mad props to xhxhxhx for the economic posts!
Lots of food for thought. Since I am lazy, I try to boil it down to smallest chunks of information, to reduce memory usage. So far I got:
1930s had lots of technology improvements leading to more efficient industry.
[snip]
The other thing that I didn’t get across was the extent to which the productivity improvements in the 1930s and thereafter were the result of complementary investments in infrastructure as much as technological change in equipment and manufacturing.
mad props to xhxhxhx for the economic posts!
Lots of food for thought. Since I am lazy, I try to boil it down to smallest chunks of information, to reduce memory usage. So far I got:
1930s had lots of technology improvements leading to more efficient industry.
The war years redirected output in unproductive directions, increased household savings, and taxed the rich.
After the war, all that efficient industry was unleashed to serve a middle class that was ready to buy stuff.
Plus: lack of competition from the rest of the world, conveniently trashed by war, which didn’t start catching up until the ‘60s and ‘70s.
Thanks! I would cut the ‘increased household savings’ bit, though. Household savings did increase during World War II, but
- It was a one-off episode. Household savings rates fell through the mid-1940s, and household indebtedness began to rise again in the 1950s and 1960s. As a result, household net worth as a percentage of personal disposable income was more or less stagnant throughout the golden age.
- It directed capital towards the federal government. It didn’t have much effect on private capital formation. Private domestic investment tanked during the war, falling to levels not seen since 1932–33.
Whenever people talk about productivity gains in an economic sense it always makes me think of a few technical innovations that spurred what appeared to be exponential growth:
[snip]
xhxhxhx said: man, chemists and materials scientists always get short shrift :33
‘Tis true! Enabling technologies that the rest wouldn’t work without.
Probably also a good idea to explicitly call out the second agricultural revolution, artificial fertilisers, pesticides, all that good if unfortunately toxic stuff.
But chemistry and materials science faces the same sigmoid growth pattern, once people figure out a few clever tricks, then mine them relentlessly, then start to run into brick walls where new unknown tricks are needed.
What have we got recently, nanoparticles? Graphene? Wake me up when we have better battery technology :)
I liked those old Atomic Age plans to put tiny nuclear or diesel engines in everything
man
more of that
[trim]
One thing I take away from Piketty’s incomes database is that progressive policies cannot do much to shift income inequality.
From peak to trough, the income share of the top 1 per cent fell from 18.4 per cent in 1929 to 15.5 per cent in 1933. During the first years of the New Deal, it actually recovered, to 17.6 per cent by 1936. That suggests to me a fairly strong pro-cyclicality to income inequality within periods. That effect is probably driven by falling returns to capital.
The ineffectiveness of the New Deal on income inequality is also apparent in broader measures of inequality, such as the income share of the top 5 per cent and the Gini coefficient.So, this is pre-tax inequality right? And then later on you talk about post-tax & transfer inequality? I wasn’t quite sure. People always seem to conflate them, but it seems like an underrated distinction to me.
Yes, pre-tax. From Piketty and Saez’s 2003 QJE paper:
We use a gross income definition including all income items reported on tax returns and before all deductions: salaries and wages, small business and farm income, partnership and fiduciary income, dividends, interest, rents, royalties, and other small items reported as other income. Realized capital gains are not an annual flow of income (in general, capital gains are realized by individuals in a lumpy way) and form a very volatile component of income with large aggregate variations from year to year depending on stock price variations. Therefore, we focus mainly on series that exclude capital gains.
Income, according to our definition, is computed before individual income taxes and individual payroll taxes but after employers’ payroll taxes and corporate income taxes.
I don’t think Piketty’s changed his method since then. His sources are tax filings. It shouldn’t have been too difficult to collect post-tax income – although finding out direct transfer income would have required a different sort of source. Your source apparently is based on estimates from the Luxembourg Income Study for the early 2000s.
Computing series after individual income taxes is beyond the scope of the present paper but is a necessary step to analyze the redistributive power of the income tax over time, as well as behavioral responses to individual income taxation.
I haven’t read Piketty’s brick of a book, so I don’t know whether he’s done this ‘necessary step’ yet.
Piketty talks quite a bit about the effect of tax policy on pre-tax incomes. Increasing personal and corporate income taxes reduce income flows and thus reduce the stock of wealth carried over into the next period. That means that high extraction rates will reduce pre-tax as well as post-tax income inequality.
And yes, the bit later on is about post-tax and transfer inequality. It’s very important – especially so for policy and equity – but it’s much more difficult to get high-quality historical data for it.
uhh since I am getting fewer and fewer notes I am just going to dash off a reply to the last part about World War II-era federal spending
so.
The better part of the Great Depression was solved through the application of monetary policy through 1937. The economy had recovered to trend output at about the same rate it did during the war. Fiscal policy played no role in this recovery.
Nor did it play much role in the recovery from the 1938 recession, and the retooling for war through mid-1942. There as well, monetary stimulus rather than federal procurement played the larger part. That, at least, was Cynthia Romer’s view, as well as that of Brad DeLong and Larry Summers.
The first part of that account is uncontroversial. It’s the second part – the relative role of fiscal and monetary policy after 1940 – that isn’t.
