Tuesday, September 27, 2016


I did an EconTalk Podcast with Russ Roberts. The general subject is economic growth, the reasons it seems to be slipping away from us and policies (or non-policies) that might help.

As in other recent projects (growth essaytestimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of the growth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.

From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.


  1. Terrific podcast, but you should really update your coal-mining example. Yes, there is still surface mining with bulldozers. But there are also, for example, "Continuous Miners", described by the Kentucky Coal and Energy Education Project as follows:

    "A machine with a large rotating steel drum equipped with tungsten carbide teeth that scrape coal from the seam. Operating in a “room and pillar” system – where the mine is divided into a series of 20-to-30 foot “rooms” or work areas cut into the coalbed – it can mine as much as five tons of coal a minute – more than a miner of the 1920s would produce in an entire day. Continuous miners account for about 45% of underground coal production, and also utilize conveyors to transport the removed coal from the seam. Remote controlled continuous miners are used to work in a variety of difficult seams and conditions and robotic versions controlled by computers are becoming increasingly common."

    1. Thanks. Yes, we don't use "shovels" and not even bulldozers anymore. Given how much time I have spent at the Chicago Science and Industry Museum coal mine exhibit, both as a child and then as a parent, I should have gotten this one right!

  2. I enjoyed this--thanks for doing it! Could anybody point me to any articles related to consumer banking proposal discussed towards the end?

  3. John, thank you for a stimulating conversation. To continue the conversation with a different point of view:

    Why not use the ‘60s as a model for economic growth? It was the best period for peacetime economic growth in U.S. history – annual growth rates averaging over 4% real GDP per capita for nine years. You don’t have to tweak the DSGE model with revised simultaneous equations to figure out what is going on. The takeoff of the growth rate for the 1960s can be traced to the national awakening from the Sputnik scare in 1957 when American primacy in the world was challenged and national leaders in our political sphere, business sector, and civic arena stepped up to the challenge without convening a National Planning Commission. Instead there was a coordinated effort to put emphasis on technical education, capital investment (not just in infrastructure), improved labor productivity during the first half of the 1960s, a noticeable pickup in world trade from the immediate post-World War II period, different sectors of the economy that benefited from cross fertilization of new technology and applications, an economy that was less reliant on consumer spending (as our present economy has been) and more reliant on the productive sectors like the industrial/commercial sectors, a fiscal policy that could work with and stimulate the greater economy with only modest budget deficits that still were able to reduce Debt-to-GDP ratios because of the good economic growth, and a monetary policy that was accommodative to growth, although we can now look back and say that it was misapplied and inconsistent and would later be a major contributing factor to the Great Inflation of the 1970s.

    The people who accomplished this historic growth were later labeled the Greatest Generation, a generation that placed a premium on achieving progress with greater growth rather than better efficiency; and, a generation that had more social and political cohesiveness so that a governing majority could enact policy, a cohesiveness that is missing in the generations of the Baby Boomers and Gen-Xers. The children and grandchildren of the Greatest Generation have gotten themselves sidetracked by other issues, taken their eye off the ball, have had succeeding economic expansions that have been in a declining trend line through the decades and here we are now with some of the worst growth in U.S. history with all kinds of excuses about mismeasurement and policy debates.

    If you want a different metaphor than weeding the garden, why not shoot for the Moon, like we did in the ‘60s?

    1. So you want to go back to the 1960's?

      "If you want a different metaphor than weeding the garden, why not shoot for the Moon, like we did in the ‘60s?"

      Prior to 1971, the U. S. government was still on a gold standard. See:

      This severely limited the U. S. federal government's ability to borrow (especially abroad).

      There was also the post World War II baby boom that began in the 1950's. U. S. population growth averaged about 1.3% from 1960 to 1970, and kids born during the 1950's were becoming adults in the 1960's needing a car, house, etc.

      Finally, the employment to population ratio (especially among women) during the 1960's reflected a single male paycheck earner:

      Averaging 57% from 1960 to 1970 among all working age, but:

      37% among women.

