The Roaring Thirties.
DURING WHICH decade did the United States make the greatest advance in technology? Perhaps the 1990s, when the huge technical advances in computing changed the way we did so many things, from writing to banking to manufacturing? Not a bad guess, but it's wrong. Here's a hint: The decade that took the biggest strides in technology is the one you would be least likely to guess: the 1930s, the same decade during which the United States experienced the Great Depression.
If you think that's counterintuitive, well, so did I. But now, having read A Great Leap Forward, I'm convinced. Santa Clara University economist Alexander J. Field's book on the decade of the 1930s will probably be one of the most important technical economics books of this decade,
What's Field's evidence? The big-picture evidence is that in 1941 about as many people were working and about as much capital was employed as in 1929, the last boom year before the Great Depression. Yet real output was 33 to 40 percent higher in 1941 than in 1929. (The range from 33 to 40, rather than a specific number, is due to the fact that there are various methods to compare output over time; the bigger number comes from a computational method called the chain index method.) This implies a growth in the productivity of labor and capital averaging 2.3 to 2.8 percent annually over those twelve years.
In no other twelve-year period during the 20th century did the United States have such a high average growth of productivity. Of course, there were periods of higher economic growth: After all, as noted, the 1930s was the decade of the Great Depression. But that growth came from an increase in the amount of labor and capital as well as an increase in productivity. As noted above, the amount of capital and labor being used in 1941 was pretty much the same as in 1929.
You might think that if Field's claim about the 1930s is true, it would have been discovered much earlier than now. I wondered about that too. But early in the book, Field digs carefully into the data to show why other economists who studied the U.S. economy's growth got it wrong. His treatment is highly technical and difficult to summarize in this space. Suffice it to say that one of the scholars whose work he criticized, Robert J. Gordon of Northwestern University, gives the book a glowing blurb in which he says, among other things, "This book will change forever standard views of which decade's growth was most dynamic, and why."
Field's care reminds me of the care taken by Milton Friedman and Anna J. Schwartz in their monumental and path-breaking 1963 book, A Monetary History of the United States, 1867-1960. It was hard to read the Friedman/Schwartz book and come away unconvinced that monetary policy was key to understanding the performance of the U.S. economy over that 9 4-year period. Similarly, it is hard to come away from Alexander Field's book and not be convinced that the 1930s had substantial technological improvements that made the United States so much more productive.
Field bolsters his case by going beyond economy-wide numbers on productivity to see what were the major technological improvements of the 1930s. In instance after instance, he had this reader saying, "I didn't know that." New chemical processes were introduced that "increased the percentage of sugar extracted from beets during refining" and comparable innovations occurred in mining. "Topping" techniques in electricity generation--using exhaust steam from high-pressure boilers to heat lower-pressure boilers--raised capacity by 40 to 90 percent with virtually no increase in the cost of fuel or labor. New treatments increased the life of railroad ties "from eight to twenty years." With new paints, the time for paint to dry on cars fell from three weeks (!) to a few hours. Adding heft to his innovation story, Field notes that total R&D employment in 1940 was 27,777, UP from 10,918 in 1933.
But one of the most important technological improvements was not innovation per se: It was a countrywide network of roads. We are used to thinking of America as a country without serious roads until Dwight Eisenhower's Interstate Highway System that started in the mid-1950s. But remember that Ike got the idea after seeing how long it took to get an Army convoy across the country in 19 19. A lot happened between 1919 and 1941. Field points out that the Interstate system's routes were typically built alongside or on top of highways already completed. Think of 1-95 and the old U.S. Route 1, for example. These roads were built primarily in the 1930s. Roads plus the earlier innovation of pneumatic tires led to a huge expansion of the trucking industry. That mattered because, notes Field, trucking was much more flexible than railroads, not just in routes but also in shipment sizes.
