Maybe the New Deal actually did end the Depression? by mattsteinglass
February 4, 2009, 11:59 pm
Filed under: Economics

Back in high school in the ’80s, I learned that the New Deal, “contrary to conventional wisdom”, didn’t actually end the Depression, but merely alleviated it; it was only WW2 that actually ended it. (Since this seems to have actually been the conventional wisdom for the past 25+ years, I’m not sure how it was “contrary to conventional wisdom”, but whatever.)

So I was doing some blog commenting research earlier this evening, and here’s the thing. It seems GDP grew at barn-burning rates all through the New Deal from 1933 to 1939 (with the famous exception of 1938 when FDR tried to raise taxes and balance the budget), but unemployment remained high, and by 1939 GDP was only back to where it had been in 1930. But then in 1940 the US economy grew 8.8%. And in 1941 it grew an unbelievable 17.1%. Which looks rather like the Depression actually was over.

But the US didn’t enter WW2 until the end of 1941.

Well, still, the big GDP growth must have been the result of rising defense spending in anticipation of war, right? Wrong. In 1940 defense spending was just 1.7% of GDP, and was actually lower even in nominal terms than it had been in 1936. In 1941 defense spending did leap, but only to 5.6% of GDP, comparable to where it is today. (For comparison, in the thick of the war defense spending was up to 38% of GDP or more.) You can’t get 17.1% of GDP growth out of 3.9% of GDP in new defense spending.

What about export growth due to the fact that the rest of the world was at war from 1939-41? Nope. US exports did indeed grow, but by just $2 billion, from $3.2 billion in 1939 to $5.2 billion in 1941. At the time that was just a couple of percent of GDP. Put together higher defense spending and higher exports, and you get at most a 5% rise for 1941 — nowhere near enough to account for that 17.1% GDP growth.

So wait a minute. It looks like neither WW2 defense spending, nor WW2-related export growth, can explain the fantastic sustained growth of the late-New Deal US economy in 1939-41. What, then, does? What if the New Deal actually did end the Depression? What if the resilient technology-fueled optimism of the 1939 World’s Fair, the advent of the cultural moment of Superman and the Wizard of Oz, etc. were the manifestations of an American economy that had gotten its mojo back and, powered by technological and business-model advances — Pan Am, NBC — was about to bring growth and prosperity back to the world? And then, unfortunately, and for no good reason, World War 2 intervened?

I’m no economist and I’m sure people have addressed this question in great depth, many times. But can somebody point me to a clear and sophisticated treatment of this question by a top economic historian who explains what happened to the US economy in 1940 and 1941?


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