The Political Economy of the New Deal

Published by EH.NET (June 1999)

Jim Couch and William F. Shughart II, T he Political Economy of the New

Deal. Cheltenham, UK and Northampton, MA: Edward Elgar, 1998. xvi + 229

pp. $85 (hardback), ISBN 1-85898-899-3.

Reviewed for EH.NET by Price V. Fishback, Department of Economics,

University of Arizona.

fishback@bpa.arizona.edu

The New Deal is certainly one of the most dramatic peace-time expansions of

government activity in recorded history. As a result, numerous social

scientists and historians have tried to understand the political economy of the

New Deal. In

particular, a great deal of effort has been devoted to trying to explain the

dramatic differences in per capita New Deal spending across states that were

first mentioned prominently by Leonard Arrington

(1970). Jim Couch and Bill Shughart offer a book-length study that is devoted

to explaining those differences using public choice theory.

Franklin Roosevelt gave speeches that argued that the New Deal was designed to

promote “Relief, Recovery, and Reform.” New Deal administrators like Harold

Ickes and Harry Hopkins also consistently talked about noble goals for the New

Deal programs. Yet Leonard Arrington’s simple comparison of New Deal spending

per capita across the states quickly raises questions about how well the New

Deal met these goals. There was substantial variation in the distribution of

New Deal funds per capita across the states; the West fared well, while the

South fared poorly. This has led a number of economists to perform econometric

studies of the New Deal. Donald Reading

(1973) found that

the distribution of funds seem to be associated with improving federal land,

building highways, and helping to promote recovery.

However, there was little sign that the New Deal money was designed to reform

society because money was not being distributed

disproportionately to poorer areas. Gavin Wright (1974) then added the issue

of presidential politics to the analysis. His results show that the primary

goal in distributing New Deal funds was to ensure the reelection of Roosevelt,

as money was primarily

distributed to swing states and to areas where the money could be used most

productively to increase presidential electoral votes. John Wallis (1987) then

expanded the sample by obtaining information on New Deal spending from year to

year and obtaining more information on the movement of the economic variables

over the course of the decade. Wallis emphasized that Congress had structured

the New Deal so that state and local governments played a role in determining

how much they would receive from

the federal government. Wallis also worried about problems of simultaneity

bias arising in the coefficients on the unemployment variables. Gary Anderson

and Robert Tollison (1991) then added Congressional politics to the mix. Couch

and Shughart’s contribution tot his literature involves a book-length study

that describes a wide variety of New Deal spending and loan programs, offers

numerous anecdotes about their impact, and performs further econometric

analysis on the determinants of New Deal spending and loan across states.

The focus of the book is on developing a public choice analysis of the New

Deal. This is not really a new emphasis because all of the previous work has

used the same notion that people in government were acting in a self-interested

manner. What is new in the book is the combining of the econometric analyses

with extensive descriptive material and a very strong negative tone about the

motives of the Roosevelt administration. The econometric results from nearly

all the studies generally imply that a focus on reelection by political

leaders and pressures from interest groups did a great deal to shape the New

Deal. Couch and Shughart’s econometric results show very little evidence that

reform, recovery, and relief were key factors, although earlier econometric

work suggests that recovery and relief motives might have played a role. To

supplement the econometric results, Couch and Shughart, offer numerous tales of

malfeasance in the book, which offer a counterpoint to many books that heap

unadulterated praise on the New Deal programs.

People interested in the distribution of New Deal funds should read the book in

conjunction with a recent paper by John Wallis (1998) in

Explorations in Economic History. Wallis’s paper in part serves as a

book re view in the sense that Wallis goes through the analyses of all the

prior authors mentioned in the book and tries to compare the results of each

analysis using the same data and the same variables as closely as possible.

Wallis also offers some new insights that are not in this volume because the

book was in press at the time that the Wallis article appeared. Couch and

Shughart expand on the earlier econometric work by offering additional material

and by dissaggregating and examining some of the specific programs.

One of the central issues that Wallis (1998, 1987) was trying to do in his

analysis was take into account the impact on New Deal spending of the matching

features that were included in some programs, as well as differences in the

attitudes of state and local governments toward seeking and obtaining New Deal

funds. His technique involved using a lagged value of grants in the New Deal

distribution equation in a panel data set. In addition for the period 1937

through 1940 Wallis has tried to directly examine the impact of state spending

on New Deal distributions. Couch and Shughart challenge the notion that

matching institutions and local attitudes had much impact on New Deal spending.

They found evidence from the Congressional Record on the share

of WPA projects funded by local sponsors. Regression analysis shows that the

sponsor’s share of the program was negatively related to the amount of WPA

expenditures. Therefore, they argue that there was no simple mechanical

relationship between the money provided by state and local governments and the

“match” from the federal government. I tend to agree that there was no

mechanical relationship, but it is likely that the attitudes and activities of

the state and local governments did influence how much effort they devoted to

obtaining New Deal funds. Couch and Shughart really do not address this issue

well because they do not try to take into account the issues of simultaneity

bias in their regression equations. Wallis (1987) has already made the

theoretic al case that federal government spending and state and local spending

are endogenous and that there are feedbacks between the two. Thus,

it is somewhat surprising that Couch and Shughart ignore the issue by running

simple OLS regressions that ignore the endogeneity issues. They do offer some

criticisms of some of the work Wallis has done on the impact of state spending

on New Deal funds, but it would seem very important to test the issue directly

in their regression analysis.

