ECON 2200 The New Deal outline notes
ECON 2200 The New Deal outline notes ECON 2200
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Date Created: 04/29/16
The New Deal (Chap 24) I. Intro: A Recall that between 1929 and 1933: Unemployment rose from under 4% to roughly 25% Real output fell by 27% B In the 1932 campaign (Hoover v. Roosevelt), Roosevelt promised: A “New Deal”: An expanded role for federal government was implied; not very clear about specific programs. A balanced budget: Historically, this had been the norm, except during wartime. Irony: How to increase G and still balance the federal budget C Roosevelt took office in March, 1933 → The First New Deal (19331934) “…designed to provide immediate relief and promote recovery.” (p. 444) Included programs to: o reduce poverty. o create jobs/reduce unemployment. Often same program designed to do both o increase prices and wages in the manufacturing sector. o stabilize the banking sector. o regulate the stock market. o assist farmers. A portion of this legislation was ultimately declared unconstitutional by the U.S. Supreme Court (see p. 460). D Roosevelt reelected in 1936 → The Second New Deal (19351941) When Roosevelt won in 1936 he appointed several justices that would rule in favor of his legislation. Less of it was ruled unconstitutional after these appointments “…pushed for reforms that would permanently improve the standard of living for the working class.” (p. 444) 2 Key Programs, both created by the Social Security Act of 1935: o Federal Old Age and Survivors’ Insurance (“Social Security”): original plan amended in 1939 o Unemployment Insurance Also the Fair Labor Standards Act (1938) and the Wagner Act (1935) II. Programs of the First New Deal (19331934) A Poverty reduction & job creation Federal Emergency Relief Agency (FERA): 19331935 first and really quick o Provided $500 million in federal funds to states for relief efforts o Most of $ used to create jobs for unemployed “make work jobs” “emergency workers” Works Progress (Projects) Administration (WPA): 19351943 single largest New Deal program o Single largest New Deal Program o Employed about 8 million of people over its entire duration o WPA expenditures 19361939 ≈ $7 billion o Projects included building or renovation of: Roads, streets, bridges Storm drains & sewer lines Hospitals, stadiums & schools o Also Federal Writers’ Project; Federal Theatre Project; Federal Art Project o Criticisms of the WPA: Unfair distribution of funds Workers were paid the “prevailing wage” in the area where project was located. As such, some (unskilled) workers may have been overpaid. Also, distribution of projects across states did not reflect unemployment rates across states. Political bias may have determined which areas / states received $ for projects May have exacerbated unemployment problem (Margo 1991) Workers were sometimes unwilling to leave secure WPA jobs to return to privatesector jobs. Civilian Conservation Corps: 19331941 o Mostly young, unemployed men, including many AfricanAmericans o Lived in camps operated by U.S. Army o Very popular with U.S. public o Projects included: Planting trees Soil erosion & flood control Wildfire management & control Buildings & trails in state/national parks Public Works Administration: 19331939 o Provided federal $ for contracts with private firms for largescale construction projects o Projects included: Tennessee Valley Authority Grand Coulee Dam (Washington) Triborough Bridge (NYC) Impact of job programs on unemployment: Table 24.1 Note the direct (unemployment ↓) and indirect (income ↑) impact of job creation programs. B The National Industrial Recovery Act: 19331935 (declared unconstitutional by US Supreme Court) Designed to ↓ competition & ↑ prices in manufacturing sector many business leaders claimed there was “too much” competition and that firms were selling at prices below cost created an “unfair” and “risky” environment for business this ignores the law of demand because as prices go up, consumers will buy less Also encouraged firms to set minimum wages & maximum hours for workers Cut hours for individual workers and share hours among more workers The National Recovery Administration (NRA) & “codes of fair practice” o NRA supervised creation of 557 industry codes: established minimum prices and wages, output limits, and maximum hours for workers. Codes of fair practice address issues above (max hours, min wages, output, min prices, etc.) Codes were done industry by industry o Management, labor and consumer representatives were supposed to be involved in establishing the codes, but in reality management dominated. Management routinely dominated these code directors, which allowed for profit maximizing codes to be created due to management bias “Industrial SelfGovernment” – getting to set up rules for themselves without input/representation from other groups Note: antitrust laws were suspended during this period – allowed firms to act monopolistic Impact of NRA & codes: Most economic historians agree that they “redistributed rather than expanded incomes.” (p. 448) Did not create any additional income in industry as a whole; did not increase output all that much. Did benefit firms who got their prices raised in a monopolistic fashion C Reforms of the Banking & Financial Sectors The Bank Holiday (1933): Previously discussed GlassSteagall Act (1933) banks could not be both commercial and investment (abolished under Clinton administration – some people claim that this caused the more recent economic downturn, but it is hard to prove) o Created FDIC (began operations in 1934) provides insurance on banks deposits, less incentive for people to participate in bank runs because it ensures the safety of our money, reduces incentives to monitor banks to make sure they are holding adequate reserves and making appropriate loans o Required separation of commercial banking & investment banking activities Securities & Exchange Commission (1934) o Supervises the US stock exchanges o Regulates securities trading practices o Oversees the issue & sale of new stocks Organizational Changes at the Federal Reserve (1935) o Board of Directors became Board of Governors All 7 members