      So, if that is your model economy, then you want to go back to a gold standard with limited upward mobility for women whose only job it is to pop out babies and generate the next baby boom.

      Is that what you are saying? :-)

    2. Not go back, but use it as a model.
      1. The gold standard had nothing to do with this extraordinary growth. We now have floating exchange rates, not fixed exchange rates.
      2. Real GDP per capita factors out the effects of population.
      3. The addition of women to the labor force had an increase after WWII, but the real acceleration of women into the workforce was in the late 1960s (around 1968, with the first wave of the Baby Boomers) and continuing through the 1970s. You would think with the addition to the workforce, we would have had even better productivity gains. By the way, since around 2000 the participation rate of women in the labor force has leveled off and dropped just a bit.

      There are a number of other points listed that you just ignore. Do you understand what I'm saying now?

    3. Vic,

      I am just giving you a little ribbing. The only point that I was making is that even though growth during the 1960's was high, the time period wasn't some problem free utopia - there were problems then as there are problems now.

      But I will try to understand what you are saying:

      "There are a number of other points listed that you just ignore. Do you understand what I'm saying now?"

      Okay your other points:
      1. "The takeoff of the growth rate for the 1960s can be traced to the national awakening from the Sputnik scare in 1957 when American primacy in the world was challenged."

      And so we should wait for some external event completely out of our control to frighten us into a higher growth economy? How exactly is that implemented as a policy?

      2. "...stepped up to the challenge without convening a National Planning Commission. Instead there was a coordinated effort to put emphasis on technical education, capital investment (not just in infrastructure)."

      There was also a sense of nationalism born out of World War II and the subsequent Cold War. Also, the rest of the world was still rebuilding from World War II while the U. S. was relatively unscathed. Again how is that nationalistic impulse and restrained global competition implemented as a policy?

      3. "...and a monetary policy that was accommodative to growth, although we can now look back and say that it was misapplied and inconsistent and would later be a major contributing factor to the Great Inflation of the 1970s..."

      Even the best monetary policy in the world cannot overcome terrible fiscal policy. And monetary policy prior to the Nixon shock was aided by the fiscal restraints that a gold standard imposed.

      4. "...and, a generation that had more social and political cohesiveness so that a governing majority could enact policy..."

      The governing majority that you are referring to I presume is Democratic control of both the Senate and House of Representatives.


      Democrats controlled the House from 1933 thru 1995 with brief interruptions in 1947 and 1953.

      Democrats controlled the Senate from 1933 thru 1995 with the same interruptions but also an interruption from 1981 thru 1987.

      The impetus for the cohesiveness you seek and the Democratic takeover of Congress in 1933 was of course the Great Depression.

      And so what is the policy tool that will generate a governing majority - another Great Depression?

      In all honesty I like a lot of what you are saying, but I am also a realist with a sense of history. The growth of the 1960's did not just pop out of a genie bottle. There were a lot of preceding events that shaped the political and economic atmosphere prior to that time period that would be a tragedy to repeat.

    4. Frank: I am not trying to paint the 1960s as utopia, just the best peacetime economic performance in U.S. history. Let’s go through your points, one-by-one:

      1st – Your view of the ‘60s may depend more on your political leanings – Left, Right, Moderate – and what generation you are in at the time – the Greatest Generation, the Silent Generation (I’m using the Pew Research Group designation of the generation that follows), or the Baby Boomers (the first wave of this cohort will reach 20 years of age in 1966).

      a. From the political Right we have Ronald Reagan giving a speech supporting Barry Goldwater in late October 1964 describing the problems in America (see YouTube). How ironic that right at that time, the 4th Quarter of 1964, the real GDP per capita will turn in 2.18% growth – the 10th best of the 280 quarters from 1947 to the present – and the yearly data of 3.2% growth will be one of the better years during the ‘60s. Reagan when President never had a quarter that good and only had one yearly growth above 3% (1983 at 5.42%) – and that was the last time we had a yearly figure above 3%. The ‘60s had four different years above 3% growth and one year that just missed at 2.94%.

