David R. Henderson  

The Roaring Thirties

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Sentences I do not Understand... Euro-TARP...

That's the title of my review, in the latest issue of Policy Review, of Alexander J. Field's A Great Leap Forward: 1930s Depression and U.S. Economic Growth. Here's an excerpt of my review:

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.


Also:
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.

Field also, as I wrote, "drives a truck" through the argument that technological improvements in World War II were responsible for much of the improvement in the U.S. economy's productivity.

Also:

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.

Field goes off the rails a bit when he gets outside his expertise. He claims, for instance, that the United States was lucky to have Ben Bernanke and Christina Romer in office during the financial crisis. He doesn't really back it up. And he claims, against the evidence, that the Bush tax cuts gave disproportionately high tax reductions to upper-income households.


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COMMENTS (9 to date)
MichaelM writes:

It's my understanding that it wasn't American Federal war spending that helped the US economy pick itself up at the end of the 30's and in the earliest years of the 40's, but rather the war spending of the European national governments. The US was equipping and building European war machines and that represented a significant enough source of demand that US unemployment dropped significantly as the European powers mobilized and fought the first few years of WWII.

liberty writes:

Arnold,

I notice - and purely as an honest intellectual question, I must wonder aloud - that the 1930s was the decade of vast government expansion, coincidentally in the same industries cited for being so innovative at that time:

Sugar: New massive tariffs / Sugar Act(1934)

Mining: After the NRA was repealed in 1935, a "little NRA" targeted coal mining specifically

Electricity: The TVA

Railroads: had been nationalized and then 'privatized' and subsidized as cartels

I share concerns over subsidies and public ownership as you know, but it is curious that there was so much innovation in the 1930s in these industries.

liberty writes:

Sorry - not Arnold, David!

J Storrs Hall writes:

It's interesting to see this and Mark Perry's post
http://mjperry.blogspot.com/2011/11/chart-of-day-record-gdp-with-66m-fewer.html
pop up within 6 minutes of each other.

Apparently, necessity is the mother of invention. (One assumes that the recent increase in output with lower labor wasn't due to a massive investment in old-style capital equipment...)

Becky Hargrove writes:

I look forward to reading this book which clears a lot of mystery in the WWII/economic recovery connection. We knew that the consumer after the Great Depression looked nothing like the consumer beforehand, but it was hard to understand why.

Chris Koresko writes:

It's easy to come up with a story which predicts rapid productivity growth during periods of massive government intervention: when the cost of labor jumps and becomes unpredictable, investment gets concentrated on ways that boost output without increasing employment.

According to that story, the recent big jump in the minimum wage, ObamaCare, etc., should be boosting productivity and maintaining high unemployment. Once those policies end, we would then be in for a burst of economic growth as output recovers to the natural level set by the new, higher technology base.

Cyril Morong writes:

To address the issue raised by MichaelM (1st comment), here is the increase in total government spending (all, not just federal) and in net exports for certain years. All numbers are nominal

Gov
1938-9: .8 billion
1939-40: .3 billion
1940-41: 10.7 billion (it went from 13.8 to 24.5)

From 1940-41, defense spending was up 11.6 billion

Net Exp
1938-9: -.1 billion (so it fell)
1939-40: .6 billion (it went up)
1940-41: -.4 billion

My source is an old macro book by Schiller

Scott Gustafson writes:

I think Chris Koresko has it exactly right. Raise labor costs and business will figure out how to do the same work with less labor. That's an increase in productivity.

Both Hoover and Roosevelt had policies of keeping wages high.

Vangel writes:

Sorry David but I do not buy the arguments. I am far more sympathetic to Bob Higgs' argument than I am to Field's. There was no productivity miracle in the 1930s and early 1940s. Consumer goods were in short supply. There was rationing of rubber, steel, and basic raw materials because producers could not make enough to meet demand that came from Europe's war. As for GDP numbers in the 1940s, they are no more accurate than those coming from the USSR's central planners. When there is no market price for goods the GDP numbers do not mean all that much.

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