The Anti-Economist — From the February 2013 issue

Revised History

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There have been similarly damaging misinterpretations and distortions of our economic boom in the years following World War II. What caused economic growth in America during this time, when our federal government was undeniably large and active?

Tyler Cowen, a respected conservative economics professor who writes frequent columns for the New York Times, attempts to answer this question in The Great Stagnation, a small book — really a pamphlet — that made the Times bestseller list in 2011. It’s a silly, trivial book, but a representative one. According to Cowen, America’s postwar prosperity can be reduced to a few simple principles: plentiful natural resources in the early years, technological advances, and an increasingly educated population.

Is this adequate history? Howard Zinn wrote that the “chief problem in historical honesty isn’t outright lying” but the “omission or de-emphasis of important data.” In the case of America’s two and a half postwar decades, Cowen is right to note the importance of natural resources — but a balanced economic history would also note that the price of petroleum, the most important natural resource at that time, was kept artificially low. Oil consumption tripled in the 1950s and 1960s, yet prices fell because of diplomatic machinations and threats of force that maintained U.S. access to growing reserves in the Middle East. Government made the difference.

Cowen is also quite right to note the key role technological advances played in our postwar boom, but these advances, too, were often driven by government stimulus. Cowen scoffs at the “nostalgia” of such economists as Paul Krugman who advocate Keynesian spending as a way to return to full employment, but Keynesian policies drove growth in the postwar era. The Cold War and the growing political power of defense companies — Eisenhower’s “military–industrial complex” — kept defense spending at 12 percent of gross domestic product in the 1950s and 10 percent in the 1960s. Those decades also saw the implementation of enormous government-sponsored research and development projects, the building of the interstate highways, and the continuation of the G.I. Bill and other forms of tuition subsidies, all of which contributed to growth. Today, even during a major war, military spending is around 5 percent of GDP. I point this out not to argue for more military spending but to suggest how much we could afford to be investing in education, research and development, communications, and transportation infrastructure.

Cowen barely acknowledges government’s role in education, but he does at least recommend more federal subsidies of research. Central to his claims about the futility of most other government policies to enhance growth today is the assertion that such advances as the combustion engine, the commercial jet, the nation’s highways, and the Internet have been fully exploited. The “low-hanging fruit,” as Cowen terms it, has all been picked.

But none of these advances looked like easy picking before they were developed, and Cowen has no empirical reason to believe that the march of technology has ended. He is simply making a stab in the dark to justify his preferred policy of minimal government action. To this end, Cowen either doesn’t know or chooses not to tell us that the “low-hanging fruit” hypothesis was also used in the 1930s to explain the Great Depression. Alvin Hansen, a prominent Harvard economist, was the leading advocate in that era of basically the same stagnationist thesis Cowen presents today. But as we know, and as the post–World War II boom showed, he was wrong. War spending provided the Keynesian stimulus that turned the Depression’s stagnation into rapid growth. Once the economy recovered, there proved to be plenty more low-hanging fruit to be plucked.

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