      b. If you listen to the political Left describe the 1960s it is likely to be a Baby Boomer – remember their age in the ‘60s. So it is going to be about protest for equal justice, anti-war, ban-the-bomb, and cities going up in flames in 1965, 1968, etc. But how does this square with the fact of the greatest peace-time economic growth in U.S. history? I thought people had to work to achieve that kind of growth, especially in an age when we had factories and plants were not as automated. I’m sorry, but I just don’t share that vision of the ‘60s like my fellow Baby Boomers. And, I worked all through the 1960s starting as a kid; and, if I had spent one summer protesting for equal justice or the Summer of Love, this kid, who grew up in a working class neighborhood (near Charles Murray’s Fishtown), would not have been able to pay his way through college without indebtedness. I didn’t grow up with a father who could start me off with a million dollars and I served in the military also.

    5. 2nd – Your comment about the Sputnik episode – well, it’s just about LEADERSHIP, in society – political, business, civic. Some generations have it together, some don’t. I might add that Ike, FDR and Eleanor were all from the generation of the 19th Century that preceded the Greatest Generation.

      3rd – Your description of the post-WWII where Europe lays in destruction and America is the unscathed arsenal producing is true for the 1950s, not for the 1960s. I know this is the orthodoxy of economists, like Tyler Cowan, Robert Gordon and many others; but Tyler was in diapers when I worked all through the 1960s and served in the military in West Germany during the 1960s. So, let’s take a look back at this “orthodoxy”. First, in 1957 Continental Europe had recovered enough to form the Common Market. Germany had two upward valuations of the DM against the dollar – the first in 1961 and the second in 1968, another would follow in the early ‘70s. The French economy was doing so well under De Gaulle that he was draining our gold by the mid-60s. Italy, unlike the last twenty years, was doing well. Even Spain and Portugal, who were not part of the Common Market, were doing well throughout the 1960s. And even Yugoslavia, behind the Iron Curtain, was doing well and trading with their Western European neighbors. And that brings me to the second point, take a look at World Trade and compare the 1950s with the 1960s. World trade picks up substantially in the late 1950s and continues by leaps and bounds to improve during the whole 1960 period. Third, and most obvious, the acceleration of the growth rate in the beginning of the 1960s and the sustained growth over nine years is nothing like the 1950s, and this is 15 years after the war.

    6. 3rd – Fiscal Policy in the 1960s: The best growth of the 1960s is between 1961 to 1966. We had great (repeat GREAT!) fiscal policy during that period. Throughout the 1960s, the Debt-to-GDP ratio declined substantially – over 30%. Since consumer spending was less than what it is today (60% then 65% to 70% today) and the industrial/commercial sector was larger then, government tax cuts (accelerating depreciation right offs in the early 1960s to spur investment and income tax brackets reduced by the mid-1960s) plus government contract spending (and this is before the Vietnam buildup which is announced in mid-1965 but doesn’t take a big effect until 1967 to 1970) that feeds right into the industrial/commercial sectors and also helps to feed the tech innovation that is going on (the 1960s is only second to the 1990s for tech innovation since WWII). As the Great Society programs begin to kick in during the mid-1960s along with MediCare (it did not exist prior to 1965) and the increase in military spending, the fiscal problems do start to show up and by mid-1966 we will have a credit squeeze that will require the Fed to intervene.

    7. 4th – Monetary Policy in the 1960s: Monetary policy was just about non-existent during the 1960s; but, it was good enough to accommodate the great growth we had. The Fed under Martin was not going to stand in the way of an economic revival not seen in many an age. He didn’t pull the punch bowl while the party was going on and only weakly took a few scoops out of the punch bowl once the economy was on roaring. There was no Volcker at that time to piss in the punch bowl; so, the economy kept roaring. I think in the post-WWII period to the present, the 1960s had the greatest percentage increase in industrial production and capacity utilization by the mid-1960s was in general operating around 90% (I believe this is also the highest) and in some industries, like auto production (about 7% of GDP at that time, half that now) was over 100% (due to overtime). When the Fed tried to tighten by raising interest rates, businessmen just factored in the cost increase because production was so good. Businesses factored in generous labor contracts, increased material costs, and increased borrowing costs – all absorbed by great productivity with corporate profits (i.e., the median return on invested capital) reported for the largest 500 non-financial corporations by Fortune Magazine going from 11.8% in 1965 to 12.7% by 1966. In addition to all this demand for goods and services coming from the domestic economy, remember that world trade is also increasing substantially all during this period. The industrial/commercial sector could not expand fast enough to keep up with demand.

