Z: **Inactive:** Brad DeLong--Economics Only

Greg Ip: Bernanke Breaks Greenspan Mold

Ben Bernanke sends signals that interest rate cuts are not foreordained, and that orderly markets can be maintained without cutting rates:

Bernanke Breaks Greenspan Mold - WSJ.com: The Fed historically has had two major economic duties. Maintaining financial stability is one. Controlling inflation while preventing recession is the other. To Mr. Greenspan, market confidence and the economy's growth prospects were so intertwined as to make the Fed's two duties almost inseparable. He cut rates after the 1987 stock-market crash and the near-collapse of hedge fund Long-Term Capital Management in 1998 to prevent investor reluctance to take risks from undermining the nation's economic growth.

By contrast, Mr. Bernanke distinguishes between the central bank's two functions. So, on Aug. 17, the Fed cut the interest rate and lengthened the term on loans to banks from its little-used discount window in hopes banks would use the window -- or at least the knowledge it was available -- to lend to solid borrowers having trouble getting credit amidst the market turmoil. The action was aimed at restoring the normal functioning of disrupted credit markets, not primarily at boosting growth. The Fed, meanwhile, hasn't cut the far more economically important federal-funds rate, charged on loans between banks, which is the benchmark for all short-term U.S. borrowing costs.... "There's no doubt they were trying to draw a distinction between using the main tool of monetary policy, which is the federal-funds rate, and aiming the discount rate at restoring the plumbing," says Alan Blinder, a former Fed vice chairman....

Neither Mr. Bernanke nor his closest colleagues, some of whom served under Mr. Greenspan, believe there ever was a "Greenspan put," a reference to a contract that protects an investor from loss. Yet officials acknowledge the perception that the Fed has bailed out investors in the past. When the stock market crashed in 1987, Mr. Greenspan, then on the job for just two months, used aggressive open-market operations -- buying and selling government securities -- to pump banks full of cash, which caused the federal-funds rate to fall to about 6.75% from 7.25%. His priority was to keep banks well supplied with cash so that strapped securities dealers wouldn't fail for lack of financing....

Al Broaddus, research director and later president of the Federal Reserve Bank of Richmond during Mr. Greenspan's tenure, says Mr. Greenspan's response in 1987 was right. "A 20% drop in the stock market was a clear threat to economic conditions." But he says that in 1998, he and some others were skeptical of the need for such drastic action to deal with market instability. "If we could have argued for something like Bernanke is doing this time as opposed to three funds-rate reductions, we might have done that"...

NOOOOOOOOOO!!!!!!!!!!!

It is always a mistake to surf over to *National Review*. Always: >Pour in the Cash [Larry Kudlow]: [M]y campaign to get the Fed to permanently inject new cash into the banking system and deal with the dysfunctional commercial paper market — as well as the general credit freeze-up. There’s housing price deflation... commodity deflation.... Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent. There’s the deflation of loan values, both CDOs and CLOs. >And there’s the deflation of the Treasury bill rate from 5 percent to 4 percent... Does Larry Kudlow really not know that three-month Treasury bills are worth 98.76 when the bill rate is 5% and are worth 99.01 when the bill rate is 4%? That the prices of Treasury bills rise--hardly a sign of "deflation"? Can he really be that ignorant? Can he really be that thoughtless?

Department of "Huh?"

Eric Hobsbawm, Age of Empire, p. 50:

The world merchant marine, whose growth roughly indicates the expansion of the global economy, had remained more-or-less static between 1860 and 1890. Its size fluctuated between 16 and 20M tons. Between 1890 and 1914 it almost doubled...

But the fleet of 1860 is a sailing fleet. The fleet of 1890 is a steam fleet. What with the changability of the wind, a steamship can sail about three times as fast as a sailing ship. the 20M tons of 1890 had three times the cargo-carrying capacity of the 20M tons of 1860.

Slouching Towards Utopia? The Economic World of the Twentieth Century: Chapter 7.2: The World in 1900: Poverty

7.2: The World in 1900: Poverty

Poverty

Let us begin with how poor the world was in the last generation of the nineteenth century. In some ways the world economy at the start of the twentieth century was still remarkably preindustrial. Most human beings still earned their bread out of the earth by the sweat of their brow. Most human beings could not read. Most human beings had not seen a steam engine up close, or travelled in a railway train, or spoken on a telephone, or lived in a city. For most human beings life expectancy was still low--little higher than it had been in most parts of the world since the neolithic revolution. At the start of the twentieth century Germany was the world's third superpower, more powerful and more industrialized than any other nation save Britain and the United States. When Adolf Hitler's Nazi Germany went to war against France in the spring of 1940, four-fifths of the wheeled and tracked vehicles in its army were powered by horses. And mules.

Even where things were different in the rapidly-growing half-industrialized core of the world economy, there was still a sense in which what we would call modern life was a thin and new crust on top of older patterns that still owed much to traditional agrarian and commercial patterns. Great Britain was the economic heart of the late nineteenth-century world. It was not the richest country in the world--its settler colonies of Canada and Australia and its ex-settler colony of the United States were richer because of their large farm and ranch sizes and their abundant natural resources. Half a continent will, said economic historian J.H. Clapham speaking of the United States, in the end raise more coal and melt more steel than one small densely-populated island. But the relative wealth of Canada and Australia and the United States at the end of the nineteenth century was due as much to human and animal muscles and lucky geography as to industry.

