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May 10, 2005

Economics 113: The Omnibus Great-Depression-and-After Lecture Notes File

The Great Depression II

The New Deal as Macroeconomic Policy: Did It Do Any Good?

Parts of the New Deal that Boosted Demand:

But There Were Also Parts of the New Deal that Reduced Demand:

And There Were the Parts of the New Deal that Created the American "Mixed Economy"--America's version of social democracy:

Still, the Great Depression had not lifted by the end of the decade: unemployment rates still 12% or so at the end of the 1930s. Roosevelt's New Deal greatly reduced the size of the Great Depression and eased the misery caused by the Great Depression. It did not cure the Great Depression. For that, we needed the surge in demand that was World War II.

World War II

Origins of World War II

  • In Germany: the Great Depression brings Hitler to power
    • No Great Depression in Germany, no Hitler
  • Hitler takes his Malthus too seriously

    • Believes that only a populous Germany can be a strong Germany
    • Believes that only a Germany with lots of farmland can be a populous Germany
    • Hence wants to do to the Poles and the Russians what the Americans did to the Indians
    • Roosevelt eager to fight Hitler to the last Briton (and give them plenty of materiel in the meantime)
      • How eager was Roosevelt to commit America to World War II in Europe? Not clear. And after Pearl Harbot it was Germany that declared war on the United States
  • In Japan, the Greater East Asia Co-Prosperity Sphere

    • Takeover of Manchuria in 1931
    • War with China beginning in 1937
    • Occupation of Indo-China
    • Roosevelt's ultimatum:
      • Withdraw from Indochina (and China?) or we'll cut off your oil
      • Dean Acheson at the State Department did indeed cut off their oil
      • Pearl Harbor as the response

Rough Numbers with Respect to Military Production (as percent of Nazi Germany):

450%: U.S.150%: Britain
100%: Germany
80%: Russia
25%: Japan
15%: Italy

The wonder is not that the allies won, but that the axis powers--out-produced five-to-one--held on for so long. Professional excellence of the Nazi Army and of the start-of-war Japanese fleet...

50 million dead in World War II--6 million Jews, 5 million Chinese civilians, 5 million Russian civilians, 4 million Russian POWs, 2 million Polish civilians, et cetera... plus all the battle and military deaths...

World War II Cured the Depression in the U.S.:

  • Extraordinary levels of aggregate demand
  • Government spending--military spending--rises to 40% of GDP
  • The ten-million man army
  • Unemployment down to 2% or lower
  • Rosie the Riveter
  • Price controls and rationing
  • After WWII, few doubted Keynes's claim that government could control the economy

  • Trying to stop the return of the Great Depression: The Employment Act

  • Trying to stop the return of the Great Depression: The Marshall Plan
    • Eichengreen and DeLong's interpretation of the Marshall Plan: key benefit that it allowed the good "mixed economy" guys to win the political struggle in Western Europe
      • Alternatives? Populist statists a la Peron--and stagnation
      • Alternatives? Communists--and eventual stagnation
      • Alternatives? Right-wing "hold what we have" semi-fascists
    • Are Eichengreen and DeLong right? Perhaps the threat from Stalin had as much to do with post-WWII "consensus" politics in Western Europe as the Marshall Plan did... Perhaps good leadership: Schumann, Monnet, de Gasperi, Attlee, Adenauer, Erhard...

Labor and Capital

America's Commitment to Education

  • Iowa: Claudia Goldin and Larry Katz look at Iowa high schools
  • America has a very strong and very early commitment to general education
    • Europe: why not provide people with the education they'll need early (answer: people change jobs, the economy changes, the background knowledge base is very important)
    • Europe: educate the working classes and they'll ask for more (response: yes, that's the point)
  • America's commitment to human capital as a very powerful multiplier of productivity
    • How much more productive do things become when any group of ten will contain somebody who can fix the internal combustion engine when it breaks down

America and Unions: The Early Stages

  • America has a long history of labor unions
  • America has a bloody labor history
    • Pinkertons
    • Federals--Grover Cleveland vs. John Peter Altgeld in the breaking of the Pullman strike
  • Early unions: Knights of Labor
  • Early unions: IWW
    • Union threat: the IWW and Henry Ford's $5 day.
    • Just because unions don't have lots of members and win lots of strikes doesn't mean that they are unimportant
  • Craft unions: the AFL
  • Craft unions: the AMA
  • After WWI: the Palmer Raids and the Red Scare
  • The 1920s: Welfare Capitalism
  • Legal doctrines: Lochner and its friends

America and Unions: The Great Depression and After

  • Sit-down strikes
  • Industrial unionism--the CIO
  • The AFL-CIO
  • The UMW and the Teamsters
  • The NLRA and the NLRB
  • The War Labor Board
  • The Taft-Hartley Act

Rolling Back Unionized America

  • Lawyers
  • Right-to-work
  • Interstate competition
  • International competition
  • Monopoly and voice faces of unionism
  • The situation today: public-sector unions have a powerful edge. private sector unions... not so...
  • What role has globalization played in the erosion of union power? Uncertain...