      I am not going to go into the credit squeeze of mid-1966 (not a recession year), but the events going on are the first indication of inflationary pressures building in the economy. I am not a monetarist; so, I disagree with Milton Friedman that monetary policy is always the cause of inflation. This period is an excellent example of both cost-push plus demand-pull forces working their will on the economy and an inadequate and inconsistent monetary policy. The gold standard has nothing to do with this. The inflationary forces that are becoming evident at this time will really play out later in the decade and especially in the 1970s because (1) the inflationary factors (business practices, labor contracts, etc.) are baked into the business model and economy; (2) and our productivity starts to decline (from a very high level) by the mid-1960s (look at labor productivity as well as overall productivity) and we will become less competitive – this becomes a long trend lasting into the 1980s; (3) fiscal policy will become more of a drag on the economy as Great Society and social welfare programs kick in along with the Vietnam buildup; and so (4) the failure of monetary policy to correctly respond to the decreasing rate of productivity is not the primary cause of the inflationary period of the 1970s but certainly is a great contributing factor. On top of these endogenous factors will be exogenous factors affecting businesses like spikes in commodity prices in the 1970s (lumber and plastics just to name two) and of course the cost of energy due to oil prices. This business model of baked in costs will not be completely undone until Reagan gets into office with policy changes while Volcker works his will with monetary policy.

    8. 5th – Social and political cohesiveness: I’m sure Dr. Cochrane is not going to allow me to go into detail for non-economic explanations; but look at the elections in some detail. The Republicans were the dominant national political party from the 1860s to the New Deal. FDR takes advantage of the Hoover mismanagement of the Depression to forge a new political alliance. Each succeeding two year election from 1930 to 1936 (in the midst of the Depression with still high unemployment) the Democrats are not only wining but increasing their margin of victory. Landslide presidential elections are when the victor takes 60% of the popular vote. The Greatest Generation has four such landslides in their adult lifetimes (while working and in retirement) – 1936, 1964, 1972, and 1984. In addition there are two elections where third parties are noticeably present – in 1948 the Democratic Party is split in three with Truman having a Democrat on his Left and on his Right while running against a Republican; and, he still wins with 50% of the popular vote; Reagan does the same with a moderate Republican running against him along with Carter and he pulls just over 50% of the popular vote in 1980. We haven’t had a landslide election since 1984 and Clinton never got 50% of the popular vote nor did Bush (W) in 2000 and just barely got it in 2004 in a re-election.

      You can go on the Pew Research web site and find plenty of data that show the Baby Boomers and Gen-Xers are more disperse on political and social issues in comparison to the Silent Generation. Tom Brokaw came up with the moniker The Greatest Generation and it was because this generation had a common experience with two great events in our history. They are a unique generation – similar to the post-Revolutionary War period and the post-Civil War period. Most of the time Americans are diffuse, somewhat like today. Don’t forget, we just came out of a great recession that we are still looking for explanations as to what happened and we have the usual populist uprisings on the Right (blaming others for our problems) and the Left (blaming Wall Street and the banks). We have weathered it before and we will weather it again.

    9. 6th – There are other factors that contribute to the good growth of the 1960s.

      a. From the Depression through the 1950’s and even into the 1960’s there was pent up demand for consumer items.

      b. Defense spending was at a premium. This was the height of the Cold War.

      c. Government spending in general, not just Federal but state and local, during the 1960’s was much more capital intensive/infrastructure as compared with the last several decades we have had.

      d. Fiscal policy worked then as opposed to today – increasing our exports/trade policy doesn't do much today when only 9% of the economy is manufacturing.
      e. NASA spending during the post-Sputnik era was running around 3-4% of the Federal budget and had a big payoff with other sectors of the economy – today it is less than ½ of 1%.

