------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (July 2007)
Robert Higgs, _ Depression, War, and Cold War: Studies in Political
Economy_. New York: Oxford University Press, 2006. xv + 221 pp. $35
(cloth), ISBN: 0-19-518292-9.
Reviewed for EH.NET by Hugh Rockoff, Department of Economics, Rutgers
University.
It was a great idea for Robert Higgs and Oxford University Press to
publish this collection of Higgs' papers. The volume brings together
ten papers that Higgs has published over the past two decades, which
reinterpret some of the key events of the twentieth century. Several
of these papers appeared originally in the _Journal of Economic
History_ and _Explorations in Economic History_ and will be familiar
to economic historians. Others, however, appeared in policy journals,
and economic historians may have missed them. The papers reinforce
each other, offering a coherent and stimulating view of three crucial
events in the twentieth century: the Great Depression, World War II,
and the Cold War.
The papers are arranged in chronological order. Chapter 1, "Regime
Uncertainty: Why the Great Depression Lasted So Long and Why
Prosperity Resumed after the War," argues that part of the
explanation for the persistence of the Great Depression was the
"regime uncertainty" created by the New Deal. Investment was
depressed not by the decline in income (the old
multiplier-accelerator model), high real interest rates, or other
conventional economic determinants of investment, but rather because
of "a pervasive uncertainty among investors about the security of
their property rights in their capital and its prospective returns"
(p. 5). Potential investors were afraid to commit their funds because
they did not know what Roosevelt and the New Dealers would do next.
Low levels of investment in turn depressed the economy as a whole.
This is not a new argument. Joseph Schumpeter (1962, 64-5), as Higgs
notes, and other prominent economists had made the same point. Higgs,
however, argues the point in detail, and brings in forms of evidence,
such as opinion polls, that economic historians often ignore. He
makes a strong case.
I find that papers by Higgs always lead to more questions. This is
not a criticism, but rather an indication they address important
issues. Terms like "regime uncertainty" and "security of private
property" cover a lot of ground. Were investors afraid mainly of
higher corporate taxes? Increased union power? Minimum wage laws?
Social Security? Abandonment of the gold standard? Outright
nationalization? Higgs quotes Elliot Brownlee (1996) to the effect
that it was tax policy that most concerned business. Higgs, however,
seems to be neutral on what if any policies contributed the most to
the low level of investment. Indeed, his argument seems to be that it
was all of these things together that contributed to the new regime,
and that trying to parse out the effect of particular New Deal
policies would be counterproductive. Before giving up on the
Depression era as a source of information about how policies affect
the economy, however, it makes sense to me to probe further. We want
to know which, if any, policies are likely to have substantial
unintended consequences for investment. Must we simply put the
Depression era aside?
One of the pieces of evidence that Higgs uses to make this point is a
graph of relative yields. He shows that the yields on long-term bonds
spiked relative to yields on short-term bonds (for a given rating)
when Roosevelt's anti-business rhetoric was reaching a peak. This
graph does add support to his argument, but I am skeptical that it is
as decisive as Higgs suggests. The following simple table shows the
yields on BAA corporates, AAA corporates, and long-term government
bonds. The data are from www.globalfinancialdata.com. The yields on
the private sector bonds fell during the New Deal. And the spreads
between private and public yields, which could be interpreted as the
premiums for holding privately issued securities, also fell.
Apparently, economic contractions were the really scary things for
investors in the bond market. To be sure, there are many possible
interpretations of this data. The anti-business rhetoric and actions
of the Roosevelt administration may have depressed the stock market
and accelerated the flight to safety that landed investors in the
private bond market. Large-scale government intervention could even
have been construed as a good thing for debt issued by large firms if
investors thought that these firms had now become too big to fail. My
point is simply that threats to property rights are difficult to
tease out of the financial data. I doubt that the debate that Higgs
has started on this issue is over.
Year Moody's Moody's U.S. BAA AAA
Corp. Corp. Bonds minus minus
BAA AAA govt. govt.