Investment Banking: Routing Around Capital Market Failures

  • The coming of the corporation: limited liability and professional management
  • Who guards the guardians? Example: Leland Stanford (and Huntington, and Hopkins, and Crocker), the Central Pacific, and British investors...
  • Separation of ownership from management creates all kinds of principal-agent and management-monitoring problems
  • How to solve them? Finance capitalism. J.P. Morgan and the "Money Trust"
  • Complaints about the Money Trust: Louis Brandeis: "personal power is unAmerican"
  • Complaints about the Money Trust: the Northern Securities Panic
  • Progressive attack on the Money Trust fails--until 1933 comes

Finance After the Great Depression

  • With the coming of FDR, the Progressive Era program for taming the Money Trust is dusted off and put into action:
    • The exaltation of management at the expense of ownership and monitoring
    • The end of utility empires--the PUHC Act
    • The separation of investment from commercial banking
    • The large-scale provision of information
    • The level playing field
  • The Berle-Means problem: managers select themselves, so how are stockholders' interests guarded?
  • The Galbraithian "technostructure"
  • The coming of the 1980s
    • Junk bonds
    • Takeovers
    • Rapidly-climbing CEO pay
    • The reintegration of high finance
  • How well do our financial markets really work? It's still an open question

Investment, Resources, Invention, and Technological Change

  • America is:
    • Resource rich
    • Skilled labor abundant
    • Energetic, entrepreneurial labor abundant (to have crossed an ocean...)
  • America is also capital rich, and new capital rich--hence technologically advanced
  • The furnace where the future is being forged...

Upward Mobility

Horatio Alger and Benjamin Franklin

  • Europe is supposed to be about who your family is
  • America is supposed to be about who you are--although it was one of Napoleon's generals who said that "I am my ancestors"
  • Abraham Lincoln's belief: anyone who wants to can move up--a combination of:
    • Plenty of room at the top
    • Lots of immigrants to (temporarily) fill in at the bottom
    • A fairly equal distribution of wealth meaning that starts were not too far apart

All This Changes in the Middle of the Gilded Age:

The Closing of the Frontier and the Great Immigration Wave

  • No more free land--direct effects (can't homestead) and indirect effects (immigrants now put downward pressure on real wages)
  • Immigrants: are the "new immigrants" not from northwest Europe American?
    • In the case of Asians, the answer is "obviously no"
    • "Races" in Pennsyvlania in 1910: whites, blacks, slavs, Latins...
  • The peak of American inequality

Ending the Gilded Age

  • Progressives
  • The New Deal picks up the Progressive Era program, and enacts it
  • Immigration restrictions play an uncertain but probably large role
  • Social democracy and social insurance...
  • Minimum wages
  • Unions again

Middle-Class America

  • The Great Compression in wages
    • Unions?
    • Wartime (WWII, that is)?
    • Social changes
    • Supply and demand?
  • Free land again--this time free land to buy a house within commuting distance of anywhere...

The Returns to Skill

  • The overeducated American
  • The enormous expansion of wage inequality since 1970
  • All of a sudden, position matters a lot

The Anemia of Social Democracy in America

  • America was never as upwardly mobile a place as it thought it was...
  • Europe was never as rigid a place as it thought it was...
  • Increasing risk (but the "risk" of being bankrupt instead of dead is a good thing--as Martha Stewart would say--no?

Why Doesn't the United States Have a European-Style Welfare State?

  • Racism?
  • The myth of Horatio Alger?
  • Another possible answer: it's just taking us a long time to build it up...

Focus on Women

The Weaker Vessel

  • Women's work
  • For the first century of industrial technology, it doesn't ease women's work much
    • Exception: spinnning and weaving... a saving of perhaps three hours per day per woman
  • But with the second century of the industrial revolution, a great deal of household technology comes into play...
    • Reduction in time needed to devote to housework
    • Birth control: less time with neonates
    • Reduced discrimination: cause or effect of women's moving into the labor force

Wage Discrimination and Job Segregation

  • Initially, enormous job segregation
  • Little "wage discrimination"
  • As time passes, "wage discrimination"--lower pay for equal work--becomes visible
  • But for a long, long time, women's work outside the home is greatly restricted: cleaning, laundry, restaurants, teaching, secretaries, et cetera
    • Sandra Day O'Connor story...
  • Marriage bars...

