One factor, stressed by some economists at the time, including Joseph Schumpeter (1939, 1037-1050) in particular and more recently Robert Higgs (1997), was that the level of private investment spending remained depressed (see the last column in Table 23.3). They blame the political climate created by the New Deal for discouraging investment. Social Security and the new freedom granted to labor came in for some harsh words from the business community. The rhetoric of the New Deal, it must be admitted, was often antibusiness. In his State of the Union message of 1936, President Roosevelt had castigated “the royalists of the economic order” who, he said, opposed government intervention in economic affairs and received a disproportionate amount of national income. People of means especially resented the tax legislation in 1935 and 1936, directed at preventing tax avoidance and making the tax structure more progressive. In addition, estate and gift taxes were increased, as were individual surtaxes and taxes on the income of large corporations. The undistributed profits tax of 1936—a surtax imposed on corporations to make them distribute profits instead of holding them so that individual stockholders could avoid personal taxation—was also resented. Why would business undertake long-term investments, critics of the administration wondered, when the profits might all be taken away by future legislation? The argument is plausible, but difficult to prove or disprove. Higgs looked at a variety of evidence including opinion polls and found some support for the conjecture, but Thomas Mayer and Monojit Chatterji (1985) found no correlation between New Deal legislative actions and investment spending.
New Deal policies such as the National Industrial Recovery Act (1933) and the National Labor Relations Act (1935), which are described in more detail in chapter 24, have also been criticized. These policies were intended to restore full employment by checking the downward spiral of wages and prices, even at the cost of allowing firms to collude to keep prices up, an action that was traditionally illegal under the Sherman Antitrust Act. Harold L. Cole and Lee E. Ohanian (2004), however, maintained that these policies had the unintended effect of inhibiting downward adjustments in wages and prices that would have produced a new full employment equilibrium. Michael D. Bordo, Christopher J. Erceg, and Charles L. Evans (2000) constructed a model in which “sticky” wages help explain the severity and persistence of the depression, although they remain open about the origins of sticky wages. These economists use calibrated general equilibrium models to make their case. One can get a taste of their arguments, however, by considering what would happen in a competitive labor market if the demand for labor fell, but the wage rate was prevented from falling by a government-enforced cartel or some other factor that inhibited adjustment. The result would be a supply of labor that exceeded demand: persistent unemployment. On the other hand,
Gauti Eggertsson (2008), using similar techniques, argued that New Deal policies had a positive impact by creating expectations of rising prices.
World History
