Chapter 25: The New Deal

Summary

This chapters presents discussions on government attempts to assume responsibility for the economy during the Great Depression. A number of acts attempted to help boost prices, manage output, set wages and influence output production. Often these acts helped one group with the unintended consequence of hurting another. This chapter provides a few examples. It additionally examines the official “start” of big government in the U.S. In summary, the debate over whether the government’s New Deal efforts and programs facilitated or hindered economic recovery is presented.

Key Terms and Concepts

Moral hazard

Teaching Tips

  1. “The myth persists that from the beginning Roosevelt followed a set of fiscal policies directed specifically at, and adapted to, the objective of increasing aggregate demands for output to the levels required to restore acceptable levels of real output and employment. This is indeed a myth. Roosevelt had formulated no definite fiscal policy before he became President. As already noted, he excoriated Hoover repeatedly during the 1932 campaign for his budget deficits and the alleged threat to the government’s credit, and he promised to put the government’s financial house in order.” (L.V. Chandler, America’s Greatest Depression, 1929–1941, p. 136). Evaluate and compare the chief characteristics of the policies taken by the Hoover and Roosevelt administrations in their attempts to cope with the Great Depression.
  2. Ask students to research the National Industrial Recovery Act (NIRA). They should define it and describe how it tried to manage industrial problems. Determine the impact this management had on industrial consumers. Ask students to evaluate the outcomes of this Act.
  3. Ask students to research the Agricultural Adjustment Act (AAA). Ask them to focus on the part of the act that led to a massive reduction in supply in order to raise prices and increase farmers’ income. Again, ask students to determine how this effort affected consumers of agricultural goods, vagrants and people standing in the ubiquitous bread lines.
  4. Research the forces behind the passing of the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, and the Banking Act of 1935. Moral hazard is common to these types of government programs. This is the risk that the insured or guaranteed institution will make risky decisions because losses will be funded by taxpayers while rewards will go to owners and managers. Discuss today’s debate over restoring the Glass-Steagall Act which was repealed in 1999.
  5. Ask students to raise their hands if they think that the government can create sustainable jobs – jobs that will continue once government support is removed. Go through the Keynesian multiplier exercise of asking students to stand up as you call them to work for the “government”. Ask them what happens to each of the following when they start working: income (increases), consumption (increases), savings (increases), investment (increases) and production (increases). Now ask students to consider where the government found the funds to pay for the government workers. (Taxes imposed on other groups.) Now go through the exercise of what happens when the amount of taxes paid increases. (The opposite of what happened above.) This exercise illustrates the key differences between the neo-classical (none) and Keynesian (positive) views of job creation through expansionary fiscal spending.
  6. Explain why some believe that the Social Security Act of 1935 created a hammock, not a safety net, for retired and unemployed people. Ask students for their opinions. Proceed with a discussion on the consequences of transferring the income earned by current wage-earners to former wage-earners. If time permits, discuss the Social Security add-ons of Medicare and Medicaid. Bring in discussions on national health care issues.
  7. Investigate how the New Deal helped increase the production and use of electric power in the U.S. What were the overall economic implications?

Websites and Additional Resources

·  Lee, Dwight R. "Redistribution." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 11, 2009 from: http://www.econlib.org/library/Enc/Redistribution.html

·  Library of Congress. “Great Depression and World War II, 1929 1945.” American Memory. 2004. Retrieved December 11, 2009 from: http://memory.loc.gov/learn//features/timeline/depwwii/depwar.html

·  Library of Congress. “Great Depression and World War II, 1929 1945: President Franklin Delano Roosevelt and the New Deal 1933-1945.” American Memory. 2004. Retrieved December 11, 2009 from: http://memory.loc.gov/learn//features/timeline/depwwii/newdeal/newdeal.html