A Balance Sheet for Feminism?

  • Less security for single mothers?
  • More opportunity?
  • Less leisure?
  • How is the extra income to the household divided? How is the housework work burden divided?

  • Disparate impact? Comparable worth?

Focus on African-Americans

  • Jim Crow and the post-Civil War South
    • Breaking southern biracial populism
    • Underinvestment in education
  • The Great Migration to the North
    • Viscious discrimination in the north
    • But much higher wages than found in the south
    • Large scale residential segregation creates:
      • Northern ghettoes--places where land values were dropping because of the attractiveness of suburbs
      • Social pathologies...
  • The Civil Rights Movement

    • The end of legal discrimination
      • How much difference does it make? Less than you would hope. Ferocious educational disparities persist--and in some cases are amplified as ghetto school quality falls. And in addition there is...
    • Illegal discrimination
      • How much illegal discrimination? Hard to tell...
      • Testers say "a lot". But the market can route itself around some discrimination...
      • Regression studies say "a lot": but employers know things that statisticians do not...
      • Amount surely falling over time...
    • Affirmative action
      • Its dilemmas...
  • A long, long way yet to go...

Governing the Post-World War II Macroeconomy

  • No more "Hooverism": countercyclical fiscal policy
  • Successful Federal Reserve--very successful after 1984 or so
  • Successful Federal Reserve prevents "small" business cycles
  • Successful Federal Reserve and deposit insurance prevents any recurrence of anything like the Great Depression
  • But there still are "medium" business cycles
    • Caused when the Federal Reserve switches state from fighting unemployment to fighting inflation
  • Why does the Federal Reserve find that it has overshot so often, and needs to focus hard on fighting inflation? Hard question with many plausible answers. But which of them are right?
    • Committee dynamics mean that you are always behind the curve (although not since 1984)
    • The memory of the Great Depression means that you are always leaning on the "a little bit more inflation" story
    • A failure to understand the "accelerationist" Phillips curve until the late 1970s

The "accelerationist" Phillips curve: its location depends on (a) the natural rate of unemployment, and (b) the expected rate of inflation...

[Standard macroeconomic Phillips curve discussion: Federal Reserve is desperate to keep expectations of inflation low, because if expectations of inflation become high--then there are no good options]* The sad case of President Mitterand of France

The problem of the Reagan deficits... and the Bush deficits... why is fiscal responsibility so hard in the modern era?

  • We don't want to see what will happen if we do run large, persistent deficits...

Productivity Slowdowns and New Economies

Causes of the productivity slowdown:

  • Environmental expenditures
  • Oil shocks
  • Excessively-young labor force
  • Reagan deficits: did they play a role in the productivity slowdown?

The productivity slowdown gave us an 'age of diminished expectations':

  • Hope among Democrats that fast productivity growth would produce a kinder, gentler, more social democratic politics
  • Hope so far in vain...

Most likely scenario: a bunch of things hitting at once...

The productivity speedup of the 1990s

  • Computers, computers, computers...
  • The fastest-growing and most important leading sector ever seen...
  • How big: a 20% per year fall in the prices of things that make up 5% of the economy gives you 1% per year in direct productivity growth from computers alone
  • What does the future hold? Likely answer: a lot more of the same...

Why did it take so long for the information technology revolution to get going?

Why isn't Silicon Valley getting really rich anymore?

  • Answer: because its customers are getting really good deals. The industry is now much more competitive, which means that the surplus flows through to customers rather than sticking with entrepreneurs and capitalists.

The Future of the Social Insurance State

Does American social democracy have a future?

  • Maybe not: perhaps a return to pre-Depression patterns
  • The health care funding crisis.... excuse me, "opportunity"
    • How much are we going to spend on health care?
    • How are we going to distribute what we do spend?
    • How are we going to finance what we decide to spend publicly?
  • Social Security
    • When should we switch to a more funded system?
  • Will the big entitlement programs eat the rest of the budget alive, and then devour each other?

Total mid-century problems: current 3% of GDP plus 2% of GDP for Social Security plus 5% of GDP for health programs--a big shift is coming, either a big expansion in the size and government and the tax base, or a big rollback in the promises that we have collectively made to each other...

The big federal tax share is a legacy of the Cold War, after all. Tax collections jump a lot in wars, and then come back down only very slowly (if at all) after the wars are over.* No Cold War gives us a much smaller federal government...* Uneasiness about Bush administration fiscal policy: liking for tax cuts and spending increases

Posted by DeLong at May 10, 2005 08:42 PM