What about the idea that technological improvements in World War II were responsible for much of the improvement in the U.S. economy's productivity? Field drives a truck through that argument. First, he points out, improvements during World War II cannot explain the tremendous increase in productivity from 1929 to 1941. Recall that the United States didn't enter World War II until the last month of 1941. Combined Army and Navy spending in 1940 and 1941 was only 3.2 percent of cumulative Army/Navy spending from 1940 to 1946. It's true that the United States had moved into war production before entering the war because Franklin Roosevelt was itching to help out his ally, Great Britain, and did so with Lend-Lease. (Lend-Lease was a U.S. government program, begun in 1941, to violate U.S. neutrality by supplying goods, including weapons, to the British Empire and China.) But Field points out that even with a broader measure of spending that includes Lend-Lease and the government's Defense Plan Corporation, a subsidiary of the Reconstruction Finance Corporation, spending in 1940 and 1941 was only five percent of the cumulative defense spending that occurred between 1940 and 1945.
Second, notes Field, productivity growth slowed during the war. Field estimates it at 1.29 percent per year from 1941 to 1948. (His explanation for why he goes three years beyond the war is persuasive but complicated.) This was down from the earlier low-end estimate of 2.3 percent from 1929 to 19 41. The huge increases in output were due to more people being employed, not to large increases in productivity.
Finally, argues Field, the war effort diverted attention from innovation for the private market into innovation in producing the instruments of war. This was costly in two ways. First, much of the innovation was irrelevant to peacetime. Second, producers had to learn the arcane rules of dealing with the federal government. Field writes:
When scientists and engineers devoted their time to producing atom bombs, when businessmen were preoccupied with learning new administrative rules, and when success was measured by one's ability to produce large quantities of ordnance quickly in an environment of cost-plus contracts, it is scarcely surprising that the overall rate of commercially relevant innovative activity slowed down.
Field points out that there were few technological improvements during World War II that made the postwar peacetime economy more productive. It's almost the reverse. It was the tremendous increase in underlying productivity of the U.S. economy before the war that allowed the U.S. economy to be so productive during the war. He writes that "there was not a single combat aircraft produced during the Second World War and seeing major service that was not already on the drawing boards before the war began."
One other myth Field dispels about World War II, probably one of the most widely-believed myths, even by economists, is that World War II ended the Great Depression. Field notes that unemployment was falling rapidly in 1941 and that the unemployment rate for the last quarter of 1941 (the government did not collect monthly data back then) was down to 6.3 percent.
I wish Field had discussed more what I called, in a study for the Mercatus Center, "The U.S. Postwar Miracle." During the war, Keynesians such as Paul Samuelson and Gunnar Myrdal predicted another great depression if the U.S. government demobilized quickly. The U.S. government did demobilize quickly and the United States enjoyed a boom in which the unemployment rate never went above 4 percent.
Although many readers will find parts of the book too technical to follow, Field does have an ability to coin a phrase. He refers to Kenneth Arrow's idea of the learning curve during World War II as the view "that the economy was one large c-47 factory." In heading off the idea that maybe depressions are good for an economy because, as Nietzsche said, that which doesn't kill you makes you stronger, Field replies, "It's just that sometimes it kills you." He also points out, "With or without the depression, Wallace Carothers would have invented nylon."
THE ONE WEAK chapter in this twelve-chapter book is on the financial crisis of 2007 to 2009. Whereas in most of the rest of the book Field makes a tight, data-intensive case for his claims, in this chapter he does not. The big question to which most readers would probably want to know the answer is: Had George W. Bush not pushed through the Troubled Asset Relief Program, would the economy be in better or worse shape today than it is? My gut feel as an economist is that the economy would be in better shape. Had Bush, contrary to the Senate's will, not used the tarp funds to bail out General Motors, then Obama would not have had as much ease in continuing the bailout and inserting the federal government into the auto industry. Then the adjustment in the auto industry would likely have happened more quickly. This is just one example.
