Category: History

Another day, a few more headlines:

The Obama administration will play a key role in reshaping General Motors' board of directors over the next six months, potentially giving it even
greater control in the management of the storied American manufacturer.

The president's auto task force plans to consult with the company as it
replaces a majority of its board, a White House official said. The
board today largely consists of the current and former chiefs of major
U.S. corporations such as Coca-Cola, Ernst & Young, Pfizer and Eastman Kodak. It is not known which of the 12 board members will leave.

The president said Monday that "the United States government has no interest in running GM."

Here is the full story.  I am sure that die-hard Republicans will have every chance at equal representation on the new board.  

That this story has attracted so little notice is another sign of how numb we have become.

For all the talk about the Great Depression, we are missing one historical analogy for a program of large fiscal stimulus, namely Germany after the Berlin Wall came down.  The two countries united, lots of money was spent and lots of money was borrowed.  West Germany had a modern economy with both manufacturing and services.  At the time Germany had unemployed resources, especially if you count the labor moving from East Germany to West Germany as grossly underemployed and available for higher-return projects. 

The results were less than wonderful.  The higher demand boosted measured gdp growth in the short run (bananas and porn, plus reconstruction) but Germany fell into economic stagnation.  The new demands took the West German economy only so far.  The higher taxes and debt then kept the German economy down for many years.  Few Germans were happy with the economic fallout from this "stimulus."  And that was with a relatively well-functioning financial system and a reasonable amount of initial optimism.

You can list many dissimilarities between German unification and the current U.S. situation (and in the comments I am sure you will).  Still, as historical examples go, I believe this one has some relevance.  When European leaders are skeptical about fiscal stimulus, they have some reasons, some of them quite recent.

If you'd like a lengthy account of the economics of that period, along with lots of numbers, try this study.  Just read through the first few pages, you'll see statements like:

Economic theory suggests that a fiscal expansion financed by distortionary taxation could potentially generate substantial adverse growth effects after the initial positive demand stimulus dies down.

It is then estimated that the negative economic impact from the German stimulus may explain up to one third of the subsequent growth gap between Germany and comparable European nations.

Addendum: Don't be fooled by the topic-shifting comments on why East Germany didn't do better; this post is about how West Germany fared from so much stimulus.  Not so great.

Can you guess?  According to economic historian Alexander Field, it is (controversially) the 1930s. Opening paragraph:

Because of the Depression’s place in both the popular and academic imagination, and the repeated and justifiable emphasis on output that was not produced, income that was not earned, and expenditure that did not take place, it will seem startling to propose the following hypothesis: the years 1929–1941 were, in the aggregate, the most technologically progressive of any comparable period in U.S. economic history.  The hypothesis entails two primary claims: that during this period businesses and government contractors implemented or adopted on a more widespread basis a wide range of new technologies and practices, resulting in the highest rate of measured peacetime peak-to-peak multifactor productivity growth in the century, and secondly, that the Depression years produced advances that replenished and expanded the larder of unexploited or only partially exploited techniques, thus providing the basis for much of the labor and multifactor productivity improvement of the 1950’s and 1960’s.

More concretely, we have this:

Within manufacturing, advance took place across a variety of fronts (Michael Bernstein, 1987, especially Ch. 4). There were, to be sure, older industries such as textiles, leather goods, and apparel, where productivity growth was slow or nonexistent. But there were also a remarkable  number of dynamic sectors, generating new process and product innovations, with varying levels of commercial exploitation before the war. Petrochemicals is an obvious example. At companies such as Dupont, advances in chemical engineering generated a host of new products, including Lucite (sold as Plexiglas by a rival manufacturer), Teflon, and Nylon (Peter H. Spitz, 1988; Stephen Fenichel, 1996). Even in an older industry such as automobiles, innovation and product quality improvement during the decade proceeded at a rapid rate. Indeed, Daniel M. G. Raff and Manuel Trajtenberg (1997) view the decade as the last one in which there were truly revolutionary improvements in internal combustion engine powered vehicles. But progress was not limited to manufacturing: communications services, electric utilities, and transportation were also standouts. TFP [total factor productivity] growth in the telephone industry accelerated significantly after 1929 before falling precipitously during the war years. In electric utilities, MFP [multi factor productivity[ growth more than doubled comparing 1929–1941 with 1919–1929; in contrast to the telephone case, high rates persisted after 1941…

Labor productivity in railroads — still one fourth of the U.S, capital stock at the time — grew as well.  Using steel with concrete also became far more productive.

I found the link to this well-known article in a very interesting post on economic recovery from the Depression.

Returning now to our pretax inflationary gap, summing to $290 billion, we may estimate how that excess income was "absorbed."  We can roughly account for about $269 billion of it:

inflation took $84 billion, or 29 percent;
personal taxes took $67 billion, or 23 percent;
net increase in individual's holdings of government securities took $49 billion, or only 17 percent;
the increase in individuals' nominal money stocks, M2…took $69 billion, or 24 percent.