In Great Britain alone was the economy primarily industrial at the turn of the twentieth century. And even in Great Britain the veneer of modernity was little more than a veneer. It was true that the share of the labor force employed in agriculture was dropping toward 15% at the start of the twentieth century. The eve of World War I saw agriculture account for only twelve percent of the British labor force; while manufacturing and construction accounted for 38%; and distribution and services for 32%. But a quarter of Britons were still illiterate as late as 1870. Primary school enrollment did not become universal until the eve of World War I. Life expectancy at birth was still fifty years or less. And less than five percent of the population went to secondary school. Britain’s--precocious--decline in the share of the labor force in agriculture suggested an economy more advanced, more industrialized, and more rich than was in fact the case.

And Britain was by far the most advanced and industrialized of the world’s economies. In the United States, and in Europe outside of Britain, farmers still made up the largest single occupational group. More than half the population still lived in the country, farming the land or providing the basic goods and services that farmers needed. Agriculture was still a very substantial share of GDP in the late-nineteenth century. It was only halfway through its long decline to its present role as a very small share of economic activity in industrialized economies. In the American west, and in the other countries that Arthur Lewis named "regions of European settlement"--Canada, Australia, New Zealand, and Argentina--farming was not only the core of the economy but farmers were relatively rich, both compared to those dwelling in the cities and compared to those who had remained in Europe.

The eve of World War I still saw more than one out of three Americans at work at work in agriculture, and one in thirty at work in mining. And with the exception of Belgium, other European countries were much closer to the American than the British pattern in their distribution of the labor force between town and country, and among sectors. This turned out to have powerful implications for politics as World War I drew closer: too much political influence was still exerted by agrarian landlords who saw themselves as the descendents of knights who fought for their kings with their swords, and proved their worth through battle.

Many of the processes that have blossomed since to make our industrial--post-industrial--economy were clearly underway by the start of the twentieth century. But they were for the most part only seedlings. In what matters most, in the warp and woof of everyday life, our counterparts in the industrial core of the world economy around 1900 still had more in common in their styles of life with their predecessors of 1600 or 1700 than with us today.

For example, in 1905 an anonymous American college professor--"G.H.M."--wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is his salary: he claimed that the "average college professor’s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about $2,000" in the dollars of that day, 1900. Yet Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year (or $451 taking account of the hazards of unemployment): $2,000 was four times average of GDP per worker at the turn of the century. In order to match turn-of-the-century professors in terms of income relative to the national average, a professor today would have to make an academic salary of $300,000–a height rarely attained, and far above any average.

The second thing to note is that our professor sees himself as a reasonable and badly underpaid man. He is not asking for what he would see as the "large salar[y], commensurate with what equal ability would bring in other lines of work ($10,000 to $50,000)"–or 20 to 100 times the then-current average level of GDP per worker. Today, 20 to 100 times average GDP per worker would be between $1,600,000 and $8,000,000 a year: the salaries of CEOS. At 60 times average GDP per worker (roughly the mid-point of G.H.M.’s range, corresponding to a salary of $2.5 million a year), we are down to less than 45000 households in today’s United States.

That an ordinary professor could feel that his talents ought, in some sense, to earn such an enormous multiple of the average income is a sign of how unequal an economy and society the turn of the twentieth century U.S. was. We have not yet meade it back to Gilded Age heights of inequality. Yet as this professor goes through his budget, he expects his readers to understand that his family is indeed strapped for cash and cannot support an appropriate and tolerable lifestyle. And what strikes us is how poor that start of the twentieth century century upper-class genteel lifestyle is. G.H.M.'s feeling of being sharply constrained by material necessity is real: as this professor goes through his budget, he expects the highly-literate and elite readers of the Atlantic Monthly to nod and agree (and we modern readers do indeed nod and agree) that his family is strapped for cash.

"We must pay $25 [at 1900 prices] a month for even a passable servant"; that is $300 a year. Add to that $10 a month for laundry, for the "servants will do no laundry work." $1 a month for haircuts. $2 a month for a gardener. On personal servies alone we are up to $445 a year, and the good professor sees these expenditures as absolute necessities. He cannot economize on them. He has no choice but to make such large expenditures on personal service--if he does not, his household will fail to make a properly upper-middle-class impression, for the lawn must be trimmed, the house dusted, the clothes cleaned, and the children washed. And "shall we expect our wives to bear and rear children, do all of the housework, sustain their social duties, and remain well and strong" without servants? G.H.M. has no gasoline-powered lawnmower, no electric hedge clippers, no vacuum cleaner, no dishwasher, and neither a washing machine nor a dryer. Consumer durables take the place now of what took servants’ time sweat for college professors’ households (and housewives', daughters', and aunts' sweat for others) a century ago.

The professor says that his food bills average $55 year-1900 dollars a month--$660 a year, which is once again about average GDP per worker back then. enough to buy 170 pounds of veal cutlets or 500 pounds of pot roast or 1000 pounds of bread. It was hard to economize on food at the start of this century: food and fuel consume almost half of consumer expenditure for the average household in 1885, but only a fifth of consumer expenditure in 1987. G.H.M.: his food bills are roughly a quarter of his annual expenditure, while my non-restaurant food bills are less than a twelfth of mine (and I buy a lot of food at a much more advanced stage of preparation today than G.H.M. could back a century ago). Somebody spending average annual GDP per worker on pot roast today could buy not 500 pounds but instead 25000 pounds.

