The case of American exceptionalism - Part 3

In the last installment, we looked at some graphs depicting American growth since the beginning of the twentieth century.

One of the key insights was that productivity grew more rapidly between 1920 and 1970 than during any other period.

In the next few installments we analyze whether or not this historic boom was a norm that the US has failed to achieve in recent decades, or a perfect storm that cannot be replicated.

(Note: once again we are going to use some ideas from Robert Gordon’s Rise and Fall of American Growth)

So what made the half century so prosperous?

1. Technological Progress

The decades leading up to Productivity Miracle saw many innovations that lay the foundation for most of modern life. The key insight here is that many of these developments were one time leaps that can’t be replicated.

Rather than going into detail, I will list the most prominent developments between 1870 and 1940 that laid the foundation for modern life.

By the end of the period, the country had gone from:

isolated towns to cities connected with electricity and running water,

little ability to preserve food to refrigerators that could store food for days,

having local food stands to large supermarkets, traveling on bumping roads by horses to paved highways , communicating by letter to communicating instantly via telephone, a 72 hour work week in hostile conditions to 40 hours in a safer environment, the list goes on and on.

Now take a second and think about how all of those developments change life in 1870 versus 1950. It is an extraordinary leap!

Now think about how different things are between 1950 and 2018.

The same appliances exist but work more efficiently.

Going to the bathroom hasn’t changed, our TVs are nicer but they are still TVs. Beds are still just beds, and the roof still protects us from the outside.

Yes we have smartphones and gaming systems, but do they help us fundamentally survive?

The important thing to notice is that all of this progress could only happen one time, and the one time that it does happen, one should expect to see a massive growth leap.

How much faster can people get from place to place than with a car?

How much faster can we communicate than by calling someone?

How much lower can infant mortality get?

Is there much of a difference if our food can last 30 days as opposed to 25?

I could list these for paragraphs but I think the point is clear.

The next natural question to ask is why didn’t growth happen as these innovations occurred?

It must be stated that Real GDP fails to capture all of the increases in standard of living that we have outlined: total economic output is not going to adjust because one can go to the bathroom more easily or doesn’t have to deal with candles at night or horse manure lining city streets.

One must also remember that it takes a while for inventions and discoveries to diffuse through the economy.

People have to gain awareness of the innovations, but they also need to have the money and time to implement them.

If you adjust for this time needed for innovations to become affordable and implemented, we gain a greater appreciation for why 1920-1970 was a Productivity Miracle.

1. World War II and the Great Depression

At first glance it may seem absurd that the worst economic catastrophe in our nation’s history and one of the most destructive wars in world history could have contributed to the greatest stretch of productivity growth in United States history, but a closer inspection reveals some subtle points of interest.

The high pressure environment of World War II caused productivity to increase as demand for capital to use in the war was high and there was an unprecedented sense of urgency among all firms and workers.

What is not most remarkable is that a leap occurred, but rather that it was sustained in the years following the war. It must have been that the efficient and innovative methods of production that were devised during the war were applied to peacetime economic activities.

One obvious but important principle of progress is that if you find an easier and better way to do something, you’re never going to return to the less efficient way of doing the same thing. It seems self evident but it is an important concept to grasp in realizing that the productivity measures discovered during World War II translated back to the peacetime economy, as firms realized more efficient manners that simply became the new norm.

The Great Depression contributed towards the great compression, which we will investigate momentarily. Although it was an economic calamity, the policies that resulted from the Depression helped workers organize into unions and push up their real wages.

The New Deal specifically helped workers see gains in their real wages; the National Industrial Recovery Act and National Labor Relations Act helped workers gain fair wages and prompted collective bargaining to negotiate worker terms. The Fair Labor Standards Act implemented the modern system of the forty hour work week and first overtime payment laws. All of these policies helped workers see gains in real wages in the ensuing years.

1. The Great Compression

The “American Dream” that people like to discuss was best embodied in the Post-World War 2 productivity boom.

Part of the reason was a great compression in wages. Inequality was at the lowest in American history during the middle of the 20th century, largely a result of the two World Wars and Great Depression.

We will see momentarily how unions and protectionists policies contributed to wage increases, but an all hands on deck mentality that pushed employment to capacity during the second World War helped lift wages for the lower classes. Furthermore, the GI Bill enacted allowed returning veterans a great opportunity and education to develop the strongest middle class in the nation’s history. Education attainment saw the high school graduation rates of teenagers grow from 6% in 1900 to 80% by 1970, allowing the population to become more effective laborers, boosting productivity.

The lack of consumer goods present during the war allowed for a historic explosion of consumer culture in the post-war rebound.

Households accumulated savings during the war that resulted in additional spending once the war concluded. Many of the developments we listed in the technology section became available to households across the country: Televisions, automobiles, and household appliances became increasingly common as the scene made a large leap that pushed it into the modern era.

Additionally, the Great Depression and subsequent difficulties depressed the income of capital that was almost entirely dominated by the top earning households: it wasn’t until the mid 1950s that the S&P 500 managed to reach its pre-Depression high.

Thus decreased inequality from both labor income and capital income helped drive the economic engine.

1. Protectionist Policies

One of the most recent political agendas the some have advanced to return America to its former glory is one of Protectionism.

In a sense, protectionist policies did contribute to the Productivity Miracle, but it was not without its drawbacks. Furthermore it is naive to think the same policies would work in a drastically different setting today.

Strict immigration policies first enacted in the first half of the 1920s curtailed significant demographic changes that occurred in the prior 40 years. Cutting off potential workers, who would purchase homes and consumer goods, has been speculated to have helped cause the Great Depression.

Firms anticipated sustained demand for their products, as they were accustomed to having a reliable inflow of immigrants for customers. When those immigrants were restricted, firms were faced with oversupply issues, and many homes were built for people who couldn’t enter the country. The result was a collapse in prices at the end of the decade.

On a more positive note, there was reduced competition for jobs that made it easier for workers to develop unions and push for higher wages.

The boost in the wages of workers near the bottom of the financial hierarchy contributed to the “great compression” of the income distribution from the 40s to 60s.

High tariffs, particularly the Smoot-Hawley Tariff of 1930, are attributed with worsening economic conditions during the Depression, but in the Post-Depression Era, the tariff wall “allowed American manufacturing to introduce all available innovations into US-based factories without the outsourcing that has been common of the last several decades” (Gordon).

Therefore many of the technological advances the US achieved didn’t spread to the rest of the world as easily as they would in the future. Among all major adversaries in the War, the United States emerged with the least damage and thus did not have to undergo the massive reconstruction projects, both structurally and psychologically, that faced the other global powers after the war.

While all of the other nations were rebuilding, the US got a head start on technological advances that made it the vanguard of global growth.

Protectionist policies helped the US bolster its labor force and delay the inevitable catch up of the battered global powers, but unfortunately for some politicians, protectionist policies will not achieve the same results today. We will examine this in greater during a later installment.

Conclusion

Thus we conclude that the technological innovations that occurred from 1870 up until 1940 served as the wood to the fire that fueled the Productivity Miracle. However there was a spark that was needed to light the fire, and that was primarily ignited by World War II, with some help from the Great Depression. Then once the fire was burning, protectionist policies were added to help the fire burn brighter.

Now the question we must ask is did the fire go out because of uncontrollable forces, or because we didn’t sufficiently manage the flames?

-Brian Proferes

Member, MCG