Brad DeLong's Website: Notes Econ 113 Spring 2005 Archives

May 10, 2005

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

The Great Depression IIThe New Deal as Macroeconomic Policy: Did It Do Any Good?Parts of the New Deal that Boosted Demand:Abandonment of the gold standardBanking-sector reorganizationAbandonment of Hoover's balanced-budget ruleRelief expendituresWhich of these were most important? W. Arthur Lewis believed that banking-sector reorganization and abandonment of the gold standard--which broke deflationary expectations--were the most important...But There Were Also Parts of the New Deal that Reduced Demand:The cartelization program of the National Industrial Recovery Act (struck down as unconstitutional in 1934)After fears of deflation were broken in 1933, any further attempts to boost prices (agricultural price floors, support of unionization, et...

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

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March 01, 2005

20050301 Econ 113 Lecture: Great Depression: Building Tools

20050301 Econ 113 Lecture: Great Depression: Building Tools 1929: The stock market crash 1929-1933: The slide into the Great Depression 1933-1940: The New Deal 1941-1945: Rearmament and World War II The Magnitude of the Great Depression Unemployment peaks at 25% One-third of all banks in the United States fail and close Unemployment exceeds 10% until the U.S. enters World War II In the U.S.: the political reaction to the Great Depression is called Roosevelt's "New Deal" In Germany: the political reaction to the Great Depression is called "Adolf Hitler" There are two Great Depressions: a European one and the American...

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20050224 Econ 113 Lecture: Gilded Age and Progressive Era

20050224 Econ 113 Lecture: Gilded Age and Progressive Era Two parts to this lecture: Progressivism American Industrial Dominion What was Populism? Three things: A belief that farmers were being cheated by railroads through monopolistic rates A belief that farmers were being cheated by banks through deflation William Jennings Bryan, the Boy Orator of the River Platte Was populism left or right? Neither. It was for the little guy, and against coastal elites. It could swing either left or right... Populism ran out of steam and was superseded by Progressivism, which sold itself as a pragmatic movement that tried to tackle...

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February 22, 2005

20050222: Econ 113: Lecture: Civil War and Gilded Age

20050222: Econ 113 Lecture: Civil War-Gilded Age Part I: Civil War Stephen Douglas Senator from Illinois Chair, Committee on Territories Believes in the West Wants settlement of the west, wants transcontinental railroad w/ terminus in Chicago Wants to open Kansas-Nebraska territory for settlement "Popular sovereignty"--slaveholders can move into any territory, and when the territory becomes a state it can vote to be a slave state or a free state Douglas thinks that he is: Not giving away anything substantive by endorsing "popular sovereignty" (after all, no water in Kansas--so no slave plantation agriculture) Pleasing the South with this purely rhetorical...

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February 11, 2005

20050210: Economics 113 Lecture: Slavery: Cui Bono?

Charles of Windsor to marry Camilla Parker-Bowles The Persistence of Southern Slavery the Result of: Free land (which makes emancipatory bargains unworkable) (Marx: Swann River Colony) Cotton gin (which gives you another staple crop you can grow for which monitoring is easy) Geographical distribution of slavery: Plantation south--slavery Mountain south--not much slavery North--no slavery Border state antislavery--Cassius Clay--get rid of the "Peculiar Institution"--no desire to free African Americans The northern desire to see slavery set on the "course of ultimate extinction" Ulpian: Roman jurist: Cui Bono? Who Benefits? Who benefitted from the crime of American slavery? Do comparative statics...

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February 10, 2005

20050208: Econ 113 Lecture: Slavery 1

The Slave Trade: Guns Slaves Sugar/molasses/tobacco/cotton Very profitable Extraordinarily inhumane Adam Smith expected slavery to come to a rapid end after 1776; Adam Smith was wrong. Why slavery should come to an end: Inefficient--slave has no incentive An incentive-compatible system produces a larger economic pie And people can decide on a system better for everyone--a system that's still unequal, but not as brutal and vicious What maintains slavery? Extreme cheapness of slaves--makes vicious discipline credible Extreme control--slaves cannot run away Extreme monitoring--easy to see if slaves are working hard Caesar; classical Roman slavery; Arabic slavery; mamelukes The American South Quick...

