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ECON 2200 The New Deal outline notes

by: Kevin Smith

ECON 2200 The New Deal outline notes ECON 2200

Marketplace > University of Georgia > Economcs > ECON 2200 > ECON 2200 The New Deal outline notes
Kevin Smith
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Full outline of The New Deal notes from class
Economic Development of US
Class Notes
Econ, moore, uga, ECON 2200
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This 13 page Class Notes was uploaded by Kevin Smith on Friday April 29, 2016. The Class Notes belongs to ECON 2200 at University of Georgia taught by Moore in Spring 2016. Since its upload, it has received 34 views. For similar materials see Economic Development of US in Economcs at University of Georgia.

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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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