      Listen to JFK’s speech in Houston (1962) on why we are going to the Moon (on YouTube). Then you will understand how a demand-driven economy works and how Fed spending creates jobs and drives innovation and productivity, especially at a time when ALL who worked shared in those productivity gains. That is the leadership we are missing today; but, leaders need followers.

  4. John, I don't know if you want to keep the comments short; but, to give my first comment context with your paper -- I think we need to make major structural changes rather than weeding; and, so this below would be my intro to the first comment.

    If you want to get the U.S. back to great economic growth you will have to make structural changes to our economy and our society along with the international ramifications that go with a globalized economy. The opportune time to do this was when Obama assumed the Presidency in 2009. Instead we patched up the old system and have been mired in slow but positive growth since.

    Economists have come up with cyclical reasons for our slow growth, cleaning up balance sheets by businesses and individual households; secular stagnation theories to stimulate aggregate demand, an economic hysteresis we can’t seem to get out of, and a variety of monetary alternatives. But after a long period of the Great Moderation where monetary theory predominated and unprecedented monetary action by our Fed under the leadership of Ben Bernanke to include intervention in the international money market to restore order and discipline after the Financial Crisis of 2008, I think we are witnessing the limits of monetary policy when other measures have been waning. Our monetary policy has been constraining our full potential for growth for the sake of economic stability (price stability) and that is why we are in an economic hysteresis where each succeeding economic expansion following an economic contraction has been weaker and weaker.

  5. Nice post, but I found this curious:

    "They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.)"--Cochrane.

    The FBI is an example of waste? Border controls?

    The US spend $1 trillion annually on "national security" including the Defense Department, the VA, pro-rated debt and black budget outlays.

    The F-35 fighter jet program, widely lampooned as a lemon-dud, easily beaten by cheaper drones, and no longer stealthy due to changes in radar, will cost taxpayers $1.5 trillion.

    In contrast, I assume we get some benefit from the FBI (though police powers can always be abused), and certainly border control is the obligation of any sovereign nation.

    1. I'm guilty of obscurity here. To my mind the contrast between border control and FBI suggests that if you want to reduce terrorism, more border control is not the best idea.

    2. In general, love the direction of your blogs.

      And terrorists are but a heinous annoyance to the USA, far less serious than the threat of, say, drunk drivers or even Zika.

      Your obscurity still escapes me. If terrorists want to enter the U.S., should we not have adequate border control? The FBI never finds terrorists?

      No doubt, the Border Control and the FBI are wasteful; all government agencies become typified by ossification and self-preservation, and even self-reverence.

      But jeez, they seem but the little toes on the federal government, and pip-squeaks against the DoD, VA, black budget and debt service on national security.

      In addition, a democratic sovereign nation should control immigration, as decided by popular vote.

      It may not be the result that I, or macroeconomists think is the correct result, but it is the right result if we believe in democracy.

  6. Hello Profa, thanks or the podcast, deserve listen twice; first - we need to define terrorism, then talk abt border control..;secondly, Whatever a rich man enjoys, the common man should be able to afford, and our job is to find a way to solve this. Reinvent antibiotics, cure cancer etc..enough of communications & cheap goods...rgds

  7. I enjoyed the podcast and this article.

    A few years ago, I came across

    Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute
    by Frederic Jesup Stimson (1910)

    on the Internet Archive. I recommend it as an eye-opening read regarding the recent, last 300 years of so trend toward statute law, i.e., popular lawmaking, in countries following the Common Law tradition. From this trend, we can see the natural progression toward the administrative state. Understanding the roots can sometimes lead to more effective management of the tangled mess we can see.

