Commentary

The American “Special Century” of Economic Progress, Part III

By Stu Rosenblatt

This is part three of a four-part review of Robert Gordon’s The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, an extremely useful book on the nation’s physical economy. Click here for Part I, and here for Part II.

1930-1950: The Golden Age of Productivity

The Rise and Fall of American Growth singles out the 20-year period 1930-1950 as the centerpiece of the expansion of real production and productivity. Gordon calls it “The Great Leap Forward.” He says that the period is not continuous, but can be broken up into several time frames. First is the plunging economy of the Great Depression period of 1929-1933, followed by the partial recovery of 1933-1937, the period coinciding with the New Deal. However, the removal of federal intervention in 1937 led to a precipitous fall in output and productivity and a steep recession in 1938, which, in turn, was followed by the World War II buildup, which Gordon correctly labels as “explosive.”

The irony of this period, Gordon writes, is that although much of the economy had collapsed, innovation in new industries and technologies continued.

The TVA project, which transformed a 7-state area, is exemplary of the revolution in infrastructure created under the FDR Administration. (TVA.org)

There were two aspects to developments in the 1930s. First was the massive surge in direct investment in infrastructure orchestrated by the Roosevelt administration. This included expansion of the highway network, and major projects such as the Tennessee Valley Authority, Golden Gate Bridge, Hoover Dam, the Bay Bridge, etc. This is clearly reflected in the growth of Total Factor Productivity (TFP) throughout the decade along with a rise in overall output. Second, innovations from earlier breakthroughs were made.

These included developments in urban infrastructure, water-purification projects, electricity-grid expansion, urban transit, and the like. There was also the further build-out of the auto industry, and related feeder industries, such as steel, machinery, auto parts, and components, etc. While Gordon spends too little time on the impact of the New Deal, and fails to fully elaborate the critical role of the new infrastructure platform in increasing overall productivity, he does, however, fully comprehend the impact of new technologies in driving the upward trend of productivity.

Toward this end, he introduces the concept “General Purpose Technology (GPT)”; he attributes this term to authors Timothy Bresnahan and Manuel Trajtenberg, who wrote General Purpose Technologies “Engines of Growth?” (1992) as a working paper for the National Bureau of Economic Research. He says that fundamental inventions, such as electricity and internal combustion engines, can be labeled GPTs. They, in turn, spawn sub-inventions, which help drive the economy. Examples of GPT are: electricity and the internal combustion engine.

In this table, Gordon points out that electricity generated by industrial establishments grew by 57% between 1929 and 1941, even greater than the 31% from 1941 to 1950.

Electricity output continued to increase during the 1930s, ‘40s and beyond; during the war years, electricity from government-owned or -financed establishments surpassed those of privately owned sources. From 1929 to 1950, electricity production rose by 3.3 times.

By 1929, the United States produced 80% of the world’s motor vehicles; the auto industry would then be converted to turn out the planes, tanks, trucks, and other vehicles deployed to win the war.

Breakthroughs in production engineering and new sub-inventions in the 1930s contributed to the increase in output and Total Factor Productivity. Gordon acknowledges the role of the Roosevelt Administration in fostering the climate for this expansion, but he misses the boat on the revolutionary role of the New Deal in shaping the outcome.

Electricity and automotive production expanded in the 1930s and was coupled with increased investments in new equipment. Spending in new structures (buildings, factories, etc.) remained depressed during the decade, but equipment investment rebounded sharply. New investment rose every year during the New Deal, accompanied by constant innovations. “Railroad locomotives, trucks, tractors, and industrial equipment manufactured in the late 1930s were all of substantially higher quality than their counterparts of the 1920s.”

Oil drilling in Texas took off in the 1930s. (wikipedia)

Gordon also references the discovery of oil in East Texas in 1930, which spurred breakthroughs in petroleum-related industries. The achievements of the 1930s, he writes, defined it as “the most fruitful innovative period” of this industry. The breakthroughs included: polyvinylidene chloride (1933), low-density polyethylene (1935), acrylic methacrylate (1936), polyurethanes (1937), and dozens more. The creation of the National Bureau of Standards under President Hoover had brought uniformity to the growing production capability. Production parts, from nuts to bolts, were brought into conformity. The increase in productivity catalyzed by standardization also helped shape the World War II economic mobilization. Output was ramped up to previously unimagined levels.

Gordon also emphasizes the impact of New Deal labor legislation on TFP calculations. The New Deal brought in the 40-hour work week; pay and benefits began to increase, along with mechanization. Gordon is convinced that this change contribution mightily to the increase in TFP during the 1930s, and beyond.  The net result of this change during the New Deal period was the second-highest rate of TFP growth in U.S. history. Gordon calculates this as approximately 1.8% per year increase.

 

Gordon’s figure, reflected in the chart above, is at odds with that of Alexander Field (A Great Leap Forward: 1930s Depression and US Economic Growth, 2011), or the National Bureau of Economic Research, which believes that the TFP increase in the 1930s was near 3% per year, and the highest of all periods.  This discrepancy will be resolved later in the review.

