The Obama stimulus package, now provisionally set at about $775 billion over two years, but sure to grow as it makes its way through the halls of Congress, has in many quarters been compared to FDR’s New Deal of the 1930s. Certainly the economic conditions facing Obama more closely match those faced by FDR (although not as dire) than those faced by any of the postwar presidents. The only two post-war downturns of comparable magnitude were quite different animals, particularly on the inflation front.

One of the themes we will see as the package gets debated — particularly by those who think there is wisdom to be found in the editorial pages of The Wall Street Journal – is that “The New Deal didn’t work; only WWII solved the Depression.” This is, in fact, complete and utter hogwash. The New Deal was extremely effective, particularly while the economic stimulus was active.

The economy enjoyed extremely high rates of growth during FDR’s first term, and only slipped back into recession in 1937 as FDR pulled back from spending over fears about the budget deficit. The graph below shows two of the best measures of economic growth during the 1930’s — namely, real GDP growth (available only annually back then) and the year-over-year growth in Industrial Production.

For comparison, the second graph shows the growth during what the Wall Street Journal editorial-board-types think was the golden age of America, the 1980’s. The GDP data for the 1980’s is quarterly.

Both periods started from periods where the economy had been in distress, although the cause in the latter period was due to tight monetary policies designed to wring high inflation out of the system. Clearly the system had suffered more in the pre-New Deal period, with industrial production falling at double digit rates for several years rather than the brief period of contraction of more than 5% during the early years of the Reagan Revolution.

However, take a good look at the scales of the two graphs. Under FDR, industrial production soared initially at a year-over-year rate of greater than 60%, and real GDP growth stayed in the double-digit positive territory for over 3 years in a row. The best industrial production growth that was achieved in the 1980’s was a brief period of about 12%, with real GDP growth of around 8% for a short time.

All in all, from the objective data, one must conclude that the New Deal was a great success.

Zacks Investment Research

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