The Impact of the New Deal on Local Economic Development

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

The New Deal not only provided employment for millions of unemployed workers, but it also added significantly to the nation's infrastructure. Policy makers today, faced with the simultaneous problems of aging infrastructure and the public's demand for welfare reform, often cite New Deal-type work relief projects as a model for an effective solution. Despite numerous studies of the politics of the New Deal, there are surprisingly few micro-level analyses of how New Deal expenditures affected local economic development in the 1930s. To help fill this gap, this project studies the impact of the New Deal on a variety of measures of economic activity, including real estate wealth, housing values, retail sales, manufacturing activity, agricultural development, as well as demographic changes attributable to the New Deal. The research is a continuation of work that was begun under NSF grant number SBR-9708098. A major objective of the research is to use the geographic variation in spending across U.S. counties to perform a series of studies that simultaneously examine the impact of the New Deal on local economic activity, both in the county where the monies were spent and in nearby counties, and the political and economic factors that influenced the distribution of New Deal funds. Because the New Deal was instituted during a period of extremely high unemployment, it seems reasonable to expect that the federal government's spending would have bolstered economic activity in many areas. Yet, recent work on the impact of public infrastructure on economic growth does not unambiguously support conclusions that more spending on public infrastructure leads to substantial increases in economic growth. It is also possible that New Deal spending crowded out the efforts of the private sector and state and local governments. Using a series of measures of economic activity, our goal is to assess the impact of the New Deal on local economies. Since the project examines the impact of the New Deal in relatively small geographic areas, it is important to allow for spillovers from New Deal spending in neighboring counties. That is, one could envision situations in which spending in one county either enhanced or hindered growth in neighboring areas. Moreover, the spillovers are not necessarily confined to the direct effects of New Deal spending. Economic growth in neighboring counties often influences economic growth in the county of interest. In addition, there may be immeasurable economic shocks in one county that might spill over into neighboring counties. Measuring the impact of the New Deal on local economies is complicated further because in most cases we probably cannot treat New Deal spending as purely exogenous. New Deal expenditures might have been related to economic activity in conflicting ways. Given the stated goals of the New Deal, we might anticipate that the New Dealers distributed more resources to areas with lower incomes or to areas with higher unemployment or slower growth. On the other hand, many of the New Deal programs required that the state or local government have the resources to seek help for projects from the federal government or go even further and provide matching funds to help finance the projects. Thus New Deal spending might have been positively influenced by measures of economic activity. To deal with the spillover effects and simultaneity issues this project develops a generalized three stage least squares models that incorporates both the simultaneous relationship between New Deal spending and economic activity and the spatial correlation inherent in the deterministic and random components of the empirical model.