In other words, monetary policy had a great deal to do with the wartime expansion.  I have yet to see a good study of wartime price controls, but if you have rising M and fixed P and market power, some of the Q's will go up (with quality going down also).

That is from Harold G. Vatter's The U.S. Economy in World War II, one of the better treatments of that era.

Note also that the wartime expansion was built upon several years of preceding economic growth, not contraction.  This point is overlooked in many current discussions of fiscal policy.

Not so much, says economic historian Jeffrey Williamson:

Most analysts of the modern Latin American economy hold to a
pessimistic belief in historical persistence — they believe that Latin
America has always had very high levels of inequality, suggesting it
will be hard for modern social policy to create a more egalitarian
society. This paper argues that this conclusion is not supported by
what little evidence we have. The persistence view is based on an
historical literature which has made little or no effort to be
comparative. Modern analysts see a more unequal Latin America compared
with Asia and the rich post-industrial nations and then assume that
this must always have been true. Indeed, some have argued that high
inequality appeared very early in the post-conquest Americas, and that
this fact supported rent-seeking and anti-growth institutions which
help explain the disappointing growth performance we observe there even
today. This paper argues to the contrary. Compared with the rest of the
world, inequality was not high in pre-conquest 1491, nor was it high in
the postconquest decades following 1492. Indeed, it was not even high
in the mid-19th century just prior Latin America’s belle époque. It
only became high thereafter. Historical persistence in Latin American
inequality is a myth.

An ungated version can be found here.

I do believe that volcano monitoring is very much a legitimate
function of government.  Furthermore, like Richard Posner, I think
we do not spend enough time and energy worrying about extreme
disasters, including volcanos and also problems from
Yellowstone National Park.  That said, I would like to point out that, from what the web indicates, the private sector started doing volcano monitoring before the public sector did:

Perhaps “modern” volcanology began in 1912, when Thomas A. Jaggar, Head
of the Geology Department of the Massachusetts Institute of Technology,
founded the Hawaiian Volcano Observatory (HVO), located on the rim of
Kilauea’s caldera. Initially supported by an association of Honolulu
businessmen, HVO began to conduct systematic and continuous monitoring
of seismic activity preceding, accompanying, and following eruptions,
as well as a wide variety of other geological, geophysical, and
geochemical observations and investigations.

A lot of cutting edge volcano monitoring is done at universities; many of them are public universities but they are not acting in their public capacity.  They may be receiving public sector grant money.  Here are blogs about the history of volcanology.  Here is a good essay on contemporary volcano monitoring.  Here is a catalog of all the current methods used.  Here is how GPS is used to monitor ground deformations.  Interoferometric synthetic aperture radar has become very important.

It is possible that some animals are better volcano monitors than we are, but I do not blame the public sector for this differential.  

Frank Steindl reports:

During the
depression, both output and prices fell, as was their usual behavior in
depressions. The bottom of the depression was May 1938, one year after it
began. Thereafter, output began growing quite robustly, rising 58 percent by
August 1940. Prices, however, continued to fall, for over two years. Figure 8
shows the depression and revival experience from May 1937 through August 1940,
the month in which prices last fell. The two shaded areas are the year-long
depression and the price "spike" in September 1939. Of interest is that the shock
of the war that spurred the price jump did not induce expectations of further
price rises. Prices continued to fall for another year, through August 1940.

Here are some graphs (see Figure 8) and more.  Steindl concludes:

The economic phenomenon that was driving the recovery was probably increasing
productivity.

In his view that also explains why it was a "jobless recovery" in the 1938-1940 period, namely that the demand for labor did not need to rise so much.  It also has been argued that the technological innovations of the Great Depression were labor-saving ones and that 1930s unemployment cannot be understood apart from this fact.

I do not mean to present these opinions as definitive (by the way here is more by Steindl); I hope to read more in the area and report back to you.  Most generally, I would like to stress how poorly we understand the economics of the 1930s and 40s.

I've had so many of you write me and ask me what I think of this blog post.  The main claim is taken from Paul Kanjorski:

The second paragraph is very much overstated (and I wonder about the exact numbers in the first paragraph).  My personal guess — and guess is the right word — is that if nothing had been done on this day, a disaster would have resulted, though not on the scale postulated here.  In my view there would have been an immediate bank holiday, partly improvised, plus complete insolvency for some very large financial institutions, followed by rapid nationalization.  There would have been a much tougher whack to the commercial paper market than what we saw.  Many businesses would have had problems meeting short-term payroll requirements.  The downturn in the real sector would have been much steeper than it has been.  In short, it would have been very bad but not the end of the world economy or democratic capitalism. 

