Nobel Prize winner and columnist for the New York TimesPaul Krugman has advocated a new major spending program in recent weeks that would closely resemble the New Deal of President Franklin. D. Roosevelt.

Krugman argues that the New Deal created jobs, improved the country’s economy, and pulled it out a terrible depression.

Writing for the Wall Street JournalAmity Shlaes explains that Krugman’s reasoning isn’t sound.

Looking at the statistics from the 1930s and early 1940 it becomes clear, Shlaes writes, that the New Deal’s spending did not improve the economy. Rather, the extra spending meant that taxes had to go up which hurt businesses, their ability to compete and their willingness to hire workers.

Additionally, the New Deal gave much more power to unions who then demanded massive wage increases even though businesses could ill afford them.

Statistics show, Shlaes writes, that ‘one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed.’

Other stats, noted by one Lee Ohanian, show that ‘even late in 1939, total hours worked by the adult population was down by a fifth from the 1929 level.’

‘To be sure,’ Shlaes goes on to write about statistics cited by Krugman and others, ‘Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire.’

The reason for the above is that ‘the notion that government could engineer economic recovery by favoring the public sector at the expense of the private sector’ was proved false. ‘New Dealers raised taxes again and again to fund spending. The New Dealers also insisted on higher wages when businesses could ill afford them. Roosevelt, for example, signed into law first his National Recovery Administration, whose codes forced businesses to pay an above-market minimum wage, and then the Wagner Act, which gave union workers more power.’

‘As a result of such policy, pay for workers in the later 1930s was well above trend. Mr. Ohanian’s research documents this. High wages hurt corporate profits and therefore hiring. The unemployed stayed unemployed. “If you had a job you were all right” — the phrase we all heard as children about the Depression — really does capture the period.’

Although the New Deal undoubtedly helped some – it created jobs for many unemployed, who would not have been able to take care of their families without the emergency job; it created programs to help and assist the poor – it was far from a perfect policy. One could even go so far as to argue that the New Deal’s approach hurt the economy’s ability to recover; economists could very well argue, and they do, that the country’s economy would have recovered faster if Roosevelt would have implemented less far reaching and costly programs.

Of course the real debate is less about how to revive the economy and more about politics in general terms: people like Krugman want the government to become more powerful, bigger, and directly involved in improving society, helping low income households and closing the gap between the rich and the poor as much as possible. Grand New Deal plans are meant to reshape society, not (merely) to help the economy recover; most research clearly shows that a more fiscally conservative approach is in the nation’s long term interest.

President-elect Barack Obama has moved to the center with regards to foreign policy in recent weeks, but he seems less inclined to do the same on most important domestic issues. How he deals with the economy, and whether or not he will advocate a new New Deal, will be a sure sign of things to come domestically in the next four years. It could very well be that his foreign policy will be realist, even hawkish realist, but that (some of) his domestic policies will be very liberal indeed.