    One insight I developed was that so much of our labor law/traditions are still tangled up in the 1349 plague in the middle ages. The first Statute of Laborers was enacted then that set max wages by trade in response to the runaway wage growth due to the reduction in labor availability. This led to price fixing for staples. Subsequent modifications of the Statute of Laborers gave us the tradition of references, originally required to prevent servants from changing employers without permission.

    While not formally repealed until the mid-19th century, the statutes of Laborers fell into disuse during Elizabeth I. Perhaps just coincidentally, this is also the same time period when the population of England finally recovered to levels near the 1340s levels.

    Another observation from the book is that much of troubles stem from the modern (and from the start in the US) trend to treat sin (acts against the church, or against one's conscience) as crimes (an offense against other men; that is, against the state).

  8. In the 1960s we were still rolling out the advances made in prior decades. The productivity enhancing effects of automobiles had not been fully realized. Factories were still being retooled to adopt lessons learned in the Second World War.

    The Federal government through the Air Force was subsidizing the development of technology for aircraft and aircraft engines. The Federal government, through NASA, was subsidizing early transistor chip improvements. Later the Federal government, through DARPA, played an important role in developing very large scale microchips.

    For growth to happen there has to be an unexploited opportunity. The best way to create new opportunities is research. Government funded research created the Internet and the World Wide Web.

    We could benefit from better, cheaper, treatment of various diseases (although such improvements might paradoxically reduce GDP). The case for putting money into infectious diseases seems to be almost overwhelming and yet it took Congress an unconscionably long time to approve Zika funding.

    1. I agree with your first three paragraphs but if you are implying that the growth of the 1960s is just a follow on from WWII then I disagree. While the 1947 to 1970/71 period is labeled the Great Expansion, the growth of the 1960s can be distinguished in several ways from the growth of the 1950s. The most obvious is what I said about the difference in growth rates – the 1960’s rate accelerates over the 1950’s rate and the 1960s rate of growth is more sustainable (over 9 years) whereas the 1950s was up and down. And another is looking at trade during the 1950s and comparing it to the 1960s – there is a very noticeable pickup in trade both in the U.S. and in Europe by the late 1950s and this expands considerably throughout the 1960s by factors of two (in Europe) and three or more in the U.S. by the mid-1960s before the Vietnam War kicks in.

      And your point about unexploited opportunity is another thing that distinguishes the ‘60s from the ‘50s. The 1950s takes advantage of capital investment (as a percentage of GDP) in comparison to the 1960s; but, it is the R&D spending as a percentage of GDP (by the government in particular, it starts to triple from the mid-1950s to the mid-1960s in comparison to the first half of the ‘50s) that will have a big payback during the 1960s and after.

      The fact that the 1960s is building on the success of a previous period is natural for any period of growth, but should not be taken as it being completely dependent upon that period. The 1920s was also a great period for economic expansion and it followed a great war buildup (along with a short post-war depression); but, its growth utilized technological discoveries from the 19th Century (like electricity and motor engines) with more modern management techniques for organizing work and produced some pretty good growth. The generation that went through the experience of WWII (including the big industrial ramp up and full employment with an unemployment rate during 1944 that some months was less than 1%) is the same generation that is responsible for the growth rate in the 1960s. It is a generation that put emphasis on productivity over efficiency; whereas today we put the emphasis on efficiency and stability (price stability) and tolerate lower growth. And that emphasis would be one of the underlying causes of the inflation that would follow as the U.S. growth rate of productivity started to decline.

    2. "if you are implying that the growth of the 1960s is just a follow on from WWII then I disagree."

      For me the operative word there is "just". In the 1960s the economy was still reaping benefits from the technical advances of the war. In addition government spending on research in the fifties and sixties and spending on the interstate highway all helped juice growth.

    3. The 1960s economy, and our economy today, still reaps the benefits from the technical advances of the 19th Century -- but why does the growth rate of the '60s accelerate in a way the '50s did not? And why can't we at this time get growth rates anywhere near what we did in the '60s, the '80s, or the '90s?

      R&D spending picked up by the mid-60s but that too increased at an accelerated rate through the mid-60s (before the Vietnam buildup) and beyond. The spending on the interstate highways started in the '50s, but that spending continued through the '60s and into the '70s. You can say the same thing about suburbia being under development, along with shopping malls, from the '50s and through each decade that follows.