(1) (2) (3) (4) (5) (6)
1929 5.90 4.73 3.60 2.30 1.13
1930 5.93 4.54 3.29 2.64 1.25
1931 7.77 4.62 3.34 4.43 1.28
1932 9.25 4.99 3.68 5.57 1.31
1933 7.72 4.48 3.31 4.41 1.17
1934 6.28 3.99 3.11 3.17 0.88
1935 5.72 3.60 2.79 2.93 0.81
1936 4.75 3.23 2.65 2.10 0.58
1937 5.10 3.26 2.69 2.41 0.57
1938 5.79 3.19 2.55 3.24 0.64
1939 4.97 3.00 2.35 2.62 0.65
In chapter 3, "Wartime Prosperity? A Reassessment of the U.S. Economy
in the 1940s," Higgs challenges the notion that in World War II a
combination of high government spending and extensive government
intervention in the form of price controls, rationing, and so on
rescued the country from the Depression and allowed Americans to
enjoy guns and butter at the same time. Higgs has a good point.
Conventional economic time series point to the war economy as a kind
of economic heaven on earth. In 1944 the standard measure of
unemployment was 1.2 percent of the labor force, inflation was a
reasonable 2.21 percent (the GDP deflator), and real GDP per capita
was at an all time high, a level that would not be reached again
until 1953 (Millennial Edition of Historical Statistics). Clearly,
the numbers suggest that the policy of massive government spending
and government controls, including price controls, had worked
wonders. Higgs rightly and convincingly attacks this view. The
statistical case for economic heaven on earth is created by comparing
apples with oranges. Unemployment rates were low, Higgs insists, in
part because young men were drafted into the armed forces, price
indexes are misleading because of hidden price increases and other
distortions produced by controls, and real GDP per capita is
misleading because, among other things, it treats an intermediate
good, munitions, as final product. Every undergraduate and graduate
student of economics (and not a few of their professors) would
benefit from reading Higgs' essay (and the related essays in Chapters
4 and 5). They would learn that economists need to think about the
meaning of economic statistics. They might even learn that knowing
some economic history can help them understand the time series they
use.
Higgs' argument still leaves open the question of why so many
contemporaries, and so many historians, including historians who
lived through the period, consider it a prosperous period. One issue
that deserves more attention, I believe, is the role of savings.
Americans built up large holdings of liquid assets during the war.
These were a source of utility for their holders, even if
expectations of postwar deflation led people to overestimate their
ultimate value. Workers may have viewed jobs in defense plants,
moreover, as a way of acquiring skills that would be valuable after
the war, as an investment in human capital. (But see Casey Mulligan
(1998) for the argument that conventional economic forces cannot
explain high wartime work effort.) Even enduring the hardships of
moving to a war production center -- and Higgs rightly emphasizes the
costs of moving to and living in war production centers -- may have
been viewed as an investment that would pay dividends after the war.
Another question raised in this essay concerns Higgs' claim that we
should exclude military production from GDP on the grounds that it is
an intermediate good that contributes nothing directly to utility.
This is true for some people; I suspect it true for Higgs. It is at
least possible, however, for people to draw utility from public
expenditures: the Space Program comes to mind. One can imagine people
taking satisfaction in World War II from knowing that they were
forging the tools of victory over Germany and Japan. Surely learning
about the Liberation of Paris, and feeling that they had contributed
if only by working in a war plant, meant something to Americans of
that generation. Perhaps this is why Simon Kuznets (1945), who
generally favored excluding defense spending from GDP on the grounds
that it was an intermediate good, argued that in a period such as
World War II when winning the war was one of the primary "end
purposes" of economic life, munitions production should be included
in GDP.
The theme of measurement error, and the consequences of
misinterpreting economic data, is continued in Chapter 4, "Wartime
Socialization of Investment: A Reassessment of U.S. Capital Formation
in the 1940s." Here Higgs takes issue with the estimates of
government owned privately operated capital made famous by Robert J.
Gordon (1969). Gordon argued that adding government financed but
privately operated capital created during the war to standard
estimates of total capital helped explain what appeared to be an
otherwise unexplainable increase in total factor productivity. Higgs'
point is that wartime capital was subject to very high rates of
depreciation, rates that exceeded accounting allowances. Chapter 5,
"From Central Planning to the Market: The American Transition,
1945-47," once again takes up the issue of what GDP measures.