Professor G.H.M cannot afford to live within walking distance of campus. He cannot afford to keep a horse and carriage. So he must use one of the new technologies of the 1890s, and bicycle to work. A single case of appendicitis costs $1200--the same multiple of an average worker's income that $160,000 would be today.

Last, note G.H.M.'s plea for culture: he and his wife's long and sophisticated education "has given us a refined appreciation of the drama, and we have a knowledge of and love of the best music. The annual football game is a social event which every loyal member of the college community is supposed to attend. We cut this out long ago. Grand opera exists for us only in the memory of our German days. Let us keep the spark alive by taking our wives once a month to a cheap concert; say $1" [a month] $12 a year--perhaps 1 1/2 percent of annual per-worker spending--to to hear perhaps 18 hours of live music played by professional musicians. And how little his family gets for it! Even the wealth of 1900 feels to us like grinding poverty. And G.H.M. does believe he is near-poor: just one racing shell-length ahead of the working class, of being barely able to afford the necessities and some of the conveniences of life.

Yet before we feel too sorry for G.H.M., reflect that working-class families at the turn of the century lived much more differently from Professor G.H.M. than working class families do from his successors today. A few miles east of the anonymous G.H.M.'s college in 1905 was the steel town of Homestead, Pennsylvania. Steel jobs were good jobs at good wages--hard, brutal jobs, but good jobs that people held on to as hard as they could and crossed oceans to get.

Few households in Homestead in 1900 had running water or a hot water heater. Water came in buckets from a faucet in the street into the house, and then heat it on the stove. In the–relatively prosperous for its time–factory steel town of Homestead, Pennsylvania at the start of the twentieth century, only one in six working class households had indoor bathrooms in 1910. Half of "Slav" and "Negro" families lived in one or two room houses. Most white families lived in four room houses. And most households in Homestead in their one or two or four-room houses had boarders: male, unrelated, single workers sleeping and eating in the house. The work of the housewife thus brought income directly into the household. Remember the three farmhands in the Wizard of Oz, set in 1890s Kansas? Odds are they slept in the house with Dorothy, her Uncle, and Auntie Em--or they slept in the barn.

A quarter of American households in 1900 had boarders or lodgers (compared to two percent today). Half of American households in 1900 had fewer rooms than persons (compared to five percent today). A quarter of American households in 1900 had running water (compared to ninety-nine percent today). An eighth of American households in 1900 had flush toilets (compared to ninety-eight percent today). Less than a fifth had refrigerators, less than one-twelfth had gas or electric lights, less than one-twentieth had telephones or washing machines, and of course there were no radios or televisions or vacuum cleaners or central heating, to list just those major appliances that have greater than ninety percent coverage today.

And even if you did have a four room house, could you afford to heat more than one room of it? Many Homestead four-room houses became two-room houses--the kitchen and the bedroom--in the depths of the western Pennsylvania winter.

The diets of workers in Homestead, Pennsylvania at the turn of the century were composed primarily of meat of widely variable quality, bread, butter, potatoes, oatmeal, and tea and milk–with luxuries such as sweets added in more or less regularly. We would find the diet somewhat monotonous (however, a lot of time and effort went into Þnding different ways to make potatoes). Almost always the first luxury that a working-class family moving up would purchase would be the services of a laundress: since laundry was expensive and difficult, few working-class families could maintain upper-middle-class standards of cleanliness. How often would you take baths if the water had to brought in from an outside pump, and then heated on the stove? How often would you wash your clothes if everything had to be washed out in the sink, if the fabrics were three times as heavy and the detergents one-third as powerful as the ones available today, and if as a result the laundry was a full day’s chore? Hand laundry was not a two hour a week task. Those who could afford the resources to maintain bourgeois styles of cleanliness flaunted it. White shirts, white dresses, white gloves are all powerful indications of wealth in turn of the century America. They said "I don't have to do my own laundry and ," and they said it loudly.

As a rule married women did not work outside the home–unless they were African-American, in which case they might well do their own family’s housework and be paid for doing a share of some white family’s housework as well. Meal preparation was not a one-hour-a-day but a four-hour-a-day task. Barring a shift toward larger-scale communal or cooperative living–a shift which simply did not happen even though anticipated, hoped for, and worked for by many feminists–within-the-household production and maintenance soaked up one-third the potential adult work hours. It made it next to impossible for married women (unless they were quite rich, or quite poor) to have independent careers and still fulfill the social expectations of household maintenance.

Infant mortality at the turn of the century was high. One in five babies in Homestead, Pennsylvania died before reaching his or her Þrst birthday. Adult men died, too, like flies (and adult women faced substantial risks in childbirth). Accident rates in the factory were such as to leave 260 injured per year–30 dead–out of a total population of 25,000 and a steel mill working population of 5,000. Each year, five percent were injured enough to miss work for some time (although only one percent per year were permanently disabled), and 1/2 percent per year were killed in factory accidents.

You can do the math. Start to work for U.S. Steel when you are 20. There is one chance in seven that the factory will kill you before you reach 50, and almost one chance in three that the factory will disable you. Is it any wonder that life insurance–disability insurance--group lodges that provide benefits (because the company provides few)--loom so large in American working class consciousness at the turn of the century? And is it any wonder that the Þrst component of the welfare state put into place, in many parts of the United States, was workmen’s compensation? Of course, in 1910 Homestead (or in 1930 Detroit, or in Los Angeles today) the most arduous and difficult jobs were done by minorities and immigrants: in 1910 Homestead by Slavs, in 1930 Detroit by Blacks, and in 2000 Los Angeles by Hispanics. At the micro level, such groups are concentrated in the most arduous and lowest-paid jobs because they are poor, because they have limited other options.

