Scott Sumner Misses One Obvious Explanation
Scott has a theory for why world economic growth suddenly slowed in the early 1970s:
Here’s what I think happened. There were a few underlying technological developments in the late 19th century that dramatically affected living standards in the 1920-70 period, when they were widely adopted in advanced economies. I would certainly include electric power and the internal combustion engine. I also think indoor plumbing is underrated. Imagine having to rely on outhouses in cold climates. And also recall the health advantage of safe drinking water. And I suppose modern chemistry should be included—something I know little about. Many key products were first invented in the late 1800s or early 1900s (electric lights, home appliances, cars, airplanes, etc) and were widely adopted by about 1973. No matter how rich people get, they really don’t need 10 washing machines. One will usually do the job. So as consumer demand became saturated for many of these products, we had to push the technological frontier in different directions. And that has proved surprisingly difficult to do.
In a follow up post he stated it even more concisely: “In my last post I argued that the growth of the 1950s and 60s resulted from a technological revolution that began in the 19th century and hit a wall around 1973.”
Hmm, can we come up with something a bit more concrete? Was there any major institutional change that could conceivably affect world economic growth (and in particular US economic growth), that was true in the 19th century and then suddenly ended in the early 1970s?
What is…. the gold standard?
When people describe the gold standard as stone age or nineteenth century, I like to remind them that we put a man on the moon with the gold standard.
So if we went back on the gold standard we could go back to 90% marginal tax rates, 30% unionization, and a $10 minimum wage, and we’d be okay?
Yes that’s exactly what I was saying, and Sumner was saying the opposite.
(No.)
Sumner’s position, I believe, is that things like high marginal tax rates are bad for growth, but that prior to 1973 this was offset by growth inducing technological improvements. Once these ended the nasty effects of the high tax high union economy of 1945-73 began to manifest themselves. If your view is that it was the gold standard and not technology that was leading to higher growth then it should be possible to return to the pre-1973 policies (high taxes plus gold standard) and do better than we have been since 1973. That doesn’t mean that this would be a good idea. Presumably growth with a gold standard plus low taxes would be even higher, and there are issues of liberty involved. But it would be doable. It would lead to the economic disaster that was the 1970s.
I dispute the Krugman/Sumner claim that marginal tax rates are a proxy for “big government.” I hardly think the price controls of the 1970s were an era of deregulation.
In any event, you don’t feel a bit funny arguing that technological progress occurred from the 19th century until 1973? Doesn’t that statement just make you want to giggle a bit?
And when we’re wondering what could possibly have changed the trajectory of the world economy in the early 1970s, the fact that the MONEY ITSELF became a complete creature of governments, is so irrelevant that Sumner doesn’t even consider it?
BTW I realize you are not personally endorsing these claims, you are just trying to clarify Sumner’s position. And I am probably being deliberately obtuse in some of “funny” replies. All I’m saying is, it strikes me as hilarious that the prophet of inflation failed to consider the abandonment of the last vestiges of the gold standard, and instead said that technological progress stopped in a particular calendar year.
Nixon announced closing the gold window simultaneously with WAGE AND PRICE CONTROLS in August 1971! And the Fed stepped on the gas. It got Tricky Dick reelected in 1972. Things started going south real fast in 1973 and by 1974 the economy was in the tank. Newsweek had a cover wondering “Are We Running Out of Everything?” Probably the real reason they got rid of Nixon that year.
I discovered Rothbard in 1973 so I knew the price controls were the culprit. THEY CAUSE SHORTAGES! I went to a libertarian meeting at some guy’s house that year and he had a quadrophonic stereo and turntable. Who says there weren’t technological advances in 1973?
What a pathetic argument Sumner which ignores the obvious.
That last sentence should have read:
As Wikipedia says:
The economy appeared to be booming in 1972 and it was a main reason Nixon was re-elected in a landslide. That honeymoon didn’t last long.
I think this is tailor-made case for a dummy variable.