Economic historian Price Fishback joins Allison Schrager to discuss the economic history of the New Deal, the various programs that constituted it, and whether today’s economic struggles compare to those of the 1930s.

Audio Transcript

Allison Schrager: Welcome to Risk Talking, a podcast about economics. I'm your host, Allison Schrager, and today I'm joined by Price Fishback. Price is the APS professor of economics at the University of Arizona, where he researches the economic history of Franklin Roosevelt's New Deal. He's also a research associate at the National Bureau of Economic Research and a scholar for the Hoover Institution's Regulation and Rule of Law Research Program.

Price is the author of several books including the co-written Well Worth Saving: How the New Deal Safeguarded Home Ownership. And today we'll discuss the social and economic legacy of the New Deal, which I think is especially relevant. This isn't just me geeking out on economic history, which I'm prone to doing. I think a lot of the questions in Price's research give us insight now that we are pondering a New Deal today. So thank you. It's very timely to have you here today. Thank you for joining me.

Price Fishback: Oh, well thank you for having me.

Allison Schrager: Yeah, so as I mentioned, I feel like this is a good day for us to be talking because as you saw, Europe just released its Green New Deal. I think inflation took some of the wind out of the sales. There's certainly a lot of momentum for thinking that, at least partially because of inflation, we need to somehow remake the economy by looking at the supply side and really have the government take a more muscular approach to structuring welfare and industry. And I think people are sort of really looking to the New Deal as inspiration. We don't really think very critically of the New Deal. We just sort of assumed it worked. And what I love about your research is it doesn't really take a yes or no, but it really looks at it a little bit more thoughtfully and critically, which if we're thinking of new New Deals, I think is important before we proceed. So it seems like a good day for us to talk.

Price Fishback: Well definitely because one think people often suggest is to have another Works Progress Administration or another Civilian Conservation Corps. Those are the ones that are most popular in describing these. Matter of fact, I read a lot of things where they talked about a new kind of green Conservation Corps, or something along those lines. The New Deal was a response to the Great Depression, which was much deeper than anything we've experienced, even deeper than what we experienced in the couple of months when we had unemployment around 17 percent during Covid.

And what's really interesting is that one of the biggest problems they faced in the early parts of the 1930s is they had deflation, not inflation, and the deflation rate was like 6 percent. So if you had borrowed money for a house, for example, you were going to pay back dollars that were like 6 percent more valuable than what you borrowed in these cases. And actually the deflation was actually 30 percent over four years between 1929 and 1939. So that put a lot of people with housing who had borrowed money into a real severe problem.

Allison Schrager: So I think we really should delve into more about, as you bring up, people are sort of definitely romanticizing the WPA. And then I want to talk more about housing too. So what was the WPA exactly?

Price Fishback: So the Works Progress Administration was kind of the second round of what they were trying to do during the 1930s. So the original program that started out was the Federal Emergency Relief Administration in 1933. And under the FERA what they did was they had work-relief programs and then they also actually provided direct relief as well. So, direct welfare. So the work relief programs paid probably about 50 to 70 percent of the normal wage at the time. And in a lot of ways the FERA and then the WPA, which followed, which did pretty much the same thing, was kind of like unemployment insurance, but you had to work during that phase.

And so when people talk about the WPA or they mentioned the FERA, they're really talking about an unemployment insurance program where you have a work requirement. The program that they really should be thinking about instead of the WPA or the Federal Emergency Relief Administration would be the Public Works Administration or the Public Roads Administration. And in those programs they were actually also working, but they were paying people a normal wage during that timeframe. And so those people were probably getting about 25 to 30 percent more than the people on the WPA. So I kind of worry sometimes when everybody talks about the WPA because I don't think they have the right picture of what it was actually doing.

Allison Schrager: So the fact we have unemployment insurance just means the WPA sort of isn't really relevant anymore, or wouldn't be particularly useful?

Price Fishback: Well, it could be, but I don't think people would accept the WPA given the wages that they were paying. People have the perception that the wages were high, but that was because they were comparing them to really low wages in, say, agriculture for agricultural workers. At the time that they did this in the 1930s, they have 25 percent unemployment for one year and they had unemployment above 20 percent for four years between 1932 and 1935.