World War II: Dramatic Increase in Productivity

Gordon’s treatment of the 1940s, and especially the World War II mobilization, 1941-1945, differs from that of other analysts. Economists and historians prior to Gordon thought the mobilization significant, but that its impact on TFP was not as great as the 1930s, and, in fact, represented a slowing down of equipment investment. They also argue that the output of war industries was consumed in military production, and did not affect the overall standard of living.

Gordon unequivocally states:

The most novel aspect of this chapter [on the 1940s] is its assertion that World War II itself was perhaps the most important contributor to the Great Leap (1930-1950). We will examine the beneficial aspect of the war both through the demand and supply side of the economy. The war created the household savings that after 1945 was spent on consumer goods that had been unavailable during the war, the classic case of ‘pent up demand’. A strong case can be made that World War II, however devastating in terms of deaths and casualties among the American military, nevertheless, represented an economic miracle that rescued the American economy from the secular stagnation of the late 1930s. In fact, this chapter will argue that the case is overwhelming for the ‘economic rescue’ interpretation of World War II along every conceivable dimension, from education and the GI Bill to the deficit-financed mountain of household saving that gave a new middle class the ability to purchase the consumer durables made possible by the Second Industrial Revolution.

Every category of production rose dramatically during the World War II mobilization. Industries worked literally ’round the clock, with three shifts fully staffed. Gordon cites the Kaiser Shipyards of California and Oregon as exemplary of the extraordinary transformation of various industries. In 1942, it took the yards eight months to build a Liberty Ship; within a year, that was reduced to several weeks, and finally, to just days.

In Michigan, Henry Ford built a gigantic factory at Willow Run with government financing, and outfitted it with the latest technology and machine tools. Willow Run employed 50,000 workers, was built inside of a year, and started production in May 1942. By February the following year, it was turning out 75 bombers per month; 150/month by November 1943, topping out at 432/month in August 1944. It was the biggest mass-production plant in the nation.

Willow Run (wikipedia)

During the war years, financing came from the government, and was also channeled through the Reconstruction Finance Corporation. Gordon completely misses the role of the RFC in helping to fund the war buildup. The RFC had been created under Hoover, mainly to bail out the banks and railroads. It was taken over by Roosevelt, and used to help build the infrastructure programs of the New Deal.

But in World War II, the RFC was given additional capital by the government, allowed to issue its own bonds, and authorized to recycle repaid debt into more projects. It spent nearly $30 billion on the war effort, and was directly responsible for erecting most of the new facilities used to build the war machine. The RFC created and ran the Defense Plant Corporation, Rubber Reserve Company, Defense Supply Corporation, eight large companies in all, and directly oversaw the spectacular war build-up.

The role of government financing of production, as distinct from the private sector, has heretofore been left out of GDP and TFP accounting, which has used only private-sector investments as their metric. Thus real value added to the economy from government-funded war industries was left out of their calculations! Gordon identifies their biggest blunder as the omission of machine-tool production. The number of machine tools produced in the U.S. from 1940 to 1945 doubled, rising from 942,000 in 1940 to 1,882,000 in 1945. It was the single-most important driver of the war program, and it was financed by the government, not by private firms.

Also, the amount of additional equipment that the federal government purchased that went into private-sector output was immense. The equivalent of 50% of the privately owned equipment stock that had existed before the war was purchased during the war. It was all new, and of the highest productive capability. In 1941, privately held capital stock was valued at $38 billion. New government investment totaled $19 billion by 1945. Again, none of this is counted in the GDP figures during the war years. The reason is that conventional GDP accounting calculated only non-farm, private investment.

Gordon also outlines the impact of electrified machine tools, machinery, etc. For every 100 units of electricity added to the productive process from 1902-1929, another 230 units were added between 1929 and 1950.

Summing up, Gordon argues that on the productive side of the equation,  the combined impact of this mammoth investment into new technologies, new machine tools and machinery, new factories, and their spinoffs during the World War II expansion, was the single-biggest driver of The Great Leap. And it was this “Leap” which established the period of 1930-1950 as the high point of American output and TFP thus far in history.

Yet, Gordon fails to capture the dramatic impact of the plethora of infrastructure projects on the growth of TFP. What’s omitted is the fact that the tremendous upgrades to existing systems were coupled with the thousands of brand new projects, which included bridges, roads, power and water systems, such as the TVA, etc. These had an immediate visible, as well as a long-term impact. Increases in productivity manifest themselves over time, minimally the lifetime of the project, which could easily be 20-40 years. Financial payback is not direct. It is also not simply from individual projects per se, but from the replacement of one entire “platform” by another, higher one. A simple example is the supplanting of horse-and-buggy transit by internal combustion engines, etc. This is not simple to calculate.