Couch and Shughart press their argument that state and local activity was

relatively unimportant further by claiming that leaders in the South, which

received less than other regions, did not oppose New Deal programs. They claim

that southerners only opposed the Roosevelt administration late in the 1930s

(p. 212). They argue that nearly all of the southern congressmen voted for the

Emergency Relief Appropriation Act, and that most of the southern opposition

came about in response to the court-packing plan in 1937. Their claims of la ck

of southern opposition to the New Deal are not very convincing. The vote for

the enabling legislation was not even remotely close, suggesting that everybody

expected that the legislation would go through because it was just continuing

the programs already in existence. Further, they appear to have missed the

work of Lee Alston and Joseph Ferrie, who have articles in the Journal of

Economic History

(1985) and in the American Economic Review (1993) that show that

southern planters were strongly opposed to many New Deal programs,

particularly Social Security.

I was surprised by another omission. In their concise history of the Great

Depression, they do not mention the work on the impact of the gold standard on

the depression by Barry Eichengreen (Golden Fetters, 1992). My

impression is that most economists and economic historians see Eichengreen’s

book as the most comprehensive discussion of the issue.

So, what can we learn from the analysis in this book, which also summarizes

most of the literature on the issue? Couch and Shughart give strong emphasis

to the notion that politics and interest groups were the primary factors

shaping the New Deal. Their regression analysis finds little evidence that the

distribution of funds matched the noble rhetorical goals of reform, recovery,

and relief motives. They dismiss the notion that matching had much impact on

the distribution of funds. At this point I am not fully convinced that the New

Dealers did not at least partially try to achieve the noble goals in their

rhetoric. One issue that cannot be addressed with the econometrics is the idea

that the New Deal was conceived to solve a national problem of relief and

recovery. In fact, the 1930s led to all sorts of federal legislation on issues

that had been the state’s preserve because people seemed to believe that these

were national problems. It is clear that the Depression did not touch all

states equally, but it certainly touched each and every state to some extent.

Each state

received a significant amount of spending, at least $200 per capita. So

Roosevelt, Hopkins, Ickes and the rest of the New Dealers could at least claim

that they used resources to foster relief and recovery at a base level in each

state. The variation across states shows that other factors determined the

distribution beyond this base level. None of the regression analyses by any of

the scholars writing on this subject show any sign that the New Deal was

reform-minded, a finding consistent with most historians’

views of the Roosevelt

Administration. It is clear that political maneuvering played an important role

in this story in all of the analyses.

The question of whether or not the variation also reflected more noble motives

is still not fully answered. Different specifications show

different results. One problem with the Couch and Shughart analyses is that

they do not adequately control for problems with simultaneity bias, which was a

central feature of Wallis’s earlier analyses. My sense having followed all of

this literature care fully over the past decade is that the distribution of New

Deal funds was complicated. It was driven by some noble goals, some political

goals, and certainly by special interest pressures.

It was probably driven as well by sheer confusion because there we re so many

diverse programs that it seems likely (and historians have documented)

that the goals of some programs came into direct opposition to the goals of

other programs. All of these factors come together into a giant and very

complex stew that boiled

over into the largest peacetime expansion of government in U.S. history.

Price V. Fishback Department of Economics University of Arizona Tucson, AZ

85721

Price V. Fishback is the Frank and Clara Kramer Professor of Economics at the

University of Arizona. His book with Shawn Kantor on the origins of workers’

compensation laws is forthcoming from University of Chicago Press early in

2000. Fishback and Kantor are currently collaborating with various scholars on

a large-scale project examining the economic impact of the New Deal on the

economy using county- and city-level data.

References:

Alston, Lee and Joseph Ferrie, “Labor Costs, Paternalism, and Loyalty in

Southern Agriculture: A Constraint on the Growth of the Welfare State,”

Journal of Economic

History, 45 (March 1985): 95-117.

Alston, Lee and Joseph Ferrie, “Paternalism in Agricultural Labor Contracts in

the U.S. South: Implications for the Growth of the Welfare State,”

American Economic Review, 83 (September 1993): 852-76.

Anderson, Gary

M., and Robert D. Tollison, “Congressional Influence and Patterns of New Deal

Spending, 1933-1939,” Journal of Law and Economics,

34 (April 1991): 161-175.

Arrington, Leonard J., “Western Agriculture and the New Deal,”

Agricultural History, 49 (1970)

: 337-353.

Eichengreen, Barry, Golden Fetters: The Gold Standard and the Great

Depression, 1919-1939. New York: Oxford University Press, 1992.

Fleck, Robert Kenneth, “Essays on the Political Economy of the New Deal”

(Ph.D. thesis, Stanford University,

1994).

Reading, Don C., “New Deal Activity and the States, 1933 to 1939,” Journal

of Economic History, 33 (Dec. 1973): 792-810.

Wallis, John Joseph, “Employment, Politics, and Economic Recovery During the

Great Depression,” Review of Economics and Statistics, 69 (Aug.

1987): 516-20.

, “The Political Economy of New Deal Spending Revisited, Again: With and

Without Nevada,” Explorations in Economic History, 35 (April (1998):

140-170.

Wright, Gavin, “The Political Economy of New Deal Spending:

An Econometric Analysis,” Review of Economics and Statistics, 56 (Feb.

1974): 30-38.