And then the unemployment rate never got below 10 percent until you get to the 1940s. And so they're facing a serious problem at that point, but we haven't faced that kind of level of unemployment except for a very short period of time. And we do have all sorts of ways to help people in the modern era that we did not have before. When the federal government started doing this, you just didn't have that kind of thing going on. And so, it really was an emergency, and it was a way to actually build public capital and actually improve the kind of capital stock of the United States like with roads, and dams, and schools, and sidewalks, and all sorts of things like that.

Allison Schrager: Well, but if unemployment stayed above 10 percent, it doesn't seem like these programs are very effective at lowering unemployment or would've been much, much worse if it wasn't for these programs.

Price Fishback: Well, so a lot of people at the time considered the people who were on emergency relief who were doing the public works or doing the WPA stuff as being still unemployed because they weren't fully employed, they weren't working full weeks and things like that. But if you take them out, they still have unemployment rates that are still substantial. The unemployment rate without the WPA or without the FERA was probably, let's see, probably about 8 to 15 percent at various times. So they couldn't fully resolve the unemployment problem. That's definitely true.

Allison Schrager: Do you think the programs just weren't big enough, or do you think they just didn't solve the right problem?

Price Fishback: Well, it's hard to say because the New Deal is not just these programs. They did all sorts of things. And so there was kind of something for everybody in the New Deal. For people who owned housing, the Homeowner's Loan Corporation bought all these mortgages to reload the lenders with capital. At the same time, they refinance the loans for all these people to keep them in their houses. You have the AAA farm program, which is designed to try to help farmers by taking land out of production to try to reduce the supply of farm goods to raise prices.

So they have so many different programs going on simultaneously that trying to pin everything onto just the work relief programs is probably incorrect. So I think the better way to think about it is, if they really wanted to do a New Deal program today that was kind of like the WPA, but was more like what people would find acceptable, it would be like the Public Works Administration, and in that case, they're actually just following the normal process that they did before, you hire contractors, and the contractors hire people and they pay them regular wages and then put them to work building dams or doing things like that, but you have to have the projects that you want to do. And so the real way to think about the modern economy I think in these kind of times is that, are there public works projects that we need to undertake and so should we be repairing roads or maintaining roads in a better way than they had, or bridges?

People talk about the roadways and bridges are having trouble, and so therefore we should try to fix them. So that makes sense as something you might want to do. I actually wrote an op-ed in the first couple of months of COVID in favor of taking people who were receiving the unemployment funds and whatever and having them work as contact tracers just to see what was going on. They could volunteer, you didn't force them to do it or you could go out and just hire a bunch of contact tracers, because it seemed like that was something we needed at the time. And so I think the key thing is, do they make economic sense? Does the benefit of actually building this stuff offset the cost of doing it?

Allison Schrager: Did it in the depression?

Price Fishback: I think generally. I've got a whole bunch of co-authors on various projects, and so Valentina Kachanovskaya and I actually did this study where we tried to look at what happened when you spent money through the public works and relief in the various states. And so if you spent a dollar in the state, did that have a multiplier effect? And it turned out that the multiplier was one, which meant that basically you had a pass-through. So the federal government spent a dollar in the state and people's incomes went up by a dollar. Now sometimes you hear stories about multipliers that say they're like two or three. Sports stadiums always have these multipliers of two or three or four, which really the typical sports stadium really has a multiplier of about 0.1, which they find when they actually do studies of them, but this is a period of high unemployment, and so you're employing people to a great extent.

So you didn't get a super multiplier, but you got just a regular multiplier, which was good. So you actually increased income by a dollar for each dollar that the federal government spent. Now in contrast, the AAA program, the one I told you about, paying farmers to take land out of production actually had slightly negative effects on income in those areas. And matter of fact, it looks like from other studies that we'd done that farm owners benefited, particularly larger farm owners, but farm tenants and farm workers and sharecroppers actually kind of lost out in that situation, because a lot of them were pushed off the land and had to migrate.

Allison Schrager: I suppose the benefits of these programs were one, they were doing public works that needed to be done. We needed better roads and highways. We were moving from an agricultural to a more industrial economy. Cars were becoming more of a thing. That also speaks to one of the challenges the economy was facing then, which is we were having to move workers from being from the land to being more fully industrialized. It was sort of the last gasp of an agricultural economy. So I guess we're kind of feeling like we're in a similar place today with manufacturing. So if we did have an equivalent green public works program, do you think that could not only have projects that we need, and also do you think that could be useful in retraining and shifting workers to be, I guess more modern in the labor force?

