Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


How FDR Ended the Great Depression and Made the Middle Class

Frighteningly, many progressives learn the wrong lesson from President Franklin D. Roosevelt’s (D-New York) experiences during the Great Depression.

To explain, many progressives think America needs jobs programs similar to those in FDR’s New Deal to alleviate the Coronavirus Depression. Unfortunately, the jobs program advocates base their argument on faulty history.

The progressives are correct in the belief FDR ended the Great Depression. Unfortunately, progressives do not understand how Franklin Roosevelt ended the Depression.

The economic data proves it was FDR’s World War II spending; not the New Deal that ended the Great Depression. Thus, progressives could advocate policies that will not end the Coronavirus Depression.

What was the New Deal?

Progressive mythology credits Franklin Roosevelt’s New Deal with ending the Great Depression.

The New Deal was a package of jobs programs, public works projects, regulations, and welfare state programs FDR implemented in the mid-1930s. Notably, many New Programs including Social Security and FDIC deposit insurance had little to do with the Great Depression.

However, FDR intended some New Deal programs including the Works Progress Administration (WPA), the Civilian Conservation Corps, and the National Recovery Administration (NRA) as Depression relief. Notably, those programs failed to end the Depression.

No, the New Deal did not End the Great Depression

The economic data show the New Deal did not end the Great Depression. However, the New Deal did temporarily relieve the great Depression.

In detail, America had a 24.9% unemployment rate in 1933, the year FDR took office. Moreover, America’s gross domestic product (GDP) shrank by -1.2% in 1933, The Balance Estimates.

In 1934, the first year of the New Deal unemployment fell to 21.7% and the GDP grew by 10.8%. In 1935, unemployment fell to 20.1% and U.S. GDP grew by 8.9%. In 1936, unemployment fell to 16.9% and GDP grew by 12.9%.

By 1937; however, America’s unemployment rate was 14.3% and GDP grew by 5.1%. Thus the New Deal had some impact, but high unemployment lingered.

Importantly in 1938, two important changes kicked in. First, FDR and Congress cut federal spending to reduce the budget deficit in 1937. Second America adopted its first national minimum wage in 1938.

How FDR grew the Economy in the Great Depression

In 1938, the unemployment rate rose to 19% and the GDP shrank by -3.3%. However, in 1939 the unemployment rate fell to 17.2% and the GDP grew by 8%.

Hence, the Depression economic data shows that giving ordinary people more money to spend grows the economy. Therefore, I think raising the US minimum wage could lead to economic growth and more employment.

In 1940, the first year of U.S. World War II military expansion and Lend-Lease American unemployment fell to 14.6%. Moreover, the US GDP grew by 8.8% in 1940.

Dramatically, unemployment fell to 9.9% and the Gross Domestic Product grew by 17.7% in 1941. Notably, 1941 was the first year of massive military spending for World War II.

Doctor Win the Wars ends the Depression

To explain, American industry was producing most of the weapons, munitions, and supplies for the British Empire’s war effort through Lend-Lease. Additionally, America was supplying a large portion of the Soviet Union’s military supplies after Nazi Germany’s attack on Russia in June 1941.

Then in 1942; America’s first full year at war, unemployment fell to 4.7% and the GDP grew by 18.9%. In 1943, unemployment fell to 1.9% and the GDP grew by 1%. In 1944, unemployment fell to 1.2% and the GDP grew by 8%. Conversely, in 1945, the last year of the war, the GDP shrank by -1% while unemployment rose to 1.9%.

Notably, in 1943 US war spending was 30 times greater than New Deal spending in 1933, The Balance claims. Economists Price Fishback and Valentina Kachanovskaya estimate America spent $653 billion on the New Deal. In comparison, the United States spent $4.69 trillion on World War II, USA Today estimates. Thus it cost $4.69 trillion for America to spend itself out of the Great Depression.

