President Obama’s New New Deal of massive government intervention was inspired by FDR’s New Deal, and both have been plagued by chronic high unemployment.
In her recent New York Times column, Christina Romer noted that there was some remarkable economic expansion during the New Deal period (1933-1940), but I doubt anybody disputes that. The key question is why, despite expansion, did high unemployment persist. It averaged 17 percent.
I suggest that New Deal unemployment and related economic difficulties were unintended consequences of New Deal policies. In particular:
1. Federal tax revenues more than tripled, from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, holding company taxes and "excess profits" taxes all went up. FDR introduced an undistributed profits tax. Consumers had less money for spending, and private sector employers had less money for hiring.
2. New Deal programs, intended to benefit the middle class and the poor, were mainly paid for by the middle class and the poor. This was because the biggest source of federal revenue during the 1930s was the excise tax on beer, cigarettes, soda, chewing gum, radios and other cheap pleasures disproportionately enjoyed by middle class and poor people. Until 1936, the federal excise tax generated more revenue than the federal personal income tax and the federal corporate income tax combined. Not until 1942, amidst World War II, did the federal personal income tax become the biggest source of federal revenue.
3. FDR caused uncertainty that discouraged investors from taking the risks of funding growth and jobs. Frequent tax hikes (1933, 1934, 1935, 1936) made it harder for investors to estimate the net returns of possible investments. FDR added to the uncertainty by denouncing investors as "economic royalists," "economic dictators" and "privileged princes," which amounted to threatening investors. No surprise that private investment was at historically low levels during the New Deal era.
4. The New Deal channeled government spending away from the poorest people who lived in the South. Comparatively little New Deal spending went there. Most New Deal spending went to political "swing" states in the West and East, where incomes were more than 60% higher. The decision was probably made that allocating more federal dollars to the South wouldn’t yield more Democratic votes, since the South was already overwhelmingly Democratic.