The Economic Impact of the New Deal

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Faced with an economy in recession, policy-makers today have proposed a variety of federal programs and projects that they believe will stimulate the sluggish economy. An underlying premise of the recent stimulus proposals is that the federal government can successfully use fiscal policy to grow the economy. The objective of this research is to better understand the economic impact of such fiscal stimulus. Perhaps the greatest example of federal peace-time fiscal intervention was the New Deal in which President Franklin D. Roosevelt introduced a myriad of programs designed to aid in the "relief, recovery, and reform" of the depressed economy. Despite the great importance of this remarkable episode of U.S. economic history, there has been very little attempt to quantitatively analyze the economic effects of the New Deal. To help fill this gap this project will provide a series of studies on the impact of the New Deal on a variety of measures of economic activity, including real estate wealth, housing values and construction, retail sales, manufacturing activity, agricultural development, criminal behavior, as well as demographic changes attributable to the New Deal. Since most of the research focuses on the impact of the New Deal at the county level, it is important to control for spillover effects from New Deal spending in neighboring counties and economic activity in neighboring areas. In addition, there may be unmeasurable economic shocks in one county that might spillover into neighboring counties. Measuring the impact of the New Deal on local economies is complicated further because in most cases we probably cannot treat New Deal spending as purely exogenous. New Deal expenditures might have been related to economic activity in conflicting ways. Given the stated goals of the New Deal, we might anticipate that the New Dealers distributed more resources to areas with lower incomes or to areas with higher unemployment or slower growth. On the other hand, many of the New Deal programs required that the state or local government have the resources to seek help for projects from the federal government or go even further by providing matching funds to help finance the projects. Thus, New Deal spending might have been positively related to measures of economic activity. To deal with the geographic spillover effects and simultaneity issues, we have adopted an econometric model that incorporates both the simultaneous relationship between New Deal spending and economic activity and the spatial correlation inherent in the deterministic and random components of the empirical model. This research program takes advantage of the new developments in spatial econometric theory that enable researchers to better understand the impact of public policy, while controlling for the geographic spillovers and simultaneity problems that inevitably undermine precise measurement. Providing a better understanding of the economic impact of the New Deal is highly valuable on at least two general levels. First, despite the significance of the Great Depression and the New Deal to U.S. economic history, very little is known about the economic consequences of President Roosevelt's experiment. Therefore, this research will add significantly to the history of the Great Depression. Second, the usefulness of government spending to stimulate a stagnant economy remains a deeply controversial modern public policy debate. Thus, one of the central goals of this research project is to shed light on this question by looking to a time when government intervention was likely to have the greatest impact - the Great Depression.