The Free Thinker: Over-Interpreting the Golden Age

It has long been customary for conservatives to look back to the 1950s as a Golden Age. Lately, this has become a habit among economists who are somewhat heterodox and/or left-leaning. Thus, Paul Krugman, in The Conscience of a Liberal, appeals to the 1950s as a better, more egalitarian time, with high taxes and more equality. Dani Rodrik, in The Globalization Paradox, holds up the Bretton Woods regime of the post-WWII years as an era of "moderate globalization," in favorable contrast to the "hyper-globalization" that began in the 1980s and accelerated in the 1990s. Robert Skidelsky, in Return of the Master, dates the decades immediately following WWII as an era when Keynes was the "coach," and contrasts them favorably to the time since then.

Skidelsky, by the way, makes the indefensible move of dating the end of the Keynesian era from 1973 in order to make the Keynesian era look good. Actually, the 1970s were the heyday of Keynesianism: it was 1971 when Nixon said "I am now a Keynesian." It was with Volcker and Reagan that Keynesianism began to be eclipsed, and it was only in the 1990s that a new anti-fiscal-policy consensus seems to have emerged. Include the 1970s and the Keynesian era doesn't look so good. But I digress.

All these authors use the post-WWII boom to support their view, by showing that growth was quite strong in that period. Generally, they are advocating a position which there are good theoretical reasons to believe to be anti-growth. Thus, Keynesianism discourages savings, which in the medium to long run must discourage investment, which slows growth. Again, globalization of finance and trade should yield benefits from diversification, economies of scale, comparative advantage, and so on which should raise the level and (at least in the short run, perhaps permanently) growth rate of GDP per capita, as well as (arguably) a more equal distribution of GDP globally. And Krugman's proposed high tax rates should obviously be expected to reduce the incentives to work, trade, save, and invest which grow the economy. Instead of acknowledging and responding to strong theoretical arguments that their preferred policies are anti-growth, they make the empirical point that when the policy regime was closer to their desiderata, growth was strong. It's rhetorically effective. But it will not do.

Two objections must be made. First, there are some big, obvious reasons for the strong post-WWII boom, and once these big, obvious reasons are considered, it's not clear that there's anything left to explain. Second, if one allows an atheoretic, empirical appeal to the 1950s and 1960s to count as a valid argument, one legitimizes other arguments that have the same form.

The big obvious reasons for the post-WWII boom are:

1. Recovery from the war (and depression). World War II was enormously destructive. So was the Great Depression before it. By the end of World War II, the world was a lot poorer than it knew how to be. You could get a lot of growth just by returning to normalcy at that point. (This argument applies especially in Asia and Western Europe, but in America too.)

2. Demography. Because of the baby boom after World War II, the population was unusually young. Young people tend to learn, or "accumulate human capital," faster, and consequently enjoy rising productivity. Also, with a smaller population of old people to support, it was much easier for governments to balance their books, with money to spare for public works projects.

I think there's also a third, subtler reason for the post-WWII boom: the West was still benefiting from the technological momentum of the late 19th and early 20th centuries, the golden age of innovation, the factory etc., the Age of Henry Ford, which had peaked in the 1920s, but had continuing to cast up new technologies which the conditions of depressions of war had not been able to exploit. A lot of low-hanging fruit had, so to speak, grown on the technology tree which a nation distracted by depression and war had not been able to exploit.

All this suggests that by the 1970s and 1980s growth had become a lot harder. Recovery from the war was complete, we were pushing up against technological frontiers, and demography was less favorable. So to compare the growth rate in 1980-2007 with that of 1945-1980 (even if you don't cheat by throwing the 1970s into the later period!) is not really a fair comparison. A growth slowdown was inevitable. Good thing Thatcher and Reagan came along, or it might have been a lot worse! (As, in fact, it was in France, Germany, and later Japan-- anywhere that didn't make a turn towards free markets about that time.)

The other problem is that if your argument is "growth was better in the 1950s and 1960s, we're not sure why, but it might be x" then you open the door to arguments like the following:

1. The civil rights movement caused the growth slowdown. The system of racial segregation before the mid-1960s was ugly, but efficiently protected the social capital of the white bourgeoisie, while the breakup of that system through anti-discrimination of laws was invasive and highly inefficient, depriving firms of quick, rough-and-ready methods of gauging employee compatibility. The cost of racial justice-- perhaps one well worth paying!-- was slower economic growth and rising economic inequality.

2. Feminism and the entry of women into the workforce caused the growth slowdown -- or perhaps, to be more exact, the productivity slowdown, by increasing the denominator of productivity statistics, person-hours of work, without increasing the numerator proportionally. Housework and breadwinning are complements. A man is both more able and more motivated to do good work on the job if a housewife is making his meals, cleaning his clothes and his house, and raising his kids. Breadwinners for a family are likely to place more value on cash relative to the intrinsic rewards of fun or interesting jobs, and that helps productivity, too. Also, when men's and women's roles are more clearly defined and prescribed by society, economic complementarity in marriage is much easier to acheive (just as it's easier to shop for electronics when all houses are equipped with the same style of plug). The cost of women's liberation and gender equality-- again, perhaps one well worth paying!-- was slower economic growth and rising income inequality.

3. The cultural and sexual revolution of the 1960s caused the growth slowdown. Tradition isn't always right but it tends to carry with it a lot of the moral values-- honesty, self-reliance, hard work-- that parents try to inculcate in children. The rebelliousness of the 1960s undermined these values, and made it distasteful to young people to emulate old heroes of industry like Henry Ford. They wanted to be rock stars instead. And the sexual revolution in particular diverted a lot of energy, for better or worse, into hedonistic sexual pursuits.

Now, I'm not endorsing (1), (2), or (3). And I think it would be very difficult to develop these speculations into rigorous theories that could stand up to critical testing and also perform well empirically, not just in "explaining" (or being consistent with) one or two big macro facts, but in detail. But I think it would be pretty easy to write books that developed these themes (and others) in an atheoretic way, and then pre-empt objections with a hand-waving appeal to empirical history. Such books are unlikely to be written, or at least unlikely to be read, because they are politically incorrect, but it's much more satisfying to say to such arguments, "No, your appeal to the 1950s and 1960s growth record in support of your argument is not persuasive, because that's sufficiently well explained by demography and the recovery from wartime destruction that there's really no mystery left to solve." And that's the same answer I'd give to Rodrik, Krugman, and Skidelsky.

Comments

I generally agree with Nathan's response here. I do think it's in bounds to invoke the post-war years if one wants to put an upper bound on the importance of marginal tax rates (for example), but not to make the case that (again, for example) higher marginal tax rates have the opposite effect as expected.

Posted by: Nato | December 13, 2011 at 03:50 PM

slowdown, by increasing the denominator of productivity statistics, person-hours of work, without increasing the numerator proportionally. Housework and breadwinning are complements. A man is both more able and more motivated to do good work on the job if a housewife is making his meals, cleaning his clothes and his house, and raising his kids. Breadwinners for a family are likely to place more value on cash relative to the intrinsic rewards of fun or interesting jobs, and that helps productivity, too. Also, when men's and women's roles are more clearly defined and prescribed by society, economic complementarity in marriage is much easier to acheive (just as it's easier to shop for electronics when all houses are equipped with the same style of plug). The cost of women's liberation and gender equality-- again, perhaps one well worth paying!-- was slower economic growth and rising income inequality.

Posted by: Retro Jordan | December 13, 2011 at 04:48 PM