Most of the Homestead workforce only worked six days a week: for four out of five workers, the mill was shut on Sundays. U.S. Steel viewed this--shutting most of the mill on Sundays–as a major concession on their part, a concession that they hoped would produce large public relations benefits. From U.S. Steel’s perspective, each hour that a modern plant like Homestead stood idle was tremendously expensive. Variable costs--wages, raw materials, and transportation--made up perhaps 2/3 of total costs. The remainder were fixed: capital costs on the construction of the plant, and maintenance that had to be performed whether the plant was operating intensively or not.

Were U.S. Steel to move from two 12-hour shifts a day to one 12-hour shift, its output would be halved but its costs would be reduced by only 1/3, so total costs per ton of steel made would rise by 1/3. This was not a margin that U.S. Steel could afford. As long as it could Þnd workers willing to work the night shift, the Homestead mill (depressions and recessions apart) stayed open 24 hours a day on weekdays. And when things did change, they changed all at once-from two 12-hour shifts before and during World War I, to two 8-hour shifts (or three 8-hour shifts) during the 1920s, and during and after World War II. Yet Homestead jobs--at least Homestead jobs taken by native-born Americans--were good jobs by the standards of the United States. As historian Ray Ginger put it:

their expectations were not ours. A man who grew up on a Southern farm did not think it cruel that his sons had to work as bobbin boys [collecting spun thread in a textile mill]. An immigrant living in a tenement and working in a sweatshop yet knew that for the Þrst time in his life he was wearing shoes seven days a week...

And Homestead, Pennsylvania jobs paid well both by the standards of the United States and much more so by the standards of the world economy of the time. White households could make around $900 (of 1910 value) a year, placing them well the upper third of the U.S. population in terms of income per household in 1910. Relative to what could be earned by people of similar skill levels anywhere else in the world, a job in the Homestead mill was a very attractive job. Even the unequal America at the turn of the century was a very attractive place compared to the rest of the world. America was exceptional. In spite of the hours, in spite of the risk of death or injury, in spite of the working conditions, these were very good jobs by international standards: jobs worth moving 7,000 miles for, from Hungary or Lithuania to suburban Pittsburgh. For the economy of the late nineteeth century was for the first time in human history a truly global economy, filled with long-distance trade and migration, so people could take advantage of the opportunities opened up by industrialization.

Slouching Towards Utopia? The Economic World of the Twentieth Century: Chapter 7.1: The World in 1900: The View from 1900

7.1: The World in 1900: The View from 1900

The View from 1900

What did the world look like in the last generation of the nineteenth century? It was a much emptier world: 1.2 to 1.5B people instead of our 6.4B. It was a much poorer world--of the 1.2B people in 1870 perhaps 1.0B lived like our preindustrial ancestors because they were our pre-industrial ancestors. It was a much less technologically-advanced world: the technological-industrial frontiers of that age were the oil well, the internal combustion engine and the electric light. Nevertheless, six processes were ongoing--not, from out perspective, in full swing but definitely ongoing--that were changing the world: industrialization, urbanization, globalization, marketization, colonization, and democratization.

Let's for a moment take a broader view, and pretend we are not just studying the past of our great-grandparents but take the perspective of a seventh-millennium professor teaching his or her class (or, perhaps more probably, downloading avatars into xe’s students’ personal AIs), with a very limited amount of time and attention span in which to flag key concepts and ideas. What would such a professor think were the things that students should remember about the world economy at the start of the twentieth century?

At most, seven things:

First, that the world at the start of the twentieth century–even the most advanced economies at the start of the twentieth century–were very, very poor relative to how they would be at the century’s end. But that was about to change.

Second, that the spread of ploughs that pulled themselves and looms that wove by themselves was about to end the pre-industrial era, and promise to make the world amazingly rich by all previous standards.

Third, that the ten thousand years in which people had lived largely in small groups in villages was about to end: people were starting to live in large groups in cities.

Fourth, that in the late nineteenth century transportation costs had finally fallen low enough and transport speeds had become high enough to make mass intercontinental shipment of goods and people possible: a global economy and, because of telegraph and all the rest, a global polity too. This fall in transportation costs had for the first time created the possibility of a global economy–an economy in which movements of people and goods across oceans and between continents were central to how the economy worked, rather than mere precious and luxury froth on the surface of a deep ocean.

Fifth, that this global economy was on its way to becoming a global market. The era in which goods were either consumed at home, consumed by you relatives, traded among your neighbors, or offered up to keep the thugs with spears or the thugs with quills from killing you was also coming to an end. Supply and demand would rule--which does not mean that thugs would not use force to manipulate supply and demand.

Sixth, that the fall in transport costs and rise in transport speeds had come about when the military-force gap between the North Atlantic and the rest of the world was at its maximum--which meant imperialism, formal or informal, and colonialism, open or masked.

Seventh, that the people were standing up politically. In proportion as populations became urbanized and as rural populations became commercialzed and plugged into the global communications network, politics became democratized: rulers found themselves depending in fact as well as in noble flights of fancy on the consent of the governed--a consent that could be extracted for a while at gunpoint or gramophonepoint.

