Keynes' Understated Criticism of FDR's New Deal
By David Henderson
One main component of Franklin Roosevelt’s New Deal was the National Industrial Recovery Act (NIRA), which cartelized hundreds of American industries. If FDR’s goal was, as the name of the act implies, to help industries recovered from the depth of the what would later be known as the Great Depression, the NIRA never made sense. When you cartelize an industry, you cut output and raise prices. With output being so low, you make the situation worse, not better.
My EconLog co-blogger Scott Sumner posted yesterday about an interesting letter that John Maynard Keynes wrote to Franklin D. Roosevelt during FDR’s first year in office, 1933. Scott highlighted the parts of the letter that interested him, having to do mainly with monetary policy. Scott briefly mentions Keynes had wise things to say about the NIRA but doesn’t quote them.
They’re worth quoting and they are largely wise, with a dose of silly. It’s possible that the silly is there so that FDR could heed the criticism of what must have been one of his pet projects.
Now I am not clear, looking back over the last nine months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former. In particular, I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large. The driving force which has been put behind the vast administrative task set by this Act has seemed to represent a wrong choice in the order of urgencies. The Act is on the Statute Book; a considerable amount has been done towards implementing it; but it might be better for the present to allow experience to accumulate before trying to force through all its details. That is my first reflection–that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.
What Keynes is getting at is what I said above: you don’t help an economy increase output by reducing output.
The “silly” is his vague reference to ” the social gains” being large. I don’t know what he means by that, but it’s hard to see the social gains being large and positive if the social gains are negative. As noted, there was less output overall than if the NIRA had not been in force. Of course, I’m taking Keynes literally here and including all of society in the adjective “social.” Maybe Keynes had in mind a subset of society, or maybe he was blowing smoke to, as I suggested above, get FDR to pay attention.
Later in his letter, Keynes hints at what these social gains might have been, writing:
I do not mean to impugn the social justice and social expediency of the redistribution of incomes aimed at by N.I.R.A. and by the various schemes for agricultural restriction. The latter, in particular, I should strongly support in principle. But too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.
Notice that Keynes singles out the restrictions on agriculture output, which, of course, made food more expensive and, thus, the lives of poorer people that much harder. Also, of course, if the government restricts output of food, there is less need for sharecroppers and we get what we got: Okies moving to California in desperate search for work. (I’ve written about that in more detail here and here.)