Gordon also fails to fully articulate the role of new scientific breakthroughs on increased productivity. He does outline the development of the aluminum, synthetic rubber, oil and gas, and other petrochemical industries. But he does not develop their impact on productivity in any significant way. He omits the development of nuclear energy, which represents a profound upgrade in energy density and productive capability.

Those oversights aside, Rise and Fall draws one other powerful conclusion, that of the impact of the psychological transformation of the population during the Depression and War years. The Depression, followed by the 1933-1937 recovery, then the steep decline in 1937-1938, left the population still wary of the potential impact of the New Deal. Deeply scarred by the Depression plunge, the nation did not believe that a sustainable recovery had taken effect.

The war mobilization changed that. It raised the standard of living for most of the population, and provided meaningful jobs, where individual technical innovation was encouraged. It united the nation in a do-or-die mission of national survival. In the process, the country got a full dose of a roaring industrial machine.

Gordon quotes economic historian Robert Higgs on the essence of the mobilization:

The war economy … broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production dispelled the hopelessness. People began to think: if we can produce all these planes, ships and bombs, we can also turn out prodigious quantities of cars and refrigerators.

Gordon then says that the impact of the World War II mobilization carried over into continuing TFP gains during the post-war period. The war machine was transformed into a peacetime juggernaut of consumer-oriented production, lifestyle improvements, and many government benefits, including the GI Bill. New technologies and new production techniques gained during the war were not lost; they were simply transferred as new knowledge, into peacetime production.

Causes of the Great Leap

In summarizing the causes of the Great Leap of 1930-1950, Gordon highlights the crucial link between output (of real goods) per person vs. output per hour. Output per hour is the productivity of labor, and it drives the amount of product created per person. Gordon charts the connection and states that output per person collapsed in the Depression, began growing during the 1933-37 recovery/New Deal, and soared during World War II. Output per person continued to increase well into the turn of the 21st Century.

But output per hour barely declined during the Depression, and then rapidly expanded after that. In 1941, it was 11% above the baseline figure calculated up to 1928, rose to 32% above by 1957, and was 44% higher by 1972, the peak year. Thus output per hour, or labor productivity, remained very high. Gordon attributes this to the massive technological change implemented primarily during the war years.

Synthetic rubber was one of the crucial technological inventions during World War II. (courtesy of indianapublicmedia)

He then isolates the key causes of the increase in TFP during the Great Leap. While educational achievement is important for technological development, its rise throughout the century was continuous, but “steady.” So, he discounts its impact on the sharp rise in TFP 1930-1950. He also acknowledges the change in the circumstances surrounding production and the workforce. Work hours fell to 8 per day and 40 per week, and while this increased productivity, it was not decisive.

Gordon agrees with his mentor Robert Solow that there are four categories of labor productivity: increases in labor quality, one measure of which is educational attainment; increases in the quantity of capital relative to the quantity of labor; increases in the quality of capital. These measures left a residue, number 4, Total Factor Productivity. This category measured everything from major innovations to simple tinkering or minor improvements, anything that increased efficiency, including movement of large numbers of people from rural low-paying jobs to urban higher-wage jobs. TFP also includes changes in living standards, new innovations, etc. Gordon analyzed both labor and capital inputs and outputs. He found that the average productivity of capital doubled during the Great Leap!

In an important new graph, Gordon presents his own TFP findings. TFP grew markedly in the 1920s and 1930s, but skyrocketed in the 1940s, nearly doubling the previous decade. TFP remained at the 1930s level into 1970, before dropping off by nearly half over the next 40 years.

To account for this dramatic finding, Gordon underscores his concept of General Purpose Technologies, and sub-inventions derived from the GPTs. The development of electricity in all its forms and the internal combustion engine are the two GPTs at the center of the Great Leap. The merging of the two in the form of new electric-powered machines, tools, and other equipment was at the heart of the expansion.

These increases in horsepower and electricity production and utilization generated an “increased energy power density” in the production process, resulting in historic leaps in productivity and output. Horsepower and kilowatt hours grew enormously in the 20-year Great Leap; private equipment grew by 50%, motor vehicle horsepower tripled, while electricity production increased by 330%.

While acknowledging that private investment is important, Gordon underscores the role of heavy government investment. He contradicts the analysis of Alexander Field that output began to flag at the end of the 1930s. Despite the impact of the 1937 Recession, Gordon says that output continued to grow at the end of the decade and into the 1940s, with the ramping up of the war economy and the restoring of New Deal government investment. Gordon buttresses his GPT estimates by citing other build-outs that contributed to the 1930s increase in TFP:

  • Distribution systems were transformed, including the advent of chain stores and the replacement of counter and shelf procurement with self-service operations
  • Major innovations in all forms of petroleum production, from fuels to plastics
  • Invention of the modern rubber industry, with its immediate impact on strong vehicle tires
  • Standardized parts
  • Major improvements in engines; better roads for transportation, etc. (to be continued)

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