Much of the economic history of the several decades around 1900--the period immediately before World War I--can be read as the working-out of the economic, political, and technological logic of the–relatively sudden--creation of the first true global economy. In the long run, however, the patterns of migration, of international investments, of the international division of labor, and of economic growth established in the decades before World War I would not last. They were destroyed by wars, politics, and changes in technology in the three decades after 1914. When the global economy and polity was knit back together in the decades after World War II, it was knit back together in a different pattern–and now it is reweaving itself into yet a different pattern still.

Hoisted from Archives: Upper-Class Living Standards in 1900

The past is a different country. Even the relatively recent past of, say, a century ago is a very different country.

In 1905 "G.H.M.", an anonymous college professor, wrote a four-page article for the Atlantic Monthly in which he pleaded for more money for college professor salaries, and claimed to be vastly underpaid. The first thing to note is the relative level of professorial salaries back then: he claimed that the "average college professor’s salary"--the salary that he saw as clearly inadequate and unfairly low--"is about $2,000." Stan Lebergott's estimates in the Historical Statistics of the United States are that the average annual earnings of an employee in America in 1905 were $490 dollars if employed for the entire year--or $451 taking account of the hazards of unemployment. What G.H.M. says is the average college professor's salary is more than four times annual average earnings of the time.

Today's professors don't make such large relative salaries (except in business, law, and medical schools). In order to match turn-of-the-century college professors in terms of income relative to the national average, a professor today would have to make an academic salary of roughly $250,000--a height far above any professorial average, and one attained only by academic celebrities.

The second thing to note is that our professor sees himself as a reasonable and badly underpaid man. He is not asking for what he would see as the "large salar[y], commensurate with what equal ability would bring in other lines of work ($10,000 to $50,000)"--or 20 to 100 times the then-current average level of GDP per worker, the equivalent today of between $1,100,000 and $5,500,000 a year. At 50 times average GDP per worker (roughly the mid-point of G.H.M.'s range, corresponding to a salary of $2.5 million a year), we are down to perhaps 4000 households in today’s United States (according to Piketty and Saez (2001)). That an "ordinary" professor could feel that his talents ought, in some sense, to earn such an enormous multiple of the average income is a sign of how unequal an economy and society the turn of the twentieth century U.S. was. Yet G.H.M.'s feeling of being sharply constrained by material necessity is real: as this professor goes through his budget, he expects the highly-literate and elite readers of the Atlantic Monthly to nod and agree (and we modern readers do indeed nod and agree) that his family is strapped for cash.

The first large expense G.H.M. lists is for personal services: "We must pay $25 a month for even a passable servant," and add to that $10 a month for laundry (for the regular "servants will do no laundry work") $1 a month for haircuts, and $2 a month for a gardener. Already, on personal services alone, we are up to $445 a year--the average annual earnings of a manufacturing worker in 1905.

G.H.M. offers two rationales for these large personal-service expenditures. The first is that they are necessary to keep the load of domestic work from sending his wife to an early grave. "Shall we expect our wives to bear and rear children, do all of the housework, sustain their social duties, and remain well and strong?"

The second rationale is that these expenditures are required for him to face the world without shame. For the professor, however, these expenditures on personal services are completely non-negotiable. If he doesn't spend, his household will fail to make a properly upper-middle-class impression: the lawn must be trimmed, the house dusted, the clothes cleaned, and the children washed. He has no gasoline-powered lawnmower, no electric hedge clippers, no vacuum cleaner, no dishwasher, and neither a washing machine nor a dryer. Consumer durables take the place now of what took servants' sweat (at least for college professors' households) a century ago.

G.H.M.'s food bills average $55 a month on food--enough back then to buy 170 lbs. of veal cutlets (present market value perhaps $1000), or 500 pounds of chuck roast (present value perhaps $1200), or 1000 lbs. of bread (present value perhaps $1300). Note that $55 a month works out to be $660 a year, again considerably more than a year’s average GDP per worker. G.H.M. spends more than 100% of an average worker's budget on food alone. In general it was hard to economize on food at the start of this century: food and fuel consume almost half of consumer expenditure for the average household in 1885, but only a sixth of consumer expenditure today. It is the same for G.H.M.: his food bills are roughly a quarter of his annual expenditure, while my non-restaurant food bills are less than a twelfth of mine (and I buy a lot of food at a much more advanced stage of preparation today than G.H.M. could back a century ago).

A third thing to note is the cost of (effective) medical care: $1200 to treat a single case of appendicitis. That's nearly three years' worth of an average worker's income--the same share of GDP per worker then that $160,000 would be today. Appendicitis today is a serious illness--but think what it was like before antibiotics, before laproscopy.

And a fourth thing to note is G.H.M.'s plea for culture: he and his wife's long and sophisticated education "has given us a refined appreciation of the drama, and we have a knowledge of and love of the best music. The annual football game is a social event which every loyal member of the college community is supposed to attend. We cut this out long ago. Grand opera exists for us only in the memory of our German days. Let us keep the spark alive by taking our wives once a month to a cheap concert; say $1." $12 a year--perhaps 1 1/2 percent of annual per-worker spending--to to hear perhaps 18 hours of live music played by professional musicians. And how little his family gets for it!

The overall impression to us is one of grinding poverty. And the overall feeling that G.H.M. has is of near-poverty--of being just one racing shell-length ahead of the working class, of being barely able to afford the necessities and some of the conveniences of life.

Yet according to GHM the average college professor stood in 1905 in roughly the same relative position in the distribution of income in America then as somebody in roughly the 99.5 percentile does today...

G.H.M. (1905), "What Should College Professors Be Paid?" The Atlantic Monthly 95:5 (May), pp. 647-50.