Price Fishback: Well, yeah, it just depends on whether the programs make sense. One of the things was most of the work that was done during the thirties was construction work and things like that. Someone might be a regular worker when they were working in the regular economy, but they ended up being someone who was like a laborer. They were digging ditches and doing all sorts of things. They developed skills. The Civilian Conservation Corps, for example, actually was pretty good because it took poor young adults age 17 to 22 and actually sent them out to various locations where they were doing conservation work and they were building buildings on the parks and replacing trees and trying to stop erosion and trying new things.

And they actually built up a number of skills. And because they were coming from poor families, they actually probably suffered to some extent from malnutrition beforehand. So a lot of times what happens with the CCC is you see the guys when they come out and they're like 20 pounds heavier, maybe even a little bit taller, and they've got some additional skills. So that was like the first non-veterans skill program that you had with the CCC. So something like that today might be pretty good, but the question is what do you train them to do is the big issue because by the time you get to the 1930s, probably about 20 percent, 30 percent of the population was still in agriculture, but then that slowly is dropped down to about 2 percent today. And manufacturing employment, even though we produce a lot more manufacturing goods, manufacturing employment has been declining as a share of the population for quite some time for like 60, 70 years.

And the big shift has been towards services. And so we largely have a service economy and we import a lot of manufactured goods. And the types of things that we manufacture today are pretty high-end things, use a lot of machinery and do things along those lines. So the question is, how do you train people to do what you're trying to do? You might help train them to learn how to install solar panels or something along those lines that might have kind of green outcomes that might improve things, but you have to designate what skills do you want to train people in?

Allison Schrager: Yeah, do you think it was easier to know in the Great Depression as opposed to now? It seems like we're going whole hog into, we need to green the economy just like we needed better roads in the 1930s, but even with those projects, the multiplier was only one. Do you think today we have this sort of similar low-hanging fruit in front of us?

Price Fishback: Well, it's hard to say. We're trying to reduce pollution and trying to reduce carbon in the atmosphere. The question is the timing of this and how quickly can we make those moves. They're making mandates that we're going to get rid of production of all gas-powered cars by 2035. I'm still living in the thirties, so 1935, but by 2035. So why aren't we thinking more about hybrid cars and things like that, because we have to make this transition, and I don't think we're going to fully make the transition to the electric car partly because the electric grid can't handle it. And so you really need to have substantial construction on the electric grid to be able to handle these kinds of changeovers.

And then you've got to build the new stations, charging stations, and a wide variety of things along those lines. When they built the gas stations and stuff in the 1910s through ‘30s, those were all done privately. That wasn't something that the federal government did. And one of the things about the New Deal, they were filling in gaps, but they were building public projects.

These were things like parks and roads and things that government normally does. And so they actively tried to avoid doing what the private sector did. So they weren't out there manufacturing things or things like that. They built the occasional golf course, but that was a public golf course, and things along those lines. And so a lot of the situation today is more like, I'm not sure if I would go out and try to build public works projects per se by the federal government. It makes some sense to subsidize some industries. We've talked a lot about subsidizing the chip industry and things like that to make sure we have enough of these chips and things along those lines. So it's not clear to me that you need the government to build those kind of things.

Actually, most of the things we probably need people to do is service type things. And so sending kids out or sending youth out to help students learn and things like that, because we don't do enough for kids. A lot of the wealth, social insurance and welfare programs are designed to help the elderly, but we don't spend nearly as much as we do for the kids that we do on the elderly. So I would transfer it more towards having kids go out and you have the Teach for America type programs and things like that. That would be the thing I would focus on: how do we help all these kids in these various schools to have tutors and do better and all sorts of things along those lines?

Allison Schrager: Yeah, if anything, we're suffering a labor shortage right now. So the idea that we need to create all these government jobs, especially in areas where we already have shortages, seems a little odd. It seems like the bigger issue we do have is quality of human capital, and is it helping people be more adaptable for the new economy?

Price Fishback: Right. And so, you can have part-time programs and things along those lines. Some of it may be we need to do some retraining as well for people, but there definitely has been a reduction in labor force participation among groups, and some of it's just age. You've got a lot of people retiring who wouldn't have retired maybe 20 years ago at this same age, but they have the opportunity to, because we're a rich country relative to where we were 10 years ago, 20 years ago, 30 years ago, and vastly richer than we were during the 1930s. Here's a good way to think about what's going on. When he had the Spanish flu in 1918, that was much, much more dangerous than what Covid was, and they kind of shut down briefly, but they didn't fully shut down anything.