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20050203 Econ 113 Lecture: Industrializing America Before the Civil War

Megasthenes: the coming of cotton to the Mediterranean... Format of the first midterm exam... David Ricardo: Why didn't the U.S. become one big unindustralized Canada? Answer: the tariff Could the tariff have been good for the country? Answer--yes, if the infant industry argument holds. What is the infant industry argument? There has to be some benefit--external to the firm and to the worker--from production. Future productivity has to be positively influenced by past production in order to make it beneficial in the long run to upset the Ricardian pattern of comparative advantage. The infant industry argument is plausible, but not...

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February 03, 2005

20050201 Econ 113 Lecture: The Pre Civil War United States--Growth of an Agrarian Civilization

1790: 3.9M people, $1100 1840 17.1M people, $1800 1860 50.2M people, $2000 % urban: 5% 1790, 11% 1840, 20% 1860. "Urban" means "2500 or more" City sizes: 1790: NY 33, PH 29, BO 18; 1840: NY 313, Balt 102, NO 102, PH 93; 1860 NY+Brooklyn 1081, PH 565, Balt 212.... Transport: Erie Canal, C&O Canal, Mississippi-Missouri-Ohio river system.... SF in 1860: 15th among American cities with 57K people... Conquest: Northwest territories, inland southeast and War of 1812, Louisiana Purchase, Florida, Texas, Mexican Cession, Oregon Territory, Alaska "Seward's Folly", Hawaii Relatively fast increase in output per capita in the U.S. before 1860.... U.S. Revolutionary War hyperinflation: $241 million continental dollars worth $1 million gold dollars by the end of the war. Value of Revolutionary War debt tripled as assumption was discussed and debated.

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A Key Invention

The Cotton Gin - Eli Whitney: Eli Whitney's machine was the first to clean short-staple cotton. His cotton engine consisted of spiked teeth mounted on a boxed revolving cylinder which, when turned by a crank, pulled the cotton fiber through small slotted openings so as to separate the seeds from the lint -- a rotating brush, operated via a belt and pulleys, removed the fibrous lint from the projecting spikes. The gins later became horse-drawn and water-powered gins and cotton production increased, along with lowered costs. Cotton soon became the number one selling textile. After the invention of the cotton gin, the yield of raw cotton doubled each decade after 1800. Demand was fueled by other inventions of the Industrial Revolution, such as the machines to spin and weave it and the steamboat to transport it. By mid-century America was growing three-quarters of the world's supply of cotton, most of it shipped to England or New England where it was manufactured into cloth.

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February 01, 2005

20050201 Econ 113 Class Opening Question

Alexander Hamilton believed that an America which owed lots of rich merchants lots of money--an America that "assumed" the debts the states had run up during the Revolutionary War and were not likely to pay--would be a stronger and better America. Why did he believe this?

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Office Hours This Week

Will be 1-3 on Wednesdays. (I may not be able to make the Friday time.)

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January 27, 2005

20050127: Economics 113: Lecture Notes--Colonial Economy

Small farm settlement The sixth was, to contemporaries, the least attractive--it was what you did when you couldn't do anything else. The sixth was also, in the long run, the most productive as far as economic growth is concerned. Free land (means high wages) Constrast with Engerman and Sokoloff's picture of Latin America: populations to exploit and ways to exploit them create extreme inequality... which has poisonous consequences.... And the economy prospers...