G.H.M. (1905), "What Should College Professors Be Paid?" The Atlantic Monthly 95:5 (May), pp. 647-50.

A great deal has been written of late, especially in the annual reports of college presidents, regarding the inadequacy of the compensation received by university teachers. The writer, to whom the question is one of vital importance, has seen many of these general statements, but has failed to find any which has taken up the matter in conclusive form. This he hopes to do here concisely.

Primarily the question is one of standard of living. If a grocery clerk can maintain his family in a suitable degree of decency and comfort on seventy-five dollars a month, have we a right to expect that a college instructor can do the same? The answer to this involves the demands which society makes upon the respective individuals.

To get at this point the writer analyzed the itemized household accounts which his wife has kept for the past nine years, during which time he has been connected with one of our large and wealthy universities. Two years were spent as an instructor, two as assistant professor, and the next five as associate professor.

Summing up his total expenditures for these nine years, and in like manner his salary for the same period, he finds his expenditures have been to his salary in the ratio of 2.1 to 1.

His average annual expenditure has been $2794.27.

His average salary has been $1328.15

For the privilege of teaching he has paid the difference, of $1466.12 annually, from private means.

Even the unbusinesslike professor must pause before such a state of affairs, and try to fathom the reason for this discrepancy, when his firm belief is that he is living on as low a scale of economy as is possible for him in his position.

In order to find out where the bad management might be, -- if bad management there was, -- he divided his expenditure account into thirty-one separate items, arranged in tabular form under the following heads: --

1. Household Furnishing and Repairs.
2. Groceries, Meat, Fruit, Vegetables, etc.
3. Servants.
4. Fuel.
5. Light and Water.
6. Gardener and Grounds.
7. Laundry.
8. Taxes.
9. Life Insurance.
10. Fire Insurance.
11. Rent, or Interest on House and Lot.
12. Bicycles and repairs.
    Horse, care and feed.
13. Doctors and Dentists.
14. Hospitals, Nurses, Drugs.
15. Death Expenses.
16. Legal Services.
17. Interest on Borrowed Money, for running expenses.
18. P.O. Box, Postage, Stationery, Telegrams, Telephone, Express, etc.
19. Newspapers, Books, and Periodicals.
20. Clothing, Dry Goods, Shoes, etc.
21. Learned Societies and Social Clubs.
22. University Gifts and Supplies.
23. Typewriting, Printing, and Mimeographing.
24. Children's Tuition and Pocket Money.
25. Subscriptions and Charity.
26. Theatre, Concerts, Athletic Sports
27. Christmas and other Gifts.
    Entertainment of Friends.
28. Wine, Beer, Tobacco, Candy, and other Luxuries
29. Personal and Toilet Supplies
30. Business and Recreation Trips, Hotels, R.R. Fare, Carfare, etc.
31. Family Obligations, or Payment of Educational Debt.
32. Savings, other than Life Insurance, looking toward old age.

He believes that, assuming that a college professor has the right to marry and have two or three children, there is not a single one of these items which may be omitted from a consideration of expenses to cover a period of years. The whole question, then, resolves itself into this: how much per year is it reasonable to allow for each of these items?

In the community in which he lives, with a family of two adults, two children, and one servant, at the present high prices of the necessities of life, he believes that the sums he mentions are the very least upon which his household can be conducted. And he bases this belief upon a most accurate analysis of fully itemized accounts.

Taking up the items in detail: --

1. Household furnishing and repairs. This item must cover, for a period of years, the original cost of household furniture of all descriptions. In addition, it must look after natural wear, tear, and breakage of furniture, glass, dishes, kitchen utensils, rugs, curtains, bedding, etc., as well as carpentry, plumbing, and the like. It must also provide for pictures, "works of art," and household adornments in general. Does $75 a year seem excessive for this? Say $6 a month.

2. For five persons a grocery bill of $25 per month, a meat bill of $15, milk $5, fruit, vegetables, butter and eggs, $10, or a total of $55 ($11 per person), should not seem unreasonable.

3. We must pay $25 a month for even a passable servant. Shall we expect our wives to bear and rear children, do all of the housework, sustain their social duties, and remain well and strong?

4. Kitchen, fireplace, and furnace fuel will aggregate $120 per year, or $10 a month.

5. Light and water average with us just $5 a month.

6. The labor of a gardener one day a month is $2.

7. Our laundry averages just $10 monthly. Our servants will do no laundry work.

8. An investment of $5000 in house and lot, together with personal property and poll tax, makes this $10 a month. If there were no house owned, the rent item (11) would have to be increased.

9. To protect the family of a man who is not in a position to save, $5000 life insurance is not too much. The monthly premium on this amount, assuming a twenty-payment ordinary life policy, will be $10.

10. $3000 insurance on house, and $2000 on personal property, makes $18 per year, or $1.50 a month.

11. Six per cent on $5000 invested in house and lot is $300 annually, or $25 a month. This does not provide for depreciation, maintenance, and repairs. No desirable house on the campus can be rented for less than $35.

12. Not caring to pay so large a rent, we live off the campus and use bicycles. Their depreciation and repairs average $2 a month. Keeping a horse would cost $8 a month.

13. An experience of ten years shows us that not less than $10 a month may be set down for doctors and dentists for the family. A single attack of appendicitis in ten years will take the whole of this.

14. Hospitals, nurses, and drugs average $5 a month.

15. Since the average duration of life is about forty years, in a family of four individuals one death is to be expected every ten years. this item may be set down at $2 a month.

