphy challenges the causes of the 1937–38 decline. FDR wanted to balance the budget, but that was a modest event, says Murphy. Then he ignores completely the fact that the Fed tightened policy sharply as well. Both anti-Keynesian policies.

What really caused the 1937–38 recession? The labor unions were given power, of course, says Murphy. Those darn workers asking for more than they deserve. This was the same union power—still less actually—that they wielded in the 1950s and 1960s, when the U.S. GDP and the standard of living grew faster than ever.

One last takeaway to be re-emphasized: Keynesianism was never really tried in the Depression. Hoover’s modest budget deficits and FDR’s somewhat bigger ones were very small compared to a reduction in GDP of 25 percent and in industrial production of 50 percent. By 1936 and 1937, GDP industrial production and capital investment were back. Did FDR deficits fail us? Let’s get over this nasty revisionism.

Finally, Murphy says I ridicule people like him for criticizing New Deal spending and then saying the war spending got us out of it. I was prepared to apologize for this until I re-read my piece, in which I said no such thing. Perhaps he misread me. Don’t know how unless he really wanted to. To be clear, Murphy thinks the war spending didn’t really work either.

Murphy and many other anti–New Dealers just want government to get out of the way. Economies adjust best on their own. It’s the old failed neo-classical claim with slightly newer colors.

But such a policy would have been tragic. Declines would have been far greater, and thus we would have been climbing out of a far deeper hole. The utter punishment to people would have been cruel and devastating. Future potential economic growth would have been lost for serious declines in capital investment and educational attainment. And there is an ample theoretical case to be made that full employment would not have returned—a case there is no space to make here. Finally, the possibility of severe political instability is completely ignored by the anti–New Dealers. These were frightening political times. Today’s political context, in which the ideological leanings of the nation are not nearly so severely tested, makes such dangerous revisionism possible.