Lessons From the New Deal Testimony Prepared for the U.S. Senate Committee on Banking, Housing, and Urban Affairs March 31, 2009 Revised, April 4, 2009 Lee E. Ohanian Professor of Economics, and Director Ettinger Family Program in Macroeconomic Research UCLA 405 Hilgard Avenue Los Angeles, CA 90024 ohanian@econ.ucla.edu Chairman Brown, it is a pleasure to have the opportunity to speak with you about economic policy and lessons from the New Deal. The New Deal was a collection of policies adopted in response to the Great Depression that were designed to alleviate economic hardship and promote economic recovery. Today’s economic crisis has prompted many comparisons to the Great Depression, and has led many to ask whether a “New” New Deal is warranted. My research shows that some New Deal policies significantly delayed economic recovery by impeding the normal forces of supply and demand, and that the economy would have experienced a robust recovery in the absence of these policies. One implication of my research, and other recent research on protracted economic crises, is that short-run policies designed to moderate the effects of a crisis - crisis management policies - can prolong the crisis if those policies impede competitive market forces. Another implication is that the policymaking process can benefit from current research on economic crises. Much of the evidence that crisis management policies can prolong economic downturns is from research that utilizes recent developments in economic theory and methodologies. These new research developments can inform the policymaking process. These views are detailed below. The recovery from the Depression was indeed slow, and this has been recognized by a number of economists, including 1976 Nobel Laureate Milton Friedman (Friedman and Schwartz( 1963)), 1995 Nobel Laureate Robert Lucas, (Lucas and Rapping (1972)), and 2004 Nobel Laureate Edward Prescott (1999). My work with Harold Cole (2007) details this slow recovery. Total hours worked per adult, which is the standard measure of labor input used in macroeconomics, was 27 percent below its 1929 level in 1933, and remained 21 percent below that level in 1939. There was even less recovery in private hours worked per adult. Per-capita investment, which declined by nearly 80 percent relative to trend (2 percent annual growth), remained more than 50 percent below trend at the end of the 1930s. Per-capita consumption, which was about 25 percent below trend in 1933, remained roughly at that level for the remainder of the 1930s. Figures 1 and 2 show