They may have shut down schools for a short period of time, but stores were open and all sorts of things like that. But we are vastly richer now than we were at that point. And so we were actually able to shut down large segments of the economy without bearing too much of a cost for a short period of time. And we still face costs from keeping schools closed or going online and things along those lines. But being richer gave us the opportunity to do more to try to prevent the spread of a very serious epidemic. And so we're in a position now where we are quite a bit richer. And so now we're worried about problems related to how can we at least stop the path for global warming to some extent and find ways to get around that. But that takes a lot of technology. And so maybe we should be training people in learning how to use new technologies.

Allison Schrager: You say that a lot of the public work projects were the purview of the government, like roads. This might be a bit outside your expertise, but do you think green technology is in that same sort of area that since it requires such a big fixed cost and has all these positive externalities, it should be what the government's doing?

Price Fishback: Well, it depends on what you're trying to do. It's hard for me to see that you're going to send people out to build things that are actually going to reduce global warming kind of issues. Because most of the issues, a lot of the things that are pushed for greening now is actually to try to reduce global warming. We've had enormous success at cutting pollution, for example. Car pollution or whatever is probably 2 percent of what it was in 1972 or somewhere in that neighborhood. And so it's just a different set of issues that are going on. And one thing we might be worried about is that a lot of the global warming is going to continue pretty much no matter what we do. So one of the things you might think about is building dams and dikes along the coastline because they're talking about rising waters in those areas and things like that. So kind of dealing with the problems that arise because of global warming in a way that allows us to preserve a lot of areas where people are living.

Allison Schrager: Do you think overall the New Deal was successful?

Price Fishback: I think parts of the New Deal were successful and parts were not. And so I think that's a better way to look at it, because the New Deal is like 60 programs. I think the public works and relief programs were successful. We have a number of studies that we've done to try to look at a wide range of dimensions of people's welfare. And so you had had the dollar-for-dollar positive effect on income. It actually contributed to higher consumption, which is a good thing during this period. So the public-work spending in the cities actually sharply reduced infant mortality and a number of different types of death rates during the time and kind of helped improve the marriage market for people. And so fertility actually started to rise back up. And so in that sense it actually reduced crime as well in these areas.

And so a lot of the money was targeted towards people who were in severe trouble because they were unemployed or they were poor to begin with. And so in that sense, that was a very successful program. The Agricultural Adjustment Act, the AAA, that has more issues. It actually helped a large number of farmers because it got them started. Later on it really focused on conservation after it was declared unconstitutional, they replaced it with the soil and domestic conservation allotment. And so when they did that, they actually tried to more actively take roles in trying to reduce erosion and problems along those lines. But even so, the biggest problem was that is that it hurt a lot of laborers, people who were tenants and sharecroppers, particularly in the South. And so, it has this really mixed-bag kind of effect.

In some ways, it was kind of like foreign aid programs, where the top part of the population gets benefits and the bottom part of the population gets hurt to some extent. And then other programs, for instance, the National Recovery Act is kind of a mixed bag because the National Recovery Act established a way for companies to get together and join together and choose what the prices were going to be and choose what the quality was going to be and led to kind of cartel-like behavior. And that was not good news. So when that was declared unconstitutional, elimination of this potential for cartels by all the various firms was one of the best things they ever did. The Supreme Court justices that struck that down are heroes of the American economy. It did have some effects on the labor side where they were trying to set up things in such a way where they were trying to share jobs.

They would try to cut back on hours worked per week, and then try to get more employment where everybody, they weren't working as many hours and so they wouldn't make as much money during the course of a week, but it actually provided employment in the private sector and stuff. And that had a mixed-bag effect. So that, I think, was more positive in a sense, but it also kind of created problems. And so the Homeowner's Loan Corporation, they went out and bought a million loans, and so they basically just put all sorts of hands in the lenders so they could actually start lending again. And at the same time, they refinanced the homes at low interest rates, like 4.5 to 5 percent at a time when interest rates were 6.5 to 7 percent, and kept people in their homes. And so that was actually a pretty positive program as well. The list just keeps going. So I'll stop there and you can ask me about specific ones if you want.

Allison Schrager: It's an extraordinary list. I think when I think of the New Deal, I think of it as this real sea change in people's relationship with government in terms of absorbing more of their risk. I don't know if that's the right way to think about it, but what did people do before? Were recessions just not as deep, or did people just really starve to death when there was a bad recession?