Thus FDR, ended the Great Depression, but he ended it as “Dr. Win the War,” not “Dr. New Deal.” To explain, FDR called himself “Dr. New Deal” and “Dr. Win the War” in a 1943 Annual Message to Congress.

How FDR created the Middle Class

FDR’s World War II spending paved the way for the heyday of the Great American middle class in the 1950s and 1960s.

To explain, World War II spending led to prosperity by adding over $1 trillion to the US Gross Domestic Product (GDP) in five years. The Real US GDP was $1.33 trillion in 1940 and $2.329 trillion in 1945, The Balance estimates.

Hence the government pumped over $1 trillion into the economy in five years. That led to a burst of consumer spending after the war. The consumer spending led to what we call the middle-class lifestyle.

Notably, the US economy shrank in the late 1940s as military spending and foreign aid shrank. The GDP fell to $2.036 trillion in 1946. However, it began growing again in 1948 with the Marshall Plan and in 1950 with the Korean War and Cold War spending, the growth of suburbia, and new consumer spending.

In detail, the GDP grew by 4.1% in 1948 and 8.7% in 1950. Thus, 1940s economic data shows high government spending is necessary for economic growth in the United States.

Notably, US Real GDP exceeded $3 trillion for the first time in 1959 and $4 trillion for the first time in 1964. In comparison, The Balance estimates US real GDP at $19.092 trillion 2020.

Will we spend our Way of the Coronavirus Depression?

The real lesson FDR should teach modern policymakers is that we can spend our way out of a Depression. Unfortunately, our leaders, on both sides of the aisle, cannot learn that lesson.

Astoundingly, Congressional Republicans want to cut spending during the greatest economic downturn since 1932. For instance, U.S. Senator Lindsey Graham (R-South Carolina) predicts half of U.S. Senate Republicans will vote against the next coronavirus stimulus package.

Graham thinks the Senate Republicans, like FDR in 1937, are more worried about government spending than the state of the economy. Some Democrats, however, seem to understand what we need.

U.S. Representatives Ro Khanna (D-California) and Tim Ryan (D-Ohio) want to pay all Americans over 16 who make less than $130,000 a year $2,000 a month for six months, Business Insider reveals. Similarly, US Representative Pramila Jayapal (D-Washington State) wants to pay every Americans $2,000 a month until the end of the pandemic. Jayapal wants to scale the payment back to $1,000 a month at some point.

In the US Senate, Bernie Sanders (I-Vermont) and Kamala Harris (D-California) want to pay each American a $2,000 stipend until the end of the crisis. The advantage to these proposals is an increase in consumer spending that could juice the economy. That could create a World War II level economic boost and end the coronavirus Depression.

Can the Green New Deal save us from Coronavirus Depression?

Similarly, Democratic presidential candidate Joe Biden (D-Delaware) and U.S. Representative Alexandria Ocasio-Cortez (D-New York) are promoting variants of the Green New Deal. The Green New Deal is a scheme to deter Global Warming by replacing fossil fuels with other power sources.

Biden’s plan will spend $2 trillion for years to combine stimulus and the Climate Change fight with a World War II style spending blitz, Slate reports. Biden claims his plan could get the US to zero emissions by 2035. Biden hopes to achieve that goal through massive investments in research in development and electric vehicles.

Thus, Democrats seem to have the right idea to spend our way out of Coronavirus Depression. Unfortunately, it is not clear if they have the will or the political savvy to achieve that spending.

Can we Escape the Coronavirus Depression?

FDR teaches us one lesson, only massive spending can save us from a Coronavirus Depression.

Unfortunately, FDR’s story shows us it could be hard or impossible for any politician; even one as popular as Franklin D. Roosevelt (D-New York), to spend that much without a war. On the other hand, a war on Climate Change and income inequality could save America from depression.

However, Great Depression history shows giving ordinary Americans in the form of an increased minimum wage or a Basic Income could be the real solution for the Coronavirus Depression.

Either way, FDR proves we will have to spend a lot if we want to escape a Coronavirus Depression.