Friday, April 24, 2015

The Post-WWII Boom... Not a Norm

I've long argued that it was not unions or government spending that produced the great post-war boom in the United States and much of the Western World. In December 2014, Tim Worstall published a column on The Register ("El Reg") that agrees with my basic theory: we had to rebuild after the war, and the U.S. was fortunate enough to be the one nation not destroyed during the two World Wars.
Bring back big gov, right? If only the economics, STUPID, could tell us more Post-WWII growth rates? Paaah
http://www.theregister.co.uk/2014/12/21/bring_back_big_government/21 Dec 2014 at 09:00, Tim Worst
You don't have to go all that far leftward these days to find someone brandishing economic growth statistics at you. Proving that growth was higher in the 1945-1973 period than it has been in our own more neoliberal age. Thus, of course, we should bring back the signal economic and political policies of those days so that we can speed up growth again. Big Unions, government controlling the commanding heights of the economy (this is not just Europe, by the way, the US economy was under a great deal of central control at the time as well), detailed planning. Hell, we should bring back the Old Labour wet dream!
Get ready for a lot of these claims during the 2015-16 presidential silly season. The "progressives" will call for a return to the past, arguing that correlation is causation. Obviously, in the progressive worldview, unions and government created the middle class (conveniently forgetting Henry Ford and a handful of other industrialists supported shorter workdays and higher wages for self-serving reasons). 

Unions and minimum wage laws were not created to help everyone, anyway. They were created to help some people — and harm others. 

Anyway, let us return to Worstall:
Which, to bring us back to our current state, means that sure, productivity growth today is slower than it was in the time of Big Unions. But not because of: it's just a coincidence that the unions thrived when we were playing catch up from the 1930s and '40s.
For here we end up with one of the central problems of economics as a field of study (at this point even I'm too embarrassed to try to call it a science). Which is that we've not really got all that information to be working with. We've really only got perhaps a half century of detailed information on perhaps 30 or so economies. What we've got for most places and most times is really pretty ropey stuff.

That's really just not enough information for us to be able to answer most questions definitively and accurately. […]
And, so it is with this discussion of post-World War II growth rates. Other than unions, planning and equaliteee, various thoughts are put forward. For example, that it was really about the rebound from WWII itself, which petered out after a time and we were back to normal.
And that is my argument: the Post-War boom was like a rubber band, pulled back and then bouncing quickly back into place. We had to rush quickly to return to normal, headed right past normal, and then vibrated a bit around the normal state.

War created demand and reduced the workforce. However horrible that is, war created a situation that felt like a huge economic boom. I'd argue that this isn't a great thing, since we have no idea what great minds and opportunities were lost while we built killing machines. Later, we rebuilt destroyed cities, but what if those great cities had not been leveled by carpet bombing? Yes, we had to bounce back, but was that really a "boom" so much as a quick recovery? I'm uncertain and don't want to test the economic benefits of global war any time soon. 

If we look at the global economic costs, the bounce back took until the 1970s for many nations. But, war did benefit the United States. From our perspective, there was a boom because we were not surrounded by the rubble of Europe or Japan. From an American perspective, the Post-War boom looks quite different and leads to assumptions about unions and big government programs. 

This faith in government also requires ignoring some of the problems associated with the New Deal, which likely extended the Great Depression and slowed recovery until World War II.

"What about the Cold War and Space Race?" progressives ask (and several books argue). Spending on technology to "Beat the Reds" led to innovations benefiting companies and society. Big Government spending powered economic growth!

If only the data supported this without any disagreement among economists.  
And – just for kicks – there's another possible explanation of the same facts.
Charles I. Jones, an economist at Stanford University, has "disassembled" American economic growth into component parts, such as increases in capital investment, increases in work hours, increases in research and development, and other factors. Looking at 1950–1993, he found that 80 per cent of the growth from that period came from the application of previously discovered ideas.
This is superficially similar to my own point. But it differs in detail. For people do point to the way that the State funded and directed must research and development post-war. And then tell us that the productivity growth came from that State involvement. But if all the basic research that we were applying to practical matters in that time came from before that time it cannot be the funding method of that time responsible, can it?
What? Research didn't create the economic boom, either? Not federally-funded research, no. 

It's hard to imagine, since we are taught that the Internet, the microchip, the computer, and so many things were dependent on government research. Reality is more complex. Companies wanted computing power, the same as government did. In some instances, the government solution was not the best technological solution, either. Government was one client, one research funding source, but not the only source and not always the best consumer. 

If Worstall and others are correct, we might not experience another boom like the Post-War period. The slower growth of today might be the real "normal" for our economic systems. No massive spending programs (Japan) or stronger unions (Spain, Greece) are going to counter the steady, slow economic normalcy we now inhabit. 

Then again, wars and other disasters do happen… 

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