Price Fishback: Well, so one of the big things for the New Deal was actually it was a shift toward the federal government taking action. Before the New Deal, the responsibility for local unemployment and for poverty was localized. And so up until the progressive era, up until the 1890s or so, almost all the action was taken by local governments, so a county government or a city government. And so they had homes, houses and they also had some outdoor relief where you might work or you might get money that allows you to stay in your house, orphanages and a wide range of things along those lines. In say 1890, the country as a whole through these local governments was probably spending about half a percent to 1 percent of GDP to try to help the poor in those settings.

Then what happens in the progressive era, the states get involved. So between 1890 and 1930, you start seeing things like mothers’ pensions, which eventually becomes Aid to Dependent Children, which eventually becomes Temporary Assistance to Needy Families. So the early mothers’ pensions programs were designed to help widows, allowed them to stay in their home and raise their kids in their home rather than have the kid be in a short-term orphanage or something like that, because a lot of times what would happen is in the 1800s, the poor would be in a position where they couldn't take care of their children for a while, so they would place them in an orphanage for a while, and then bring them back out when they had enough resources to support them again. And then they would also get benefits from local governments.

But the mothers’ pension actually targeted this particular group that had lost a major earner. And so now they're in a position where they can still take care of the kids and live in the home or live with family. Then they started to do things like aid to the blind. And then in the late '20s and early '30s, they had old-age assistance where they explicitly tried to provide benefits to the elderly so that they could stay in the home and stay with family rather than end up in a almshouse or something along those lines. And then it rolls into the 1930s, you have the financial emergency, and the way they respond is with the Federal Emergency Relief Administration. They also had the Civil Works Administration, which was work relief as well. And then in 1935, what they did is there was kind of like a negotiation between the House and the Senate and the president about long-term versus short-term decisions.

And so what happens is the federal government kind of takes over what's going to be these temporary programs. And so the temporary program, the WPA replaces the FERA, and then the federal government gives back direct relief to the states and local governments in a sense. And so the idea is the federal government's not going to pay payments where they didn't work. It's going to focus on these temporary work programs and the local governments are going to go back to providing the relief there. And then the federal government steps in with the Social Security Act and provides matching grants. And so the mothers’ pensions, they've renamed things and they call it Aid to Dependent Children. And then the federal government provides a matching grant of half of the amount that the state local government would provide. And then part of the deal was that every county in the state had to provide these kind of programs because the original budgets, pensions didn't necessarily cover all the counties in the state.

And then they do the same thing with old-age assistance. They do the same thing with aid to the blind and they pass the Social Security Act for the national pensions, and then they provide unemployment insurance. But usually that takes another two years to really roll out in most places because you have to develop a fund that allows you to pay the benefits. But if you look at it in terms of just direct poverty payments where you didn't put any money in the system or anything like that, that was about 1 percent, 2 percent of the economy in the 1920s. These direct payments went up to some extent during the '30s because unemployment was so high and then it pretty much was settled in at 1 or 2 percent of the economy until Medicaid came in. And with Medicaid, what happens there is that as another 2 or 3 percent, so that the pure direct welfare payments or whatever are probably about, I don't know, 4 or 5 percent of what the GDP is today. The vast majority of the spending that's gone towards social welfare programs has gone to social insurance.

And what I mean by social insurance is a situation where the worker or their employer contributes to a fund, like an insurance fund that's going to help you, if you have unemployment, they're going to provide you unemployment benefits. If you have a workplace injury, you have worker's comp, if you have disabilities, then you have disability insurance, old-age pensions and all sorts of things like that. And so the big rise in government spending has been these changes in these social-insurance programs. Medicare is another big one as well, where people contribute to the funds, and then they get redistributed when people meet the eligibility requirements, they age out or they become old, they get injured at work, they become unemployed, all sorts of things along those lines. And that's pretty much what most of the countries around the world are doing. It's mostly social insurance rather than just direct welfare.

Allison Schrager: Well, it seems like also a big change. You talk about what was happening in the states. You say things like widows’ pensions. Was the Great Depression the first time that, say, an able-bodied man would get money from the state?

Price Fishback: From the federal government, yes, but able-bodied men were getting money even before. So if you were in bad shape and these kind of situations, the local government would provide aid to males and people like that. The specifics about the windows’ pensions was is it targeted a specific group. You still had the local aid still going to people who are in trouble, so they might end up in almshouses, if they're sick, they might end up in the local public hospital or charity hospital.