Paul Krugman poses a very good question.  He points to:

…the role of WWII in cleaning up private-sector balance sheets.
During the war years there was very little private borrowing, thanks at
least in part to wartime restrictions; meanwhile there was both strong
economic growth and a lot of inflation. The result by the war’s end was
a very low private debt level relative to GDP.

How big a role did these improved balance sheets play in the fact that the postwar economy didn’t fall back into depression?

The economic history of these years, in my view, still remains to be written.

The good news is that we're going through this cycle more rapidly than Japan–dithering faster, you might say.

That's from Megan McArdle.

From the former Soviet Union, markets in burnt out light bulbs:

For most of us, it is hard to fathom the rationale for a market in burnt-out light bulbs. But in the scarcity-driven Soviet economy, the market was entirely reasonable. Light bulbs were rarely available to individual consumers, but were obtainable for state-sponsored activities. Thus, it would be difficult to purchase a light bulb for a new lamp in one's home, while burnt-out bulbs in state-run offices or factories were routinely replaced. So if someone purchased a new lamp and needed a bulb, he would buy a used light bulb for a small fee and replace a functioning bulb at work with the dud. He would then take the functioning bulb home for the new lamp, while the burnt-out bulb at the office/factory would be replaced with a new functioning bulb. Meanwhile, the maintenance person at the office/factory would take the used bulb and sell it on the used light bulb market.

I thank Eric W. for the pointer.

Addendum: But from Singapore, no legal organ selling any time soon.

Robert Barro writes:

What do the data show about multipliers? Because it is not easy to
separate movements in government purchases from overall business
fluctuations, the best evidence comes from large changes in military
purchases that are driven by shifts in war and peace. A particularly
good experiment is the massive expansion of U.S. defense expenditures
during World War II. The usual Keynesian view is that the World War II
fiscal expansion provided the stimulus that finally got us out of the
Great Depression. Thus, I think that most macroeconomists would regard
this case as a fair one for seeing whether a large multiplier ever
exists.

I have estimated that World War II raised U.S. defense expenditures
by $540 billion (1996 dollars) per year at the peak in 1943-44,
amounting to 44% of real GDP. I also estimated that the war raised real
GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8
(430/540). The other way to put this is that the war lowered components
of GDP aside from military purchases. The main declines were in private
investment, nonmilitary parts of government purchases, and net exports
— personal consumer expenditure changed little. Wartime production
siphoned off resources from other economic uses — there was a
dampener, rather than a multiplier.

We can consider similarly three other U.S. wartime experiences —
World War I, the Korean War, and the Vietnam War — although the
magnitudes of the added defense expenditures were much smaller in
comparison to GDP. Combining the evidence with that of World War II
(which gets a lot of the weight because the added government spending
is so large in that case) yields an overall estimate of the multiplier
of 0.8 — the same value as before. (These estimates were published
last year in my book, "Macroeconomics, a Modern Approach.")

There are reasons to believe that the war-based multiplier of 0.8
substantially overstates the multiplier that applies to peacetime
government purchases. For one thing, people would expect the added
wartime outlays to be partly temporary (so that consumer demand would
not fall a lot). Second, the use of the military draft in wartime has a
direct, coercive effect on total employment. Finally, the U.S. economy
was already growing rapidly after 1933 (aside from the 1938 recession),
and it is probably unfair to ascribe all of the rapid GDP growth from
1941 to 1945 to the added military outlays. In any event, when I
attempted to estimate directly the multiplier associated with peacetime
government purchases, I got a number insignificantly different from
zero.

I'm a little confused by his definition of the multiplier (how does it relate to "crowding out"?; what he calls a multiplier of zero I would call a multiplier of one), but I think you get the point.  By the way, I ran across this interesting short paper on fiscal policy and the fetishization of measured gdp, from Japan.

Bruno Frey, David Savage, and Benno Torgler report:

You’ll find a more speculative treatment here:

British passengers on the Titanic died in disproportionate numbers
because they queued politely for lifeboats while Americans elbowed
their way on, an Australian researcher believes.

David
Savage, a behavioural economist at the Queensland University of
Technology, studied four 20th-century maritime disasters to determine
how people react in life and death situations. He concluded that, on
the whole, behaviour is influenced by altruism and social norms, rather
than a “survival of the fittest” mentality. However, on the Titanic he
noted Americans were 8.5 per cent more likely to survive than other
nationalities, while British passengers were 7 per cent less likely to
survive.

“The only things I can put that down to are: there
would have been very few Americans in steerage or third class; and the
British tend to be very polite and queue.” (The ship’s first-class
staterooms were closest to the lifeboat deck.)

Savage admits there is no direct evidence for his hypothesis concerning the Americans.

I thank Leonardo Monasterio, a loyal MR reader, for the pointer.  Here is Leonardo’s post on Greg Clark.