He applied the “Page 99 Test” to his new book, A Great Leap Forward: 1930s Depression and U.S. Economic Growth, and reported the following:My book argues that against the backdrop of double digit unemployment, the potential output of the U.S. economy grew by leaps and bounds between 1929 and 1941, and that this laid the groundwork not only for success during the War, but also for the golden age (1948-73) that followed. Expansion during the Depression was driven not by increases in labor hours or the services of the physical capital stock, but rather primarily by improvements in the efficiency with which such inputs were used. To borrow from the title of my 2003 American Economic Review article, the 1930s were the most technologically progressive decade of the century.Learn more about A Great Leap Forward at the Yale University Press website.
Between 1929 and 1941 private sector labor hours and the private capital stock grew hardly at all. But over the same period real output grew 33 to 40 percent, depending upon how we measure it. As an approximation, we can attribute all of this residual growth to technological and organizational innovation. The difference between output growth and a weighted average of input growth is called total factor productivity (TFP) growth.
Because productivity is procyclical, it’s important to measure from one business cycle peak to another. Measuring from a peak to a trough, for example, we might see productivity declining, but this would be misleading. The challenge is complicated by the war, which can distort our measures of economic output. 1929 was clearly a business cycle peak, with unemployment a very low 3.2 percent. 1941 is the last year before full scale war mobilization, and the unemployment rate had declined from the high rates that prevailed throughout the 1930s. But it still stood at 9.9 percent.
Without a cyclical adjustment, measuring between 1929 and 1941 will underestimate the trend growth rate of productivity, because productivity moves procyclically, and the economy still awaits the fiscal and monetary stimulus of the war that will end the Depression in the sense of finally closing the output gap.
Page 99 addresses how to make a cyclical correction for 1941. It asks what TFP growth would have looked like had the U.S. economy returned to peacetime full employment in 1941. We can infer that had peacetime 1941 unemployment been 3.8 percent, as it would be in 1948, the 1941 level of total factor productivity would have been higher, and thus its rate of growth between 1929 and 1941 would have been higher.
Here is an excerpt from page 99:
If one is a war productivity optimist, one thinks of 1948 as the first year in which a demobilized peacetime economy benefited from all the new production knowledge generated during the war, and this influences one’s interpretation of its achieved productivity level. A better way to think of 1948, in my view, is that it is 1941 with full employment. The major new consumer product, television, had had all of its development work done before the war, been rolled out to the public at the New York World’s Fair in 1939, but had its commercial exploitation delayed until after the war. One can tell a similar story about nylon, over which women went wild when it was first introduced in 1939, before the war, diverting its use from stocking to parachute and tent production, made it a scarce civilian commodity. The 1948 surface transport infrastructure, which underlay productivity levels in distribution, transportation, and housing, had been almost entirely completed before 1942.
All of this suggests that if we imagine a world without the disruptions of the war, with the economy continuing a rapid progression towards full employment in 1942, productivity levels in 1942 could well have approached those achieved in 1948. In a closely related exercise, we can ask what productivity levels would have been in 1941 had unemployment been at 1948 levels (3.8 percent).
--Marshal Zeringue
Posts