Also, charities played a substantial role at the time as well. Charities, religious charities, and private charities probably spent as much in a lot of places as the public sector did as well. But it was all localized. Almost all the labor legislation was focused at the state level because of the way the federal system worked was that the federal government just didn't need to be involved in local markets, was essentially the idea. And then the Great Depression hits, and you've got this nationwide situation where everything's going bad everywhere. And so then they start thinking, well, this is a national emergency, and so now we need to take steps.

Allison Schrager: Yeah, and it seems like we've only been taking more since. Do you have any idea how much we spend on social welfare now?

Price Fishback: So spending in say around 2010 to 2020, total spending was probably about 20 percent, 21 percent of GDP, somewhere in that neighborhood. And a big part of the spending, probably half, maybe even more, is social-insurance spending, and social-welfare spending. They often call them entitlements. And so we've got a huge budget that's entitlements. And so the amount of budget that we actually have to play around with that aren't associated with these expectations and with these contributions for these people is actually a relatively small share of the federal budget.

Think about this. When the great recession occurred, when we were having all the problems in the housing markets that spilled over into the economy and unemployment went up to about 10 percent, spending went up from about 20 to 23 percent during that period. When Covid hit, that seemed like a bigger emergency. And so the spending during that period, if you look at the year from say April 2020 to March 2021, we went from about 20 percent of GDP being spent to about 36 percent of GDP being spent, maybe a little bit more. And now we're getting closer and closer to World War II territory where we're spending as much as 40 percent of funds on governmental activity. So that was a huge surge in 2021, and a big chunk of the money still hasn't really been spent, so it's not clear where everything got spent, but it was allocated to be spent.

Allison Schrager: Yeah, I have a note here that the New Deal spending was roughly the equivalent of $900 billion in today's money. And you think, just one of our Covid relief efforts was more than $1 trillion, it seems like. So it's relatively small compared to what we’ve done recently.

Price Fishback: Right. So during the 1930s, the federal spending went from about 2 or 3 percent at the beginning of the decade, Hoover actually added another 2 to 3 percent. And so you're probably at about 5 or 6 when Roosevelt hits office. And then we ended up at about 10 percent by the end of the decade. And so relative to GDP or whatever, the New Deal actually looks kind of small relative to some of the other things that are going on. One of the surprising things I've discovered in the course of this was that the Hoover administration actually increased federal spending in real terms by about 88 percent between 1929 and 1932. But then in the last year that Hoover had control of what was going on, they actually just kept things flat. So people have this impression that Hoover wasn't doing anything, but actually what he was doing was he was expanding things, and they were actively talking about let's stimulate the economy with new road building and things like that.

But mostly they were trying to do it within the context of existing programs and also trying to do it voluntarily. And so then Roosevelt comes in and so he just starts all new programs and so he can highlight what they’re doing—here's this new program that we're doing for you, and here's this new program we're doing for you. And so he's a pretty jaunty guy and pretty hail-fellow-well-met. And so he's able to publicize all the things he's doing, whereas you look at all the pictures of Hoover, and he looks kind of dour and never seems to be smiling very much during the time period. And he is just kind of doing it within the same context of what was existing before. So it's kind of an interesting contrast about public relations with respect to what was going on as well.

Allison Schrager: Speaking of, this was a big change in having the federal government in people's lives. Was the New Deal popular?

Price Fishback: Oh yeah. Now it was popular among most people because a lot of people were benefiting from it directly. And so there, you go to the National Archives, you could find boxes and boxes and boxes of letters to the president saying, oh, thank you, and doing all these kind of things like that. There were groups that were not happy, particularly large-scale businessmen, because they felt like that they were getting trounced.

Now, people who were paying high taxes actually probably were unhappy. But you have to realize that at the time the federal income taxes, only about 7 to 10 percent of the population was paying federal income taxes. And that number shrinks in the course of the 1930s. So even though they've raised rates quite a bit on income, not very many people are paying them. Now what they did do that was kind of hidden that people didn't see as much was they actually increased the excise taxes on a wide variety of things, on electricity, on gasoline, and a whole bunch of things along those lines. And so in that case where we actually raised a lot of money, a substantial amount of money with those kind of excise taxes, which were kind of hidden in the prices of gasoline and electricity.