DeLong and Summers’ reasoning is fairly straightforward: federal spending as a share of GDP did not between from 1938 and mid-1942, and five-sixths of the pre-1929 trend in output had been made up by that time.
World War II was then an overcorrection, whose limited effect on actual and potential output was hidden by controls in the product and capital market. Wartime product was marked at input prices, private domestic output stagnated, and real household consumption was controlled.
Those distortions were unwound after the war by decontrol, while the mis-measured increases in real output were eaten away by rapid inflation, leading a reversion to trend over 1945–46. DeLong and Summers don’t make the extension, but we might.
The alternative view to Romer–DeLong–Summers – and a restatement of the conventional wisdom – was set out by JR Vernon, who claimed that all of the increase in aggregate demand from 1940–42 was accounted for by fiscal policy, and none by monetary policy.
The first contention is that more than half of the recovery happened between 1940:IV and 1941:IV. Only about half of the pre-war trend had been made up by 1940:IV, but, by 1941:IV, four-fifths had. That suggests that something important happened in that year. Vernon thinks that something is ‘federal purchases’.
Those federal purchases were $8.8 billion, about 55 per cent of the change in RGNP. But the ordinary Keynesian measure is not the change in government spending, but the change in net government spending – deficit spending. That was only $3.5 billion.
Vernon thinks that the effect is closer to the $8.8bn than the $3.5bn. He assesses the contribution of the different components of taxation on output by using an early Federal Reserve MPS model to estimate the multipliers. The results: multipliers of 1.56 on federal spending, –0.66 on personal taxes, and –0.17 on corporate taxes.
Vernon’s multipliers are all based on the parameters of the 1964:I economy. Romer’s alternative estimates were based on the years 1921 and 1938, where, Romer believed, the only aggregate effects were monetary and fiscal.
I think Romer had the better case, but I don’t know what direction the literature took after Romer and Vernon were published in 1992 and 1994. Robert Gordon and Robert Krenn recently claimed that their dynamic VAR estimation of fiscal and monetary multipliers for 1939–42 supports Vernon over Romer, but I am too tired to properly read or describe their paper.
It has been too long since I’ve made a throwaway comment and had xhxhxhx jump in to expand it with a variety of cross-referenced data sources.
So uh, the post-WWII economic boom was driven by reallocation of resources towards the middle class, both by explicit policy and as a side-effect of other economic changes. It did not come from technological progress driven by the war, and it certainly didn’t come from building a bunch of planes and ships and then blowing them up (broken windows theory).
Yeah.
The big question here is perhaps the hardest to answer. There was a big reallocation of resources to the ‘middle class’, but it is not at all clear to me how much that drove the economic growth of the period.
I suppose we’ll eventually be studying the demand-side equality bias of technological innovation, but I don’t think we do right now. The literature does talk a lot about the producer-side biases resulting from technological change – they call it ‘skill-biased technological change’: increasing relative returns to skilled labor over unskilled labor – but I’m not sure whether we talk about the demand-side biases on technological change, or the consumer-side biases as a result of technological change. It seems worth looking into.
During the postwar era, domestic productivity growth was consistently higher during the low-inequality Golden Age than it was during the high-inequality period after 1973. But domestic productivity growth during the moderate- and high-inequality interwar years and Gilded Age was higher than it would be in the postwar era. And international output growth is higher now, in what Angus Maddison called the ‘neoliberal period’, than it was at any time before 1945.
So it isn’t clear prima facie that high equality is required for productivity and output growth, even if our intuitions suggest that equality might be better for productivity and output now and in the recent past.
After the cut: the “explicit policy and as a side-effect of other changes”.
Alexander Field has a 2011 working paper that revises his historical estimates of productivity growth in light of the chained-index CPI measures of real gross domestic product.
To calculate productivity growth, you need three things: labor input, capital input, and real output. A revision to any one measure – or a revision to an underlying measure, like the price deflator – will require a revision to a synthetic measure, like productivity growth.
I’m noting it here not because it changes our view of productivity growth during the Great Depression or World War II – although it does; Field revises his estimates of interwar and wartime productivity growth substantially upwards – but because Field also did a calculation for the Gilded Age.
Here’s the interesting part: The interwar years might have been the most technologically-innovative period in American history, but the Gilded Age was the second-most technologically-innovative period in American history.
Productivity growth during the Gilded Age was 1.95 per cent per annum – higher than it would be during the Golden Age (1.88 per cent) and much higher than it would be during the New Economy (1.46 per cent).
Food for thought.
Last time: productivity and the limits to capital deepening. This time: the miracle of the Great Depression.
The Great Depression was the most technologically-innovative period in the history of the United States.
You think that sounds ridiculous, but here’s a good intuitive illustration of the fact: Capital and labor inputs fell dramatically during the contraction. They did not fully recover until after mid-1942, as the US geared up for war. No matter how capital and labor inputs are weighted, labor and capital inputs were only as high in 1941 as they had been in 1929.
But real output was between 33 and 40 per cent higher. That means that productivity improved somewhere on the order of 2.3 to 2.8 per cent per year over that twelve-year period. Those are productivity growth rates unmatched in the twentieth-century United States – and unmatched in US history.
How did it happen? Alexander Field’s “Technological Change and U.S. Productivity Growth in the Interwar Years” has some answers.