1. Secular Stagnation in the United States in the 1930s: Why Was Alvin Hansen Wrong?
Nicholas Crafts
Secular Stagnation and Measurement Conference, Banque de France, January 16, 2017

2. Secular Stagnation 3 (possibly related) concepts
Short-medium term: neutral real interest rate negative but at ZLB (Summers, 2013)
Medium-long term: very low trend rate of growth with adverse demography, slow technological progress … so weak investment (Hansen, 1939)
Medium-long term: rapid technological progress implies persistent high unemployment because demand shortfall (Hansen, 1951) or inflexible labour market (Hansen, 1932)

3. Why Was Alvin Hansen Wrong?
Regime change stimulated strong recovery post-1933
Low investment not primarily due to demography or weak technological progress
USA had strong TFP growth from the 1920s through the 1960s

4. Source: Balke and Gordon (1986)
Real GNP in USA
1929 III
100
1933 I
68.4
1936 I
85.2
1936 II
90.6
1936 III
93.2
1936 IV
96.3
1937 I
95.9
1937 II
98.4
1937 III
98.0
1937 IV
91.0
1938 I
87.1
1938 II
88.6
1938 III
93.7
1938 IV
97.4
Source: Balke and Gordon (1986)

5. New Deal and Recovery Alphabet soup of New Deal initiatives well known
New Deal a very modest fiscal stimulus (Fishback, 2010) with adverse labour-market implications (Bordo et al., 2000; Cole & Ohanian, 2004)
But perhaps was central to changing inflationary expectations and escaping the liquidity trap (Eggertsson, 2008); mentions of inflation spike in April-May 1933 (Jalil and Rua, 2016) 5

6. Why Was 1930s’ Investment Low?
Reduction in household formation did have reduce housing starts (Hickman, 1973) but other factors more important (Field, 1992)
Adverse impact of credit crunch (Calomiris & Wilson, 2004), increased taxation of profits and dividends (McGrattan, 2012), uncertainty (Baker et al., 2015) were more important than Hansen’s slow growth story especially given strong TFP growth

7. New Growth Accounting Estimates (Bakker et al., 2015)
Improve on Kendrick (1961) in terms of better estimates of labor quality, more sectors covered, a full set of value added weights, and capital services for
This generates new (lower) estimates for TFP growth mainly because labor quality grows more quickly
It allows an accounting of sectoral contributions to TFP and as assessment of the importance of the ‘great-invention’ clusters

8. TFP Growth in the U. S. Private Domestic Economy, 1899-2007 (% per year)
0.93
0.64
1.63
1.87
2.00
2.23
0.48
0.98
1.45
Source: Bakker et al. (2015)

9. TFP Growth in the1930s (Bakker et al., 2015)
Very strong although Field (2003) exaggerated
The ‘great invention sectors’ accounted for 44% of TFP growth a large part of which came from wholesale and retail trade
Including TFP spillovers in other sectors might raise this to about 55%

10. Sources of Growth in the Private Domestic Economy (% per year)
BCW
Kendrick
BCW
Kendrick
Y/HW
2.47
2.16
K/HW
0.15
0.04
0.31
0.28 LQ
0.45
0.16
0.55
0.22
TFP
1.87
2.27
1.30
1.66
Source: Bakker et al. (2015)

11. TFP Growth in the Private Domestic Economy, 1929-41 (% per year)
1.87
Great Inventions
0.82
Electricity
0.16
Internal Combustion Engine
0.57
Rearranging Molecules
0.04
Communication & Entertainment
Spillovers
0.21
Source: Bakker et al. (2015)

12. Whence Came U.S.TFP Growth before WWII?
Key feature of the 1930s is broadly-based TFP growth; Gordon’s key clusters perform very strongly but are not the whole story
Taken together, the ‘great inventions’ outdo ICT but the strength of other sectors is remarkable to modern eyes
Rapid TFP growth pre-dates the 1930s and is based on superior national innovation system

13. Early 20th-Century National Innovation System
Traditional accounts rightly stress college and high-school education (Acemoglu, 1998; Goldin & Katz, 2008)
Second key aspect which deserves more attention is prowess at ‘creative destruction’
Micro evidence show firms with market power innovating strongly to maintain rents (Nicholas, 2003)
Macro evidence using DEA techniques shows lagging British and German manufacturing productivity performance with a persistent inefficiency handicap (Timmer et al., 2016; Woltjer, 2013)

14. Crude TFP Growth in Major Sectors (% per year)
UK,
UK,
USA,
Agriculture
0.4
2.1
Mining
-0.1
1.2
2.9
Manufacturing
0.6
1.9
3.7
Construction
0.1
1.3
0.8
Utilities
1.6
1.8
3.9
Transport & Comms
0.7
1.0
3.4
Commerce
0.5
-0.5
GDP
2.2
Sources: Bakker et al. (2015) database; Matthews et al. (1982)

15. The ‘Great Invention’ Sectors
In terms of Census classifications, Bakker et al. (2015) take these to be:
Electric Machinery, Electric Utilities Local Transit, Transport Equipment, Wholesale & Retail Trade Chemicals, Oil & Gas, Petroleum and Coal Products, Rubber Products Telephone, Spectator Entertainment

16. TFP Growth and TFP Contribution to Labour Productivity Growth, PNE, 1974-95 and 2004-12 (% per year)
0.54
ICT
11.3
0.34
Other
0.2
0.20
Source: Byrne et al. (2013)