16. Occasional notary and minor legal services average $1 a month.

17. Certain expenses, like life insurance and taxes, being payable in large amounts, necessitate loans from the bank, which are gradually repaid. This item may be set down at fifty cents monthly.

18. For a live family with connections, postage, stationery, telegrams, telephones, express, freight, cartage, and allied items, will aggregate $3 a month.

19. Newspapers, books, and periodicals. A college professor is supposed to revel in this kind of thing. Suppose we allow him $5 a month.

20. To clothe four individuals neatly and completely cannot cost less than $180 a year, can it? This is $15 a month.

21. Learned society and social club initiation fees and dues must amount to at least $2 monthly.

22. University gifts and supplies, typewriting, etc. We are constantly going into our pockeets for small items which the university will not or cannot furnish without unbearable delay; or we may be working on lines of investigation that call for outlay. Say $1 a month.

23. In our case, our children are of the kindergarten and primary school age, so this item is only $9 a month. Older colleagues, whose children have advanced to the music lesson and preparatory school age, say they must allow $50 to $60 monthly.

24. Some families belong to a church. We all have charitable instincts, we are of that class to which the call of needy or suffering humanity appeals. May we allow $2 a month?

25. Our education has given us a refined appreciation of the drama, and we have a knowledge of and love of the best music. The annual football game is a social event which every loyal member of the college community is supposed to attend. We cut this out long ago. Grand opera exists for us only in the memory of our German days. Let us keep the spark alive by taking our wives once a month to a cheap concert; say $1.

26. We have children and friends; there are birthdays and anniversaries; as well as Christmas. Is $50 a year too much? This is $4 a month. Dinners, receptions, and the like, are not for us.

27. Occasionally a man is jaded; he has a wild desire to "blow himself." May he have $1 a month pocket money, to share with his wife?

28. Most of us can shave ourselves, but we cannot cut our own hair, although we may invert a bowl over the heads of our youngsters, and trim around the edges. Here is another $1.

29. When summer comes, a teacher is pretty nearly always exhausted. His work is trying and confining. His family requires an occasional change of air. His professional needs may call for a long journey to attend an important meeting of fellow workers, etc. For an average geographical location $100 a year, or $8.50, is not too much to cover these items. For an exceptional location, like the extreme Pacific coast, this item should be trebled.

30. The writer has known many colleagues whose educational expenses had put them under obligations which they were pledged to repay. In most cases it takes ten years to wipe out these obligations. Sometimes at the end of this period not even the beginning of discharging the debt has been made. Our college professors often come from families whose means are small. The support of aged parents or other relatives may have to be borne by them in common with their brothers or sisters. Every man is apt to have some such claim on himself or his wife. To cover these items let us allow him $10 a month.

31. A few, a very few, of our colleges pay pensions to their old and worn-out teachers. In such cases perhaps there is no need for a man to lay aside something for his old age, or to make provision for his children's start in life. Perhaps he owes a duty to his children to give them as good an education and chance as he himself received. If so, he must begin to lay aside for it. Where there is no pension, should he not aim, after thirty years of faithful service, to have $10,000 laid aside? He is not in a position to know of places where he can get large returns on his small investments. Shall we allow him $250 a year to put aside (providing there are no "exceptional and unusual" expenses that year, as there always are)? Let us say $20 per month.

SUMMARY

These are certainly not great demands. Yet, summing them up, taking the smaller of the two when two sums are mentioned, we have $262.50 monthly, or $3150 per year. Let us talk no more of bad management, -- we and our wives face an impossible problem.

CONCLUSION

If this seems extravagant to those who have to determine upon the proper minimum compensation for a man of long training, education, and refinement, we must ask them to look over these items carefully, one by one, and put down what they think a fair sum for each item for a family of the college professor's social status. Then let them foot up the total. The average college professor's salary, in the United States, is about $2000. The inevitable deduction from the table of analyzed expenses, borne out by the experience of the writer and of all his colleagues whom he has consulted, is that this must be increased sixty per cent, -- the increase to be uniform in all grades, from instructor to head professor.

If the profession of teaching is to attract the highest type of efficient manhood, a living salary must be paid. A man who devotes his life to the cause of the advancement of education must feel a "call" to it. He should be of a type which joyfully relinquishes all desire to accumulate worldly wealth or to live in luxury. Large salaries, commensurate with what equal ability would bring in other lines of work ($10,000 to $50,000) might be just, but would be undesirable, as they would tend to serve as bait to attract mercenary and lower types of men.

but a man fit to occupy a chair in a university shoul dbe paid enough to enable him to live in decency and comfort, rearing and educating his children, and retiring in his old age to something other than absolute penury.

The writer would commend a careful study of his table to all college trustees.

Can a man, whose energies are spent in so unequal and impossible a struggle to make both ends meet, maintain freshness and vigor in his work, be an inspiration to his students, and fulfill in scholarship the promise of his early years? The alternative demanded by the conditions is celibacy.

The First Wave of Globalization

A few guestimates...

Paul Krugman Says: Recessions Are Evil!

His strictures against neo-Hayekian economics. It is the best refutation of investment-overshoot-plus-frictional-adjustment around. From BobbyK's Paul Krugman archive:

THE HANGOVER THEORY: Are Recessions the inevitable payback for good times? SYNOPSIS: The constantly occuring idea of helpful recessions is incoherent and faulty

A few weeks ago, a journalist devoted a substantial part of a profile of yours truly to my failure to pay due attention to the "Austrian theory" of the business cycle--a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire. Oh well. But the incident set me thinking--not so much about that particular theory as about the general worldview behind it. Call it the overinvestment theory of recessions, or "liquidationism," or just call it the "hangover theory." It is the idea that slumps are the price we pay for booms, that the suffering the economy experiences during a recession is a necessary punishment for the excesses of the previous expansion.