Allison Schrager: Yeah, I remember when I was in grad school studying the origins of the Social Security program and how people were so insensitive even paying those taxes, which were half a percent, and they promised never to go up to more than 2 percent. And people thought that was outrageous.

Price Fishback: Well, the original Social Security was 1 percent by the worker and 1 percent by the employer. And then the original taxes for unemployment insurance were always paid by the employer. And that's still true today. Now, one of the things that's happened over time is that the Social Security system is based on a pay-as-you-go structure, that happened in the late 1930s where they switched fully to pay-as-you-go. And so we've had to increase the tax rates in Social Security to try to be able to make sure to have enough money to pay out into the system. And so by about 2033, 2035 according to Social Security Administration, almost all the Social Security's going to end up on the regular budget rather than being fully funded by Social Security taxes.

Allison Schrager: Someone asked me today, and I actually am curious if you know why they initially put on a cap on the amount of income subject to social security tax.

Price Fishback: Well, the argument was that they had a cap on what you were going to pay and on benefits. So this was basically pension plan. And so in pension plans, if you run a pension plan, normally what you do is you put money into the system, they guarantee you a certain payment, but the payment's not going to be extreme. And so someone who had higher incomes was only going to get a certain amount from the pension program, and so therefore they wanted to make it somewhat close to being actuarily sound. And so in that sense, you wouldn't expect the person to pay more because their benefits are capped. And so you'd cap what their contribution would be as well.

So one of the ways to think about it is that we have pension programs where what you do is you put your money in and it goes into the system and then it gets invested in whatever way that you want. This is a modern pension program like an IRA or a 401(k). And so you put your money in and then you're able to pull it out in retirement, but the amount that you're able to pull out is based on how much you've put in and what the investment returns are. And so that's a defined-contribution program. So there's a defined-benefit program where what you do is you put your money in and then they promise you a certain benefit, but if the system's working correctly, the accumulation of what you've got and then the investment returns is going to add up to the thing where they can pay those benefits.

But the Social Security system is such that they couldn't fully fund it at the beginning because they had a lot more retirees who hadn't put anything into the system when they started out, and so that meant that they had to overtax people who were the young people who were in the system. And so eventually they decided to make this work, what we're going to do is you're going to pay the taxes that we suggest through your contributions, and then we're going to guarantee you that we're going to collect enough taxes in the future that we'll be able to pay the benefits when you're eligible for the benefits. And so that's how the system's been running and runs in a lot of countries around the world. That's how it's been running from the beginning or close to the beginning.

Allison Schrager: Yeah, and for pretty much everyone alive then they got a good rate of return on their taxes.

Price Fishback: Well, yeah. So what happened was that the early people hadn't put anything in, so they got great returns. And so the rate of return on what you actually put in has been slowly declining over time, and the biggest problem we face is we just don't have as many people today relative to the number of people who are receiving benefits. And so we're paying pretty similar benefits as a share of what people's earnings are at the same time, but we just don't have nearly as many people in the pool who are paying into the system, but a lot more people drawing from the system.

And so we had all those discussions about having private accounts, but apparently George W. Bush actually tried to push the idea of private accounts, but that seemed to be just anathema to all sorts of people at the time. And so he was kind of like everybody always talked about Social Security was like the third rail of American politics. You just don't want to touch it or you get electrocuted.

And George was pretty well grabbing onto to the electrocution there for a while and then 9/11 happened and that kind of changed the world. And so we really kind of lost it at that point. But the odd thing is that Sweden has some private accounts for a segment of what they're going on, so they switched these private accounts, plus they have the original pension system, but they redesigned the pension system to probably become much closer to the defined contribution where you pay in and you get back based on what you paid in.

Allison Schrager: Talking to you, I'm just struck by how much of our entire social welfare system really has its foundations in the 1930s. And the economy was very different then. So we are moving from agriculture to an industrial economy, moving people off the farms and into cities. And now as I said, we're in a very different kind of economy, going through a very different kind of transition and yet people still want to hold onto these old programs. Do you think we need to revamp all of these, like we need a new New Deal and not a green New Deal, but just sort of overhaul of our social programs?

Price Fishback: No, I'm not so sure about that. So I would adjust your description of what was going on. In the '30s, we weren't moving completely from agriculture to industrial. We were already pretty heavily industrialized. I would say we were moving actually more toward services and all sorts of things along those lines at the time, and that's been the big move in the 20th century and the 21st century is moved toward services and away from manufacturing and agriculture. The programs are there. I don't think that people want to eliminate the welfare programs.