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20050127: Economics 113: Lecture Notes--Colonial Economy

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20050127: Econ 113: Class Opening Question

Class Opening Question: Consider Engerman and Sokoloff’s political-economy explanation of the large current gap in prosperity between North America and South America. Assume that their explanation is correct. Write two sentences on what you think the implications are for how one should act to accelerate development in Latin America today.

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20050127: Econ 113: Class Opening Question

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January 26, 2005

20050125: Econ 113 Lecture Notes--Colonization

Then in the late 1800s the British East India Company makes its bid for power... Terrible consequences for African civilizations... Coffee, sugar, tobacco [chocolate, cocaine?] Extremely profitable.

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20050125: Econ 113: Class Opening Question

Class Opening Question: What goods were worth transporting across oceans before, say 1830?

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January 25, 2005

20050125 Econ 113--Notes from Richard Halkett Section

What accounts for differential human development? Why Europe? Why England? How should we best measure differential human development? Is going for agriculture a good decision?

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January 20, 2005

20050120: Econ 113 Lecture Notes: Amerindians

Thursday 20050120: Econ 113 Lecture Notes: Amerindians Index card: Malthusian pressure Amerindian settlement New World agriculture New World civilizations The Conquest Disease Technological gap Organizational gap Jared Diamond's theories of why Lack of domesticable fauna--hence disease Plant endowment Animal endowment North-South axis Two heads are better than one All of these add up to an enormous gradient by 1492 We thus understand why Europe discovered America--and why discovery was such a demographic and then a political and civilizational disaster for the Amerindians But why was it Europe, and not China or India or the Middle East or Africa, that discovered...

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20050120: Econ 113 Lecture Notes: Amerindians

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January 18, 2005

20050118: Econ 113 Opening Lecture Notes

The opening lecture of every course always completely exhausts me. And today was no exception... Lecture Outline [Housekeeping, administrative, and logistic] Why care about American economic history? Because we are here; it is important and interesting to know how and why "here" came to be. Because America is special: Special relative to other countries At current exchange rates, six times as well-off as the world average, and thirty-six times as well-off as the bottom quarter. At purchasing power parities, three times as well-off as the world average, and roughly seven times as well off as the bottom quarter. Digression on...

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20050118: Econ 113 Opening Lecture Notes

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Notes Econ 113 Spring 2005

Main Weblog Page | Main Website Page | Rules of the Road

May 10, 2005

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

World War II

Labor and Capital

Upward Mobility

Focus on Women

Focus on African-Americans

Governing the Post-World War II Macroeconomy

Productivity Slowdowns and New Economies

The Future of the Social Insurance State

March 01, 2005

20050301 Econ 113 Lecture: Great Depression: Building Tools

20050224 Econ 113 Lecture: Gilded Age and Progressive Era

February 22, 2005

20050222: Econ 113: Lecture: Civil War and Gilded Age

February 11, 2005

20050210: Economics 113 Lecture: Slavery: Cui Bono?

February 10, 2005

20050208: Econ 113 Lecture: Slavery 1

20050203 Econ 113 Lecture: Industrializing America Before the Civil War

February 03, 2005

20050201 Econ 113 Lecture: The Pre Civil War United States--Growth of an Agrarian Civilization

A Key Invention

February 01, 2005

20050201 Econ 113 Class Opening Question

Office Hours This Week

January 27, 2005

20050127: Economics 113: Lecture Notes--Colonial Economy

20050127: Economics 113: Lecture Notes--Colonial Economy

20050127: Econ 113: Class Opening Question

20050127: Econ 113: Class Opening Question

January 26, 2005

20050125: Econ 113 Lecture Notes--Colonization

20050125: Econ 113: Class Opening Question

January 25, 2005

20050125 Econ 113--Notes from Richard Halkett Section

January 20, 2005

20050120: Econ 113 Lecture Notes: Amerindians

20050120: Econ 113 Lecture Notes: Amerindians

January 18, 2005

20050118: Econ 113 Opening Lecture Notes

20050118: Econ 113 Opening Lecture Notes