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Last week I had a post noting that the US government followed more or less naive Keynesian policies (whether on purpose or not I cannot say) from the early 1930s to the late 1960s. The post also notes that what Tyler Cowen calls The Great Stagnation, a period of relatively slow economic growth, began just about when the government moved from naive Keynesian policies to a regime that could mostly be described as “all deficits all the time.”

In this post, I’d like to present a couple of graphs that are pretty self-explanatory. The data in the graphs comes from the BEA’s NIPA Table 1.1.5. The black line runs from 1929 to 1967, and the gray line from 1968 to the present.

Figure 1

(You may need to double click on the figure to see the whole thing.)

Figure 2

I’ll be coming back to this topic in future posts, but I’d like to make a few quick comments:

1. The Great Stagnation Tyler Cowen comments on seems to, at a minimum, coincide very strongly with the period where the government quit Keynesian policy, where the private sector’s share of the economy stopped shrinking and began growing, and where the government’s role in the economy stopped growing and started shrinking.
2. Even if you assume the growth of the private sector or the shrinking of the government isn’t causing or contributing to the Great Stagnation, the data still leaves libertarian and conservative economic views at a loss. After all – shouldn’t growth increase as the private sector becomes more important and the government shrinks in size?
3. Bear in mind that marginal tax rates – reduced in 1964 and then reduced again multiple times since then – were lower during the Great Stagnation period than they had been since the 1930s. Needless to say, this is yet another fact that makes the data inconsistent with libertarian and conservative economic theory.
4. As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (one m only in my last name!!!) at gmail period com. And don’t forget which post your writing about.

9 Responses to “Another Look at Keynesianism and the Great Stagnation”

  1. PJR says:

    Also consider that government investment plummeted (as a percent of GDP) after 1968, as you can see here:

  2. Mark A. Sadowski says:

    Tyler Cowen refers to TFP (total factor productivity, or the residual from in growth after accounting for physical capital and labor accumulation) when making his argument for the Great Stagnation.

    The BLS maintains a database of annual TFP for the US back to 1948. A good source of information on TFP growth prior to that is a few of papers by Alexander J. Field: “US economic growth in the gilded age”, “The Most Technologically Progressive Decade of the Century” and “The origins of US total factor productivity growth in the golden age”.

    Average annual TFP growth is as follows:

    The first thing that should grab your attention is that TFP growth was at its most rapid during the Great Depression. The second thing you should observe is that TFP growth was at 1.9% or higher from the 1870s through 1973 with the exception of 1892-1919 and 1941-1948. TFP growth has picked up since 1995 (but has slowed since 2005). So this pretty much supports Tyler Cowen’s conjecture.

    Now, why was TFP growth faster during the periods mentioned?
    Well, Field analyzes the growth by sector and sector size and comes to some interesting conclusions. TFP growth was fast from the 1870s through 1892 because of railroads (which peaked in track mileage in 1916) and to a much lesser extent because of the telegraph. Almost all growth in TFP in the 1920s can be accounted for by manufacturing and that probably fed that decade’s stock market boom. Why did manufacturing TFP explode in the 1920s? According to Field it was due to the widespread electrification of factories (which had started in the 1880s). In the 1930s manufacturing TFP, although still relatively fast, slowed down. (He also points out that private R&D quintipled from 1929-1941.) But transportation TFP soared from 1929-1941 mainly due to the five fold increase in the share of tons-miles hauled by interstate trucking and its interaction with railroad transportation. (The US built its first interstate highway system in the 1930s.) And he argues that transportation TFP was largely responsible for the growth seen from 1948-1973, as manufacturing TFP actually went negative for part of that period. (And recall the Interstate Highway System, built on top of or paralleling the US Route system of the 1930s was largely completed from 1956-1973.) TFP growth was negative from 1855 to the 1870s primarily because of the Civil War.

    Recent work by Bart van Ark shows that TFP in the distribution sector was the main source of the surge in growth from 1995-2005, and he argues that was due to the widespread adoption of ICT technology by that sector. (Think big box Walmarts.)

    What’s interesting is that Federal government money played a major role in all of those developments with the exception of factory electrification (urban areas were largely electrified with private money), even, and perhaps especially, the internet. This of course comes with the qualifier that much of public fixed investment is probably nonproductive. But evidently some of it mattered a great deal.

    What’s also interesting is that Tyler Cowen is very familiar with Field’s papers, referring to them specifically, and yet he never mentions Field’s explanation for why TFP growth is high when it is, and consequently acknowledging that the absence of well targeted Federal investment might be a culprit in the Great Stagnation.

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