Allison Schrager: Well, not eliminate them, but maybe . . .

Price Fishback: But you could revamp them. So you could reorganize Social Security. That's one thing, but that's a big battle that everybody's talking about. So AARP fights all these changes or whatever. And now that I'm of age, I could get Social Security, whatever, I'm kind of looking at mine, but Sweden actually did make this move. They tried to make adjustments. Actually, I think having some private accounts would actually be a good thing to invest more and more people into the regular economy and having capital is a good thing for people I think, and having wealth, this is a way to increase wealth along those lines.

We have been making changes. Temporary assistance and needy families was a major change in the 1990s under Clinton. So we have made adjustments on the side. And so the question is, how are we going to deal with the overall budget? Do we want the federal government to spend more than it's currently spending? Hard to say. It seems people want to do it, but they don't seem to want to pay the tax base to be able to cover all those things. And that's not just true of Democrats, that's true of Republicans as well.

So we just have a situation where government is now much more a part of our lives than it was in the 1930s, whenfederal government was not very involved at all. And now they're involved in housing markets and labor markets. They have all sorts of regulations that didn't exist at the time. One of the features of the economy that we don't think very much about is the extent of regulation.

In 1900, if you started a business, you had to deal with local people about property taxes and you probably had some building codes you had to meet, things along those lines. There were some labor regulations you had to meet and police protection, things like that. And now if you start a business now, there's dozens and dozens of things that you have to do to deal with various government regulations at the time. And so that's a big shift as well. And it just depends on how you feel about how much government should be involved in the economy and with people.

Allison Schrager: It was largely necessary, as I said, moving to a more modern economy. There's no going back. It seems one lesson we can learn from the Great Depression is that the government's role only seems to grow. But do you think that was largely necessary?

Price Fishback: Yeah, hard to say. Necessary is kind of a tough word in this one.

Allison Schrager: Well, I guess I should say efficient.

Price Fishback: Well hard to say about efficient. Okay. I have a good friend, Bob Higgs, who wrote a book called Crisis and Leviathan, and what he was writing about was the growth of government in the 20th century. And what he pointed out was there was kind of a ratchet effect related to emergencies. And so World War I was an emergency, we ratcheted up government spending during the emergency, then the war ends, and so we bring it back down, but not to the prior level. So the Great Depression occurs, we ratchet things back up again, and then the Depression ends. And so then the amount of government spending actually is going to go down a little bit. Some of the temporary programs go away, but you're higher than you were before. And then during World War II, we ratchet things up enormously and then we bring it back down.

And then over the course of the things we've had lesser emergencies, but we seem to kind of go through these ratchet effects every time we have minor emergencies and an emergency like Covid, which was a big emergency, we ratcheted up again. And so I don't know if that's efficient or not. That efficiency is a tough situation there. My own biases tend to be towards smaller government to stay out of my social life and the economic life, but the U.S. has actually got a pretty mixed economy these days. And if you add up all our social spending, that includes the private social spending and take out the tax taxes that we're paying, that you pay on benefits and stuff, the U.S. ranks second behind France in the world in terms of private and public spending, net of taxes as a share of GDP, which is a big surprise.

Allison Schrager: Yeah, that is a surprise.

Price Fishback: If you don't take into account the taxes and you don't take into account the private spending, then we're probably ranked 20th, somewhere in that neighborhood. And so we look somewhat like the Netherlands and somewhat like Switzerland and Australia, which actually do pretty much similar types of thing. And Canada, surprisingly, even though everybody thinks about Canada as being heavily government oriented, wherever they have a lot of things that they do privately, the healthcare system's not private, but a lot of other things that are social welfare are private in Canada.

Allison Schrager: Well that's all we have time for, but thank you. I've really enjoyed this. It's always great checking in with you.

Price Fishback: Yeah, I have too. It's good to be here.

Allison Schrager: Thank you. So you can find City Journal on Twitter @CityJournal and on Instagram @CityJournal_MI. And as always, if you like what you hear, please give us a five-star rating on iTunes. Price, thank you again. Like I said, I think so much of where we are now really needs a lot more grounding in history and what we've done before, and you can always bring that. So thank you.

Price Fishback: Yeah, you're talking to the converted on that one, but thank you for having me.

Allison Schrager: Thank you.

Photo by MPI/Getty Images

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