    4. https://fred.stlouisfed.org/graph/?g=7x63

      That does look like an acceleration to me -- and 15 years after WWII.

    5. Not really an acceleration, but there is a pattern:

      RGDP per capita growth year over year (by quarter):
      Max - 1950 - 4th Quarter - 11.5%
      Min - 1958 - 1st Quarter - Neg 4.5%
      Average - 2.50%

      Max - 1965 - 4th Quarter - 7.2%
      Min - 1961 - 1st Quarter - Neg 2.3%
      Average - 3.13%

      On average there was a 0.61% increase in average real growth comparing the 1950's and the 1960's. What is more noticeable is the volatility of that growth.

      The 1950's was more boom / bust - including a nasty recession in 1958.

      The growth of the 1960's was more stable - only three quarters of negative growth in the ten years from 1960-1970.

      I believe that the U. S. economy was weening itself from a wartime economy through the 1950's. And the Interstate Highway Act wasn't passed until 1956 - most of the gains from it didn't occur until much later.

    6. Not an acceleration???

      Using your data -- 3.13% to 2.50%, that's a 20% to 25% difference in growth depending what you are using for the base year for comparison (the '50s figure or the '60s figure).

      Reading off the graph I posted to compare economic expansion from trough to peak:
      1950s -- 1949/4th Qtr = $13,346 to 1960/3rd Qtr = $17,380
      42 quarters, 2.88%
      1960s -- 1960/4th Qtr = $16,938 to 1969/3rd Qtr - $23,332
      36 quarters, 4.19%
      4.19% to 2.88%; that's a 31% to 45% difference depending on what you use for the base year.

      Really!!! That's a fact. What you or I want to call it is an opinion. I call it an acceleration.

    7. Another thing that distinguishes the growth of the 1960s from the growth of the 1950s is the expansion of industrial production capacity along with utilization – both decades just about double production capacity; but, it is the 1960s running at 90% capacity utilization by the mid-decade that cannot keep up with the expanding demand – domestically and internationally.

  9. We live in a world where scientific knowledge is increasing at 8 to 9% per year, compounded. This exponential rates means new ideas are possible at a rapidly increasing rate. Meanwhile all new ideas interact with all existing ideas, creating new possible combinations with a factorial rate of increase (faster growth than exponential).

    The question becomes why aren't all these unseen opportunities being exploited and creating real jobs?

    1. "The question becomes why aren't all these unseen opportunities being exploited and creating real jobs? "

      (1) the exponential growth is not weighted by the importance of the extra knowledge (what does it matter if the number of known digits of pi doubles every two years)
      (2) related to (1) some of the discoveries are so esoteric that there market opportunity is very small.
      (3) the patent system, particularly as it relates to digital / software issues, has become an impediment to growth.

  10. To go back to the original point of the post – how to get growth back into the economy?...and how to do it with increased productivity? I still say the 1960s is a good model and we can incorporate what we have learned since then.
    1. We now have free capital flows internationally – we didn’t then.
    2. We now have floating exchange rates – we did not then.
    3. We now have much better use of monetary policy – it was very inconsistent back then.
    4. Back then there was better use of fiscal policy – does not get much use now.
    5. Back then the structural makeup of the economy put more emphasis on the higher productive sectors of the economy – industrial/commercial sectors – over the consumer sector. It has been the reverse for several decades now.
    6. Government deficits and trade deficits (if any) were very modest back then – they run around 5% of GDP now, and the U.S. gets over 50% of the world financial inflows, with about 25% of those assets in financial instruments like government treasuries, currency, and their equivalents, primarily for safety/security/stability.

    In a world of free capital flows and floating exchange rates, the use of monetary policy to stimulate the economy, when the dollar is the world’s primary reserve currency and has been in high demand since the Financial Crisis of 2008, is reaching its limits. All the more reason to utilize fiscal policy.

