New Deal
What is New Deal?
The New Deal was a set of U.S. government programs in the 1930s aimed at relief, recovery, and reform during the Great Depression.
It expanded public works, created Social Security, and increased financial regulation, reflecting Keynesian-style government intervention. It permanently enlarged the federal government's role in the economy.
New Deal: a worked example
Run the public works side through the spending multiplier. With a marginal propensity to consume of 0.75, the multiplier is 1 divided by 1 minus 0.75, or 4. A 5 billion dollar program of dams, roads, and post offices raises real GDP by 5 times 4, or 20 billion. If the recessionary gap is 30 billion, the program closes two thirds of it. Compare a tax cut of the same size. The tax multiplier is 0.75 divided by 0.25, or 3, so 5 billion of tax relief adds 15 billion, less than direct purchases because the first round of a tax cut is partly saved. Now finance the works with 5 billion of new taxes. Output rises 20 from the spending and falls 15 from the taxes, leaving 5 billion net, the balanced budget multiplier of 1. How a program is paid for matters as much as its headline size.
The mistake students make with new deal
Students pour every New Deal dollar into government purchases when shifting aggregate demand. Relief payments and pensions are transfers, not purchases of goods and services, so they never enter G in the expenditure identity and they move demand only through whatever share recipients choose to spend. Building a dam is a purchase. Mailing a relief check is not. A related habit counts the reform measures as stimulus, when rules on banks and securities worked through confidence and financial stability rather than through any spending flow.
New Deal questions
Did the New Deal end the Great Depression?
The New Deal eased hardship, halted the banking panics, and restored some confidence, yet economists still disagree about how much it lifted output. Deficits stayed modest next to the size of the gap, partly because the government kept trying to balance the budget, and unemployment stayed high until wartime spending arrived on a scale the relief programs never approached. The reforms outlasted the relief programs, permanently reshaping banking, financial markets, and support for the old.
What were the three R's of the New Deal?
Relief, recovery, and reform organized the programs. Relief meant immediate help for people out of work and for farmers facing foreclosure, delivered through direct payments and job programs. Recovery meant restarting output and employment through public works, credit support, and price stabilization. Reform meant rules to prevent a repeat, including deposit insurance, securities regulation, and a national old-age pension. The three goals often pulled against each other, since new rules could slow the recovery the relief spending was meant to start.
Was the New Deal Keynesian?
New Deal spending resembles what demand management prescribes, but the programs were not designed from that theory, which was published after the first wave of them began. Officials defended public works as relief and as a way to rebuild confidence, and many still believed a balanced budget was the responsible target. The episode became the standard illustration of activist fiscal policy afterward, which is how the label attached to it in hindsight.
Related terms
Common comparisons
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