Other evidence for my gut feel comes from the stock market. The Dow Jones Industrial Average, one important indicator of economic health, did decline by about five percent (from about 11,000 to about 10,500) during the twenty minutes on September 29, 2008, when it became clear that the House of Representatives would reject the bailout. This would suggest that the bailout would have been good for the economy. But in the seven days following the second vote for the bailout, the one that was "successful," the Dow fell from about 10,500 to about 8,000, a drop of about 24 percent. Certainly, if the 2008 bailout was good for the economy, participants in the stock market didn't think so.
As I said, I don't know that the bailout was good for the economy: I strongly suspect that it was bad. But whether I'm right or wrong, an economist who wants to persuade those of us who are undecided must make a case. Instead, Field simply makes assertions. In the introduction to his book, for example, Field writes, "The United States was fortunate at this juncture [between 2007 and 2010] to have had a Federal Reserve chair (Ben Bernanke) and a chair of the President's Council of Economic Advisers (Christina Romer) who were both serious students of economic history and of this period."
Really? Why? It must be because Field thinks Bernanke and Romer advocated good policies that made the economy stronger than otherwise. But Romer's own research showed that countercyclical fiscal policy, which her boss, President Obama, implemented, was unlikely to be effective. As I wrote in a January 7, 2009, Forbes.com article titled "Will the Real Christina Romer Please Stand Up?":
The Romers' research actually undercuts the Keynesian approach in a more fundamental way. They find that tax cuts to offset a recession are ineffective, but their reasoning would also apply to government spending increases to offset a recession. In other words, if she believes her own research, Christina Romer should be a strong critic of her new boss's policies.
Furthermore, writes Field, "Massive monetary and fiscal interventions undertaken by the Federal Reserve and Treasury arrested what otherwise could have been a terrifying free fall." Of course, adding the word "could" does hedge Field's statement.
Just pages later, though, the hedge is gone. Field writes that "the only thing preventing a cataclysm was massive intervention by both the fiscal and monetary authorities. All of this was abundantly clear from the vantage point of 2010."
Field also drops his careful methodology in addressing George W. Bush's tax policy. Field writes that Bush's 2001 tax cuts "allowed disproportionate reductions in taxes to upper-income households." The author seems to imply disproportionately high, and he confirmed in an e-mail that this is what he means. In fact, though, for all the Bush tax cuts (in 2001, 2002, and 2003) combined, the percentage reduction in taxes for upper-income households was less than the percentage reduction for lower-income households. The second-lowest quintile, for example, had its taxes cut by 17.6 percent whereas the highest quintile had its taxes cut by about 11 percent. I don't have data for the 2001 tax cut alone, which is what Field's claim is about. But because the 2002 and 2003 tax cuts were aimed disproportionately at high-income people, it follows that the 2001 cut alone had to have been even more tilted to lower-income people than the above percentages suggest.
Why do so many people, including Field, think differently about this important issue? My guess is that it's because the media emphasized the absolute size of the tax cuts that higher-income people got. In a progressive tax system, with higher marginal tax rates for higher incomes, a given percentage tax cut will cut taxes of the people who pay a lot in taxes much more than it cuts taxes for people who pay only a little.
Field also calls the increase in inequality of income in the last quarter of the 20th century "redistribution." It's not. Most people in the United States, including most lower-income people, were better off in 2000 than they were in 1975, and most of them by a lot. To be sure, that is not evidence enough against the claim of redistribution; possibly they would have been even better off had not high-income people taken, that is, redistributed, their income. But here's what Paul Krugman wrote about that issue in 1990:
Old-line leftists, if there are any left, would like to make it a single story--the rich becoming richer by exploiting the poor. But that's just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don't work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor.
Still, these are just a few weaknesses in an otherwise very strong book. Alexander Field should be, and probably is, proud of his accomplishment.
David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics at the Graduate School of Business and Public Policy at the Naval Postgraduate School. He blogs at www.econlog.econlib.org.
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||A Great Leap Forward: 1930s Depression and U.S. Economic Growth|
|Author:||Henderson, David R.|
|Article Type:||Book review|
|Date:||Oct 1, 2011|
|Previous Article:||The Congo Nightmare.|
|Next Article:||Election 2012: an unusually clear policy choice.|