appointed by President Given control over bank reserves Allowed to set margin requirements for loans for stock purchases o Creation of Open Market Committee 12 members, including all 7 Board members + 5 Fed District Bank Presidents (NY Fed District Bank + 4 others on a rotating basis) Given control of open market operations o Centralization of Fed’s power with Board in Washington, DC – diluted power of Fed District banks D Agriculture & the New Deal The Farm Crisis (Table 24.2) o Adverse terms of trade: Farm prices fell by 56% between 1929 and 1932; overall price level fell by 37%. o Declines in real income o Rising debt burdens (note impact of deflation) + falling incomes + “balloon” mortgages → Growing # of farm foreclosures Year Foreclosures per 1000 farms 1929 15 1930 18 1931 27.8 1932 38.1 o Some states passed moratoriums on farm foreclosures. New Deal Farm Relief Programs o Agricultural Adjustment Act (19331936) (declared unconstitutional by US Supreme Court) Created Agricultural Adjustment Administration (AAA) Goal: ↓ supply to ↑ prices (parity pricing) Parity pricing – tried to increased prices such that farmers’ terms of trade were similar to 19101914 Acreage allotments: AAA set the total acreage devoted to crops and designated state allotments based on the total. States then determined individual farm allotments based on past production. National land gets an allotment for each crop, then allocations were made to states, then states went to each farmer and allotted a certain amount to them based on how much they have produced in the past wanted to reduce supply to increase prices Adjustment payments: Direct payments to farmers to compensate them for compliance. Payments were financed by taxes on first processor of any farm product. Farmers were asked to not produce This may past a certain amount wanted help farmers, to reduce supply to increase prices but the taxes and increase in prices will get passed on to the consumers o Soil Conservation & Domestic Allotment Act (1935): Paid farmers who decreased acreage in crops for conservation and erosion control purposes. Paying farmers not to use land for crops to get around unconstitutional manner of AAA o Commodity Credit Corporation (CCC) (1933): See Econ Insight 24.1 Provided loans to farmers using stored crops as collateral. Loans were “without recourse.” (WINWIN situation) Favorable interest rates and longer terms If crops are stored as collateral, and the price of the crop falls, the CCC will honor the original price and take the collateral at the higher price (rather than the fallen price) If prices of collateral crop rise, farmers can sell the crop, pay off the loan with the revenue and keep the profits Sets a price floor because nothing will ever go lower than what the CCC is paying for (in the case of fallen collateral crop prices) Led to decreased market supply through: (1) federal government purchases of crops, and (2) farmers paid NOT to grow crops o Farm Credit Act (1934; still exists) Provided loans to farmers using real property (land) as collateral. Loans had longer maturities than typical privatesector loans at the time. Favorable interest rates and longer maturity dates of loans o (Second) Agricultural Adjustment Act (1938) Added goal: ↑ demand to ↑ prices in addition to original goal of decreasing supply to increase prices Expanded role of CCC & loans to farmers based on parity prices for commodities Impact of New Deal farm programs? Some temporary decrease in supply increase in prices in 1937, but did not last Longterm impact permanently expanded the Federal government’s role in aiding farmers Programs, at best, probably redistributed income among farmers, rather than generally expanding societal welfare III. Please cover on your own: Labor and the New Deal (p. 455458) Be sure to consider: Persistent unemployment & sticky wages Impact of New Deal labor policies on union growth & effectiveness NorrisLaGuardia Act (1932) National Labor Relations Act (Wagner Act) (1935) Fair Labor Standards Act (1938) IV. The Second New Deal (19351941): The Social Security Act of 1935 A Federal Old Age and Survivors’ Insurance (Social Security) Features of the original plan created in 1935 o Benefits for retired workers only –no Survivors’ Insurance o Designed to replace part (NOT all) of wages lost after retirement o About 50% of workforce covered o Membership compulsory o NOT meanstested (participation not dependent on income or wealth) o Originally a "fully funded" program: contributions of a worker pay for the benefits that worker will receive. originally, like a private insurance program or pension o Goals: individual equity: benefits linked to past earnings/contributions political & economic motives Note the FDR quote workers felt they had a “right” to benefits conflict because they had contributed in these goals social adequacy: adequate pension benefits for lowearning contributors redistributive motive redistribution of income from high earners to lowearners 1939 Amendments o Converted SS to "payasyougo" program (also known as "unfunded" program): Contributions from current generation of workers are used to pay the benefits of the current generation of retirees. o Added spouse & dependent benefits (survivors’ insurance) o Created the SS Trust Fund: separates SS revenues and expenditures from rest of Federal budget B Unemployment Insurance Provides shortrun payments to unemployed workers (typically because of layoffs) Federal program administered by the states o Federal government sets and collects UI tax o States determine eligibility & benefits (based on broad federal guidelines) Provides an “automatic stabilizer” during recessions V. Criticisms of the New Deal (p. 461463) Too much bureaucracy; too much spending Not enough government intervention; too little spending Wasteful, inefficient spending Spending allocated to maximize political support rather than meet the most severe needs Private investment (I) hampered by too many taxes and regulations on business → prolonged the Depression However, these criticisms are muted by the fact that FDR enjoyed landslide reelection victories in 1936 and 1940.
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