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The new deal the financial aid of the government during the great depression

Over the past 15 years, I have worked with Shawn Kantor and a number of other co-authors to examine the economic consequences of a variety of New Deal spending and loan programs. The Great Depression led to a dramatic change in attitudes toward federal spending and regulation. Between 1929 and 1932, real GDP declined by 25 percent and unemployment rates rose above 20 percent.

In response, Herbert Hoover and Republican Congresses nearly doubled federal spending from 3 to 5. Meanwhile, real tax revenues declined from 4 to 2. Seeking to balance the budget, Hoover and Congress held spending constant and raised a wide range of taxes in their last year in office.

Promising a New Deal to combat the problems of the Great Depression, Franklin Roosevelt and a Democratic majority in Congress were elected in a landslide in 1932. Inundated by a broad range of problems, they offered dozens of new programmatic and regulatory fixes. Many new programs involved large increases in funding; real federal outlays increased from 5.

  • Based on the assumption that the power of the federal government was needed to get the country out of the depression, the first days of Roosevelt's administration saw the passage of banking reform laws, emergency relief programs, work relief programs, and agricultural programs;
  • They then refinanced the mortgages for the borrowers;
  • A number of ideas for instruments have come from the political economy literature on the distribution of New Deal funds;
  • To offset the lost income of farm owners, the Agricultural Adjustment Administration AAA used 11 percent of the grants to pay farmers to take land out of production and thus limit output and raise farm prices.

The deficit fluctuated but the budget never got too much further out of balance because real tax revenues expanded by roughly the same amount. About half of the grants went to federal funding of poverty relief, largely delivered as work relief with limited work hours and hourly earnings of less than two-thirds of the earnings on traditional government projects. Seventeen percent went to veterans.

Another 18 percent financed the building of roads and large public works, paying workers regular wages. To offset the lost income of farm owners, the Agricultural Adjustment Administration AAA used 11 percent of the grants to pay farmers to take land out of production and thus limit output and raise farm prices. The majority of loans went to farmers for mortgages and crop loans or to the Home Owners' Loan Corporation HOLC to purchase troubled mortgages and refinance them.

To gauge the impact of these New Deal programs, we compiled and digitized panel data sets for cities, counties, and states from a variety of sources.

  • I worked with several people to compile annual evidence on federal funds distributed to each state for over 50 programs between 1930 and 1940;
  • A multiplier of one means that an additional dollar of federal funding distributed to the state was associated with a rise in state income of one dollar;
  • Seventeen percent went to veterans;
  • To gauge the impact of these New Deal programs, we compiled and digitized panel data sets for cities, counties, and states from a variety of sources;
  • I worked with several people to compile annual evidence on federal funds distributed to each state for over 50 programs between 1930 and 1940;
  • Even so, the agency ended up foreclosing on 20 percent of its loans.

Many of the datasets used in the published papers can be found at my website at the University of Arizona https: New data sets will continue to be posted there as we publish papers that use them. We analyze the data using the econometric methods developed for panel data sets with multiple observations for each location.

The analysis usually identifies the impact of a particular New Deal program by focusing on changes over time within the same locations while holding constant changes at the national level, such as changes in the money supply or in national regulations that vary from year to year.

In some cases the identification comes from deviations from time trends within the same locations while controlling for the national changes. In nearly every setting, we need to deal with feedback effects from the economy to the New Deal policies, and with potential inability to control for relevant factors that are correlated with the New Deal policy as well as the outcome being studied.

We have therefore used a variety of instrumental variable techniques that tighten the focus of the analysis on aspects of each New Deal policy that are not correlated with the outcome variable of interest.

A number of ideas for instruments have come from the political economy literature on the distribution of New Deal funds. The fiscal stimulus package of 2009 has led to renewed policy interest in fiscal multipliers. I worked with several people to compile annual evidence on federal funds distributed to each state for over 50 programs between 1930 and 1940. We typically could not reject the hypothesis that the multiplier was one.

The Impact of New Deal Spending and Lending During the Great Depression

A multiplier of one means that an additional dollar of federal funding distributed to the state was associated with a rise in state income of one dollar. Some of that money was spent on consumer durables like automobiles; we found that an additional dollar of federal funds was associated with a rise in the value of car registrations of about 15 cents.

Public Works and Relief Spending The form of federal spending during the 1930s also mattered a great deal.

  • AAA grants had slight negative effects on retail sales per capita and on net migration;
  • The HOLC also had positive effects on housing markets, helping to stave off further declines in home prices and home ownership rates after 1933;
  • A 10 percent increase in work relief spending was associated with a 1;
  • The public works and relief programs generally raised economic activity, but the AAA farm payments had conflicting effects;
  • Many of the New Deal acts or agencies came to be known by their acronyms.

The public works and relief programs generally raised economic activity, but the AAA farm payments had conflicting effects.

In the state multiplier study, public works and relief grants had the highest multipliers, ranging from 0. Several other studies also show positive effects on other socioeconomic outcomes. Counties with more public works and relief spending had higher growth in retail sales per capita during the 1930s, as well as more net in-migration. A 10 percent increase in work relief spending was associated with a 1.

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An increase in private employment was even better because a 10 percent rise in private employment was associated with a 10 percent reduction in property crime. Such spending would also lead to an increase in the birth rate back to its long-term trend. Valentina Kachanovskaya and I find that additional federal spending in a state had a negative effect on private employment.

AAA payments to farmers to take land out of production had conflicting effects. In the cross-state study of multipliers, an additional dollar of AAA payments was associated with an increase in personal income of at most 15 cents, and the effect was negative in other specifications.

The AAA mostly aided landowners, particularly large landowners, by paying them to take land out of production, but this came at the expense of many farm workers.

AAA grants had slight negative effects on retail sales per capita and on net migration. They then refinanced the mortgages for the borrowers. The HOLC came close to fully replacing toxic mortgages on lenders' books because it often paid prices that covered the principal owed, interest owed, and taxes paid by the lender.

When the loan was refinanced, the HOLC used the amount paid to the lender as the basis of the refinanced loan; therefore, the borrowers did not get a break on the amount owed.

Borrowers benefitted because the HOLC refinanced at a low interest rate, lengthened the period of the loan, and used a modern, direct-reduction loan contract where each loan payment immediately retired part of the principal owed. They also benefitted because the HOLC was very slow to foreclose, often waiting through more than 1. Even so, the agency ended up foreclosing on 20 percent of its loans.

The HOLC benefitted from a federal guarantee on its bonds, which allowed it to issue bonds at low interest rates and to practice its patient foreclosure policy.

The ex ante risk for the HOLC probably implies a federal subsidy of 20 to 30 percent of the value of the loans. After the HOLC closed down its operations in 1951, however, its losses added up to only about 2 percent of the value of the loans because it was often able to sell foreclosed homes when housing prices recovered during World War II.

The HOLC also had positive effects on housing markets, helping to stave off further declines in home prices and home ownership rates after 1933.

NBER Reporter 2014 Number 3: Research Summary

In smaller counties throughout the U. The New Deal led to a huge expansion of government activity in a wide variety of sectors at all levels of government, and I can only cover part of the research that we have performed here. Fishback, "New Deal Funding: