What was the New Deal?

2 July 2020

Franklin Delano Roosevelt is having quite a moment.

At the weekend, Michael Gove heaped praise on the 33rd US President who, he claimed, “managed to save capitalism.” On Monday the Prime Minister called for a “Rooseveltian approach to the economy” on Times Radio. 

And on Tuesday, the Prime Minister outlined some of the government’s  economic policies in a speech. He said: “It sounds like a New Deal and all I can say is that if so, then that is how it is meant to sound and to be,” referencing Roosevelt’s program of investment and reforms.

The Times went as far to claim Mr Johnson would promise “an economic recovery plan as bold as…[the] New Deal.”

But what exactly was the New Deal and are the UK government’s recent pledges comparable in any way?

The run up to the New Deal

On 29 October 1929 the US stock market crashed, setting in motion the Great Depression, a period until the early 1940s where poverty and unemployment increased not just in the United States but across the world.

The president at the time was Herbert Hoover, the efficacy of whose response to the Depression has been debated. By the 1932 Presidential election, Hoover was unpopular with the people, and Franklin D Roosevelt (commonly known as FDR, to distinguish him from his distant cousin Theodore Roosevelt who was president from 1901-1909) was elected in a landslide victory.

The New Deal

The New Deal incorporated a number of policies of FDR’s government with the aim of stabilising the economy.

To help the workforce, FDR set up agencies to provide aid to the unemployed and also provide jobs. For example the new Works Progress Administration hired around 8.5 million people over its eight year existence to build roads, bridges and other infrastructure.

Also laws were changed to help improve working practices and regulate the financial system to avoid another crash.

And in 1935, the Social Security Act was passed, establishing a pension system across the entire country as well as other payments intended to provide a safety net for Americans in need.

There is some debate about how effective the New Deal was. Some argue that while it helped end the Great Depression, the Second World War was actually the key event which offered a solution to unemployment and a surge in demand for military equipment stimulating the recovery. Others say that the economy was already mostly recovered by the time of the war.

What about the Prime Minister’s pledges?

On Tuesday the Prime Minister gave a speech where he made a number of pledges including spending more on new hospitals, the NHS, housebuilding, schools and infrastructure. Some of these are old policies and some are new.

But before the speech, some newspapers and the Conservative party focused specifically on £5 billion of already-planned spending that was being brought forward, and compared that portion to the New Deal, when the levels of spending are very different.

In 2017, an economist at the Federal Reserve Bank of St Louis, Bill Dupor, calculated that the amount spent on New Deal policies in total was equivalent to 40% of the USA’s economic output (the total value of goods and services) in 1929.

By comparison, £5 billion is 0.24% of the UK’s 2019 economic output.

The government’s wider programme of spending also doesn’t appear to be comparable to the New Deal in terms of the government’s role in the economy.

One way you could compare the two is by looking at just how much state spending increased. Between 1933 and 1934, US federal spending increased by 42% from $4.6 billion to $6.5 billion. In total, federal spending increased by 77% over FDR’s first term.

By comparison, the Office for Budget Responsibility (OBR) estimates that the UK government’s total spending will increase by 18% between 2019/20 and 2023/24, the end of Mr Johnson’s first term.

Another way is to compare state spending to the size of the economy. In 1932, federal spending was equivalent to 6.8% of the US economy, and by the end of FDR’s first term it increased by 3.5 percentage points to 10.3%.

By comparison, the OBR estimates that the UK government’s total spending will account for 41% of the economy by the end of the Prime Minister’s first term, up one percentage point from 2019-20.

So it’s fair to say that the government’s spending plans represent a much smaller expansion of the state than the New Deal, although the UK is starting from a very different place.

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