    But for the U.S. to get the best results from fiscal policy will entail, using the 1960s as a model:
    1. Restructuring the economy to emphasize the productive sectors. The U.S. doesn’t have to be a net-exporter, just do more exporting, especially of goods. We already are an excellent exporter of services – over 50% of those services utilize digital technology. We need to put more emphasis on the high-end of technology for design, R&D, testing and analysis, and manufacture.
    2. We need to upgrade of educational system to emphasize technology – like we did after Sputnik.
    3. We need to revamp our tax system – maybe a flat tax to replace graduated income taxes. Then when we wanted to have a tax cut to stimulate consumer spending it would have more impact – Bush’s big tax cuts had little effect on the lower end where the tax burden was mainly on the upper end.
    4. And in our globalized financial world where over one trillion dollars gets moved around every business day, and after the results of the Financial Crisis of 2008, I suspect that the allocation of capital to the needed areas of the world where productivity would be in more uplifting (than it is already) sectors is somehow missing the mark.

    If we took a lesson from the ‘60s and the Greatest Generation to put a little more emphasis on productivity rather than economic stability (aka ‘efficiency’) I think we could get out of this hysteresis we seem to be in. Samuelson said, “Every good cause deserves a little inefficiency.”

    1. Vic Volpe,

      On the 1960's as a model:

      1. We need to put more emphasis on the high-end of technology for design, R&D, testing and analysis, and manufacture.

      If you are saying that Congress should direct spending in this direction, then I agree. The problem is Congress - for every project that Senator Sue wants to pass going this direction, there is Representative Joe / President Paul wanting to create a new insurance program (Medicare, Medicaid, etc.), increase unemployment benefits, or put American soldiers in some foreign country to blow shit up. Care to explain how you get the good without the bad in a representative democracy?

      2. We need to upgrade of educational system to emphasize technology – like we did after Sputnik.

      Even late into the 1960's, most technological jobs could be performed by people having at most a high school diploma. Not so these days. And so which educational system did you have in mind - upgrade primary education (like in the 1960's) or secondary / higher education?

      3. We need to revamp our tax system – maybe a flat tax to replace graduated income taxes.

      Music to my ears. But again, this runs into the same problem - Congress.

      I have a somewhat nefarious inclination - career politicians and political families could give a rat's behind about either productivity or efficiency. Having never been in a situation where falling personal productivity is a ticket to the unemployment line, politicians these days have no incentive to demand it.

    2. Political will comes from the people, not their politicians. That's one of the differences between the Greatest Generation and the Baby Boomers and Gen-Xers.

    3. Vic,

      "Political will comes from the people, not their politicians."

      And politicians are what - robots running around with fake skin and hair, aliens from a planet near Alpha Centauri?

      Shared political will comes from shared experience. Events like the Great Depression and two World Wars tend to generate that kind of shared experience.

      What is your policy prescription for that shared experience and political will?

    4. Shared experience doesn't always result in common ground. I knew two Marines who grew up together, went into the Marine Corps together (during Vietnam around 1966), were in the same squad, went out on the same patrols together and experienced the same ambushes together, and yet had different viewpoints on whether the U.S. should have/or should not have been involved in Vietnam. I heard them discussing this years later in the 1980s and what was interesting listening to them argue was that each used the same experiences to justify their position, one on one side of the argument, the other on the other side of the argument. Two people who walked in the same shoes and had two different opinions about the same experience. Both of them Baby Boomers.

  11. Hello Mr. Cochrane, I hope you get a notification about this post.

    I listened to your talk with Russ Roberts, especially the part about banks issuing equity instead of guaranteed cash accounts. This was about 46:00 - 59:00 of the podcast. "Tokens" seems to be the best word for the idea broadly, since it crosses borders of other traditional terms.

    Have you heard of Ethereum or any other cryptocurrency projects? There's significant activity in the Ethereum space on tokens, decentralized organizations and infrastructure, crowdfunding, and a multitude of digitized assets. It's a rabbit hole that I've fallen deeply into.

    Enjoyed the whole talk. Take care.


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