Prior to the Great Depression policy makers in the United States generally tended to accept that business cycles happened and in accord with Adam Smith's "invisible hand," tended to be self-correcting. The stock market crash of 1929, and the more general problem of massive unemployment forced a reconsideration. Smiley (2008) and Bernstein (2016) both point out that the human face of the Depression left no choice but for some government intervention. Jahan and Papageorgiou (2014), discussing Keynesian Economics put it plainly: “The central tenet of this school of thought is that government intervention can stabilize the economy.” The centerpiece of President Roosevelt's approach became increased government spending. The "alphabet soup" of agencies created as part of the "new deal," Taylor (2016) provides a partial list ranging from the AAA (Agricultural Adjustment Act) to the WPA (Works Progress Administration), represent pure government spending as the way to fight recessions. The question is, did it work?
Approach
Recessions are identified based on an evaluation of several factors. The U.S. Bureau of Economic Analysis (2008) points out that the “standard” definition of “recession” as “two consecutive quarters of negative growth,” is not the “official” definition. Rather, the National Bureau of Economic Research meets and reviews several factors including income levels, employment and production, along with GDP, before declaring a recession.
For purposes of this analysis a combination of employment levels and unemployment rates are used. This approach is taken for two reasons. First, the human suffering resulting from widespread unemployment is the direct and visible political impetus for any action whatsoever. Inflation, income, and other factors matter to economists. To politicians who control policy makers, it is the obvious impact on citizens that matters. When, in Of Mice and Men, (Steinbeck (1937)) Candy worries about going “on the county,” when he’s no longer able to work, he is referring to the primary source of support available during the 1930s. Government, then, was local and the county poor house or poor farm represented “hitting bottom.” As the depression settled in more and more citizens wound up “on the county” and Americans decided that something had to be done. Moreover, what needed to be done needed to be done at the federal level.
Second, reviewing unemployment rates is an imprecise approach. Most obviously, as Bernstein (2016) points out, the government did not collect data on unemployment until 1940. We are left, then, with estimates alone for that crucial period. In addition, even today with extensive data gathering capabilities and reporting requirements, a variety of seasonal statistical adjustments are made. Besides that, the whole, difficult to identify category of “discouraged workers” can come and go from the statistical universe.
The number employed is a more reliable data set, when available. The Federal Reserve Board of St. Louis (2016) notes that this covers approximately 80% of total employees. These data are reported monthly giving a fine grained series. While the precision of the numbers may be debated, the consistency in collection methodologies gives them value as an index. In other words, while the number, say 18,569,000 might not be precisely accurate, it is clearly greater than 17,650,000.
Unemployment in the Depression
Smiley (2008) estimates that nonfarm unemployment peaked at 37% in 1933. A minor improvement stalled again in 1937. This is the era of the Grapes of Wrath, with Okies and Arkies seeking any work and sometimes literally starving. All of this in spite of, as Powell (2009) points out, over 50 billion dollars in government spending, a truly huge amount in the 1930s. It remained for the opening stages of World War II and then the United States direct entry into that war following the attacks on Pearl Harbor for the exigencies of war to bring about full employment. The effectiveness of government spending to fight recessions then is certainly open to debate.
Employment in the 1980-82 Recession
The 1980-82 recession, the “Reagan Recession,” is one of the more famous economic downturns outside of the Great Depression. The Gilder Institute (2016) spells their view out plainly: “Following the passage of the 1981 Economic Recovery Tax Act, the United States experienced what came to be known as the Reagan Recession—worse than the economic crisis of the Carter years and in fact the worst recession since the Great Depression. Unemployment peaked at nine million and 17,000 businesses failed. The economy began to recover in 1983.” This is in the era of data availabilty, and a review of employment figures shows a different story. What was dubbed “Reagonomics” was, essentially, monetary policy in action. Tax cuts were passed to improve purchasing power and increase overall economic activity. Under “tickle down” theory or, in its converse statement, “a rising tide raises all boats” theory, this should have improved conditions.
Unemployment levels rose then. But what happened to the more reliable number, the number employed? Returning to the Bureau of Labor Statistics and accepting 1980 as the start of the “Reagan Recession,” in 1979 there were 98,824,000 Americans employed. In 1980 the number was 99,303,000. In 1981 there were 100,307,000 employed. The only drop in number employed in the decade of the 1980s was 1982 when there were 99,526,000 employed. The previous high level of employment was exceeded in 1983 when 100,834,000 were employed. By 1990, following steady increases in this key number there were 118,793,000 employed. In the key area of employment then, Reagonomics, that monetary policy in action, was a rousing success.
