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Editor’s note: Wall Street Journal writer Amity Shlaes spoke last week at the annual Wyoming Business Alliance forum in Casper.

Amity Shlaes' "The Forgotten Man: A New History of the Great Depression" has become the go-to reference for conservatives (including Shlaes herself, an op-ed writer for the Wall Street Journal) looking for lessons from the 1930s.

"Before we go into a new New Deal," as George Will put it during the stimulus debate, "can we just acknowledge that the first New Deal didn't work?"

To make this case, Shlaes devotes most of her attention to two elements of the New Deal: the short-lived National Recovery Act (widely reviled and struck down by the Supreme Court in 1935), and the "Roosevelt Recession" of 1936-37. In the resulting portrait, the New Deal trampled liberty, frightened off private investment and -- on balance -- made things worse.

However appealing it is to Fox News, this account features gaps in logic and evidence that the Tennessee Valley Authority could not stop.

In making the case that the New Deal failed to address unemployment, Shlaes uses an old (and long discredited) data series. There was no official unemployment rate in the 1930s, so economic historians have reconstructed those numbers. The first effort to do so left out public works jobs, an oversight that was corrected in the 1970s. If we use the now-standard measure employed by the Bureau of Labor Statistics, the numbers do little to support Shlaes argument. National unemployment peaked at just under 25 percent in 1933, and then fell steadily to under 10 percent by 1937, blipped up to 12 percent before falling again. In other words, the New Deal chopped unemployment by half.

In making the case the New Deal spending was counterproductive (scaring off private investment and slowing recovery), Shlaes gets the story completely backward. Early spending programs brought the economy around. The only glitch came during the "Roosevelt Recession" when FDR adopted more "orthodox" economic policies (balanced budget, higher bank reserve requirements).

It was a reversal of New Deal policies that contributed to rising unemployment and slower growth during 1937-38. When the New Deal began spending again, the economy grew at an annual clip of 11 percent. The proof in this pudding, of course, is World War II, when mobilization erased any doubts about Keynesian or countercyclical spending.

The New Deal only faltered when it reverted to the tight-fisted shortsightedness that Shlaes and her ilk are so enamored with -- and it succeeded spectacularly as soon as the war erased further doubts about government spending.

In building her case that the New Deal stalled growth, Schlaes makes the curious choice of tracking the Dow Jones Industrial average -- a volatile measure which (especially in the 1930s) says little about the health of the larger economy. Gross Domestic Product (the more relevant measure) actually shows robust growth -- about 9 percent annually -- through the mid-1930s. The New Deal accomplished growth rates which would be considered miraculous today.

By this point, of course, Shlaes’ argument has become completely unglued. If the "failure" of the New Deal to bring about full recovery shows that government spending and taxes are counterproductive, why is it that the economy improved when the New Deal spent more, tumbled when the New Deal spent less, and recovered fully when it spent and taxed a lot?

In making the case that the New Deal killed investment, Shlaes resorts to the tired argument that government intervention "frightens" private investment by creating a climate of uncertainty. "No one knew what it meant," as Schlaes argues breathlessly, "and markets were terrified. Everyone feared FDR would regulate or prosecute them next. Businesses refused to invest."

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But here again, the evidence says otherwise. A crisis in business confidence and investment followed the market crash of 1929, private investment actually recovered quite nicely as New Deal policies took effect. Basic regulatory innovations were widely applauded for creating a climate of certainty and stability (even Milton Friedman, the patron saint of supply-side economics, called the Federal Deposit Insurance Corporation "the structural change most conducive to monetary stability since ... the Civil War").

We see the same logic at work today: How else can we explain the assessment of The Wall Street Journal (Dec. 8, 2008) that "The prospect of new government action to create jobs and keep auto makers out of the ditch sent stocks higher for a second consecutive day, amid hopes that a worst-case scenario for the global economy could be avoided. Gains in the U.S. were part of a world-wide rally triggered by President-elect Obama's plan for a stimulus package."

"The Forgotten Man" is breezily written and punctuated by marvelously irrelevant anecdotes and observations (I'm not sure what we are supposed to do with: "Hoover was a fly fisherman, Coolidge fished with worms"). But its larger argument -- that the failure of the New Deal to bring about full recovery shows that government spending and taxes are counterproductive -- is not only weakly argued, but flatly wrong. Shlaes uses the wrong numbers. Over the short term, the numbers support the opposite conclusions. And, over the long term, the argument comes completely unraveled.

Across the middle years of the 20th century, shared prosperity ran alongside the heyday of the New Deal system; stagnant incomes and rising insecurity have run alongside the dismantling of that system.

Prof. Colin Gordon serves as chair of the Department of History at the University of Iowa.

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