Official figures show real GDP per capita falling precipitously from
1945 to 1946. But Americans didn't see 1946 as a return to the Great
Depression. Economic historians can try to adjust the GDP figures.
Alternatively, they can simply say that people saw 1946 for what it
was, a year of rapid transition to postwar economic prosperity.
Altogether, Higgs mounts a powerful challenge to conventional
economic wisdom regarding the accomplishments of the Roosevelt
administration during both the New Deal and World War II.
Another major theme is the enormous cost of the Cold War and the
enormous waste in military spending programs associated with it.
Economic historians, Higgs claims, have not paid sufficient attention
to the Cold War. Higgs has made a good start on filling the gap. In
Chapter 2, "Private Profit, Public Risk: Institutional Antecedents of
the Modern Military Procurement System in the Rearmament Program of
1940-41," Higgs shows how the military went from competitive bidding
to negotiated contracts in which the government assumed most of the
risk in the summer of 1940, and never looked back. Chapter 6, "The
Cold War Economy: Opportunity Costs, Ideology, and the Politics of
Crisis," describes the cost of military spending during the Cold War,
and shows that military spending came mainly at the expense of
private sector spending not civilian government spending. Chapter 7,
"Hard Coals Make Bad Law: Congressional Parochialism versus National
Defense" tells the story of how the legendary Congressman Daniel
Flood and other politicians forced the Department of Defense to buy
anthracite coal. Some of it was shipped to Germany, a clear case of
coals to Newcastle, and some ended up simply stored in the U.S. in a
great heap. Chapter 8, "Airplanes the Pentagon Didn't Want, but
Congress Did," tells a similar story about aircraft production that
was kept going long after it was clear that there were more effective
ways of spending defense dollars. Higgs writes well and does a good
job of pointing out the underlying forces that distort defense
spending. And it is not as if the lessons have been learned. The same
forces are at work producing the same distortions in spending.
Chapter 9, "Profits of U.S. Defense Contractors," shows that
investing in defense contractors was very profitable over the years
1970-1989. Indeed, combining Higgs' data with the earlier work by
George Stigler and Claire Friedland (1971) leads to the conclusion
that investing and holding stocks of defense contractors was a good
strategy throughout the Cold War. Chapter 10 "Public Opinion: A
Powerful Predictor of Defense Spending," shows that an index derived
from public opinion polls does a good job of predicting national
defense spending. Higgs is justifiably cautious about this finding,
and is quick to point out that public opinion was only the proximate
determinant of defense spending. Ultimately, public opinion was
shaped by the arguments made by politicians, experts, and the press.
And, of course, public opinion may be misled by experts who claim to
have special information not known to the general public, a prescient
observation.
This is an important book. Economic historians, no matter their area
of specialty, and no matter their ideological preconceptions, should
be familiar with Higgs' arguments. You will not learn any new
econometric techniques with which to wow your friends from reading
this book. You will not find any data that you can use to quickly
turn out a note for a journal. You will find, however, an original
and thoughtful exploration of what the great events of the twentieth
century tell us about the appropriate role of the government in the
economy.
References:
Robert J. Gordon, 1969. "$45 Billion of U.S. Private Investment Has
Been Mislaid" _American Economic Review_, Vol. 59, No. 3 (Jun.):
221-238.
Simon Kuznets, 1945. _National Product in Wartime_. New York,
National Bureau of Economic Research.
Casey B. Mulligan, 1998. "Pecuniary Incentives to Work in the United
States during World War II," _Journal of Political Economy_, Vol.
106, No. 5 (Oct.): 1033-77
Joseph Schumpeter, 1962. _Capitalism, Socialism and Democracy_. New
York: Harper Torch Books.
George Stigler and Claire Friedland, 1971. "Profits of Defense
Contractors," _American Economic Review_ 61 (4): 692-4.
Hugh Rockoff is a professor of economics at Rutgers University and a
research associate of the National Bureau of Economic Research. His
paper written with Leonard Caruana, "An Elephant in the Garden: The
Allies, Spain, and Oil in World War II," is forthcoming in the
_European Review of Economic History_.
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