Employment in the 2008 - Present Recession
The collapse of Bear Stearns and the fear of more widespread collapse in the banking system threatened a truly world wide depression in 2007. Rich (2013), writing for the Federal Reserve History publication of the Federal Reserve, iidentifies period of the subsequent recession as: “The Great Recession began in December 2007 and ended in June 2009, which makes it the longest recession since World War II.” The final months of the Bush administration saw the Targeted Asset Relief Program pass to support banks at risk of failure. Then in the opening months of the Obama administration the American Recovery and Reinvestment Act (the “stimulus”) was passed. This was almost a trillion dollars government spending on public works projects (those “shovel ready” projects) and some targeted tax breaks. In other words, Keynseian fiscal policy in action.
The “official” end of the Great Recession was, as we have seen, identified as June, 2009. But how did it do in that central question of employment? Returning to the Bureau of Labor Statistics, in 2007 there were 146,047,000 Americans working. Employment fell to 145,362,000 in 2008, before the stimulus programs had time to have any effect. In 2009 employment fell to 139,877,000. Another minor drop in 2010 marked the bottom. By 2014 the number employed had returned to pre-recession levels when it hit 146,305,000 and in 2015, the last year for which a full year’s data is available, it reached 148,834,000. Based on the impact on the number employed then, the fiscal policy implemented in 2008 can be best described as only marginally successful.
Conclusion
Thomas Sowell (2013) explains why markets work and command economies do not. In market economies, all anyone needs to know is the few things necessary to make their own decisions. In a command economy those in comand need to know everything. In the phrase so often encountered as to be unattributable, “nobody knows how to make a pencil.” In a market economy, pencils are bought when needed. In a command economy there is a perpetual shortage of pencils.
Whether monetary or fiscal policy is involved, these are essentially government efforts to intervene in the market. In other words, either policy is a way to impose commands on the economy. It should be no wonder then that results are, at best, mixed. Did fiscal policy and increased spending get America out of the Great Depression? No. But it did provide jobs and, indeed, legacy buildings and public works that still stand today. The programs and policies helped to some extent. Similarly, did the monetary policy of the 1980s end the Reagan Recession? No. But employment kept growing even as other indicators were still problematic. Did the fiscal policy of the 2008 “stimulus” work? Not very well in terms of employment.
All of which point out the central policy question to be addressed in the future. How much intervention in the market is warranted? Keynesians will continue to say significant intervention is warranted and point to present unemployment rates reported as below 5% or approaching full employment. Monetarists will say little intervention is warranted beyond providing markets the opportunity to work. These arguments will, without any doubt, continue for the foreseeable future.
References
Bernstein, I. (2016). United States Department of Labor, Office of the Assistant Secretary for Administration and Management. History, Chapter 5, Americans in Depression and War. Retrieved from https://www.dol.gov/oasam/programs/history/chapter5.htm
Federal Reserve Bank of St. Louis. (2016) Economic Research. Retrieved from https://fred.stlouisfed.org/series/PAYEMS
Gilder Lehrman Institute of American History. (2016). Reagan Recession. Retrieved from http://www.gilderlehrman.org/history-by-era/age-reagan/timeline-terms/reagan-recession
Hubler, J. J. (2013). United States Monetary Policy and Business Cycles 1913-2010. University of Phoenix. ProQuest Dissertations Publishing.
Jahan, S., Mahmud, A.S., & Papageorgiou, C. (2014). What is Keynesian Economics? International Monetary Fund: Finance and Development. Retrieved from http://www.imf.org/external/pubs/ft/fandd/2014/09/basics.htm
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money (2007 ed.). New York, NY. Palgrave Macmillan.
McCallum, B., Nelson, E. (1999). An optimizing IS-LM specification for monetary policy and business cycle analysis. Journal of Money, Credit and Banking. August 1999, 296-316.
Mankiw, G.N. (2013). Principles of Macroeconomics (7th ed.). Stamford, CT. Cenage Learning.
Powell, J. (2009, February 11). The ‘Old’ New Deal Still Isn’t Paid For. Forbes. Retrieved from http://www.forbes.com/2009/02/11/new-deal-stimulus-opinions-contributors_0211_jim_powell.html
Rich, R. (2013). Federal Reserve Bank of New York: Federal Reserve History. The Great Recession of 2008-09. Retrieved from http://www.federalreservehistory.org/Events/DetailView/58
Smiley, G. (2008). Great Depression. Library of Economics and Liberty. Retrieved from http://www.econlib.org/library/Enc/GreatDepression.html
Sowell, T. (2013). Basic Economics: A Common Sense Guide to the Economy (4th ed.) New York, NY. Basic Books.
Steinbeck, J. (1937). Of Mice and Men - 37 ed. New York, NY. Penguin Books.
Taylor, Q. Jr. (2016). History 101: Survey of the History of the United States, New Deal Agencies. University of Washington. Retrieved from http://faculty.washington.edu/qtaylor/Courses/101_USH/new_deal.htm
U.S. Bureau of Economic Analysis. (2008). Recession: How is that defined? Retrieved from http://www.bea.gov/faq/index.cfm?faq_id=485
United States Department of Labor, Bureau of Labor Statistics. (2016) Databases, Tables & Calculators by Subject. Retrieved from http://data.bls.gov/timeseries/CES0000000001