The hangover theory is perversely seductive--not because it offers an easy way out, but because it doesn't. It turns the wiggles on our charts into a morality play, a tale of hubris and downfall. And it offers adherents the special pleasure of dispensing painful advice with a clear conscience, secure in the belief that they are not heartless but merely practicing tough love.

Powerful as these seductions may be, they must be resisted--for the hangover theory is disastrously wrongheaded. Recessions are not necessary consequences of booms. They can and should be fought, not with austerity but with liberality--with policies that encourage people to spend more, not less. Nor is this merely an academic argument: The hangover theory can do real harm. Liquidationist views played an important role in the spread of the Great Depression--with Austrian theorists such as Friedrich von Hayek and Joseph Schumpeter strenuously arguing, in the very depths of that depression, against any attempt to restore "sham" prosperity by expanding credit and the money supply. And these same views are doing their bit to inhibit recovery in the world's depressed economies at this very moment.

The many variants of the hangover theory all go something like this: In the beginning, an investment boom gets out of hand. Maybe excessive money creation or reckless bank lending drives it, maybe it is simply a matter of irrational exuberance on the part of entrepreneurs. Whatever the reason, all that investment leads to the creation of too much capacity--of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes--investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover.

Except for that last bit about the virtues of recessions, this is not a bad story about investment cycles.... But... [w]hy should the ups and downs of investment demand lead to ups and downs in the economy as a whole?... [T]he key to the Keynesian revolution in economic thought--a revolution that made hangover theory in general and Austrian theory in particular as obsolete as epicycles--was John Maynard Keynes' realization that the crucial question was not why investment demand sometimes declines, but why such declines cause the whole economy to slump.... As a matter of simple arithmetic, total spending in the economy is necessarily equal to total income.... [I]f people decide to spend less on investment goods, doesn't that mean that they must be deciding to spend more on consumption goods--implying that an investment slump should always be accompanied by a corresponding consumption boom? And if so why should there be a rise in unemployment?

Most modern hangover theorists probably don't even realize this is a problem for their story. Nor did those supposedly deep Austrian theorists answer the riddle. The best that von Hayek or Schumpeter could come up with was the vague suggestion that unemployment was a frictional problem.... But... why doesn't the investment boom--which presumably requires a transfer of workers in the opposite direction--also generate mass unemployment?...

A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time. Yet, for all its simplicity, the insight that a slump is about an excess demand for money makes nonsense of the whole hangover theory. For if the problem is that collectively people want to hold more money than there is in circulation, why not simply increase the supply of money? You may tell me that it's not that simple, that during the previous boom businessmen made bad investments and banks made bad loans. Well, fine. Junk the bad investments and write off the bad loans. Why should this require that perfectly good productive capacity be left idle?

The hangover theory, then, turns out to be intellectually incoherent.... Few Western commentators have resisted the temptation to turn Asia's economic woes into an occasion for moralizing on the region's past sins. How many articles have you read blaming Japan's current malaise on the excesses of the "bubble economy" of the 1980s--even though that bubble burst almost a decade ago? How many editorials have you seen warning that credit expansion in Korea or Malaysia is a terrible idea, because after all it was excessive credit expansion that created the problem in the first place?

And the Asians--the Japanese in particular--take such strictures seriously.... [T]hey are in trouble partly because they insist on making hard choices, when what the economy really needs is to take the easy way out. The Great Depression happened largely because policy-makers imagined that austerity was the way to fight a recession; the not-so-great depression that has enveloped much of Asia has been worsened by the same instinct. Keynes had it right: Often, if not always, "it is ideas, not vested interests, that are dangerous for good or evil."

Yet More Seminars to Go to This Semester

David Romer's Econ 291--unfortunately, it's W 4-5:30, and that's when Jim Powell scheduled me to teach...

Econ 291, Fall 2007:

*September 12: Raghuram Rajan, University of Chicago: "The Persistence of Underdevelopment: The Role of Constituencies and Competitive Rent Preservation" * September 26: Peter Klenow, Stanford University: "Misallocation and Manufacturing TFP in China and India" * October 10: Samuel Kortum, University of Chicago: "Unbalanced Trade" * November 7: Nathan Nunn, Harvard University: "Ruggedness: The Blessing of Bad Geography in Africa" * November 28: Enrico Moretti, University of California, Berkeley: "To Be Announced" * December 5: Emmanuel Saez, University of California, Berkeley: "Uncovering the American Dream: Inequality and Mobility in Social Security Earnings Data since 1937"

Dollar Diplomacy

Niall Ferguson praises the Marshall Plan, and cites yours truly:

Dollar Diplomacy: Books: The New Yorker: This positive reassessment echoes the argument advanced in the early nineties by Brad DeLong and Barry Eichengreen (in an article that is absent from Behrman’s bibliography). Marshall Aid was indeed vital, but more in terms of political economy than macroeconomics. It helped get the European economies through a balance-of-payments crisis, to be sure. More important, though, it helped European governments balance budgets and reduce inflation. It forced them to shift from wartime controls to free-market mechanisms. And it played an important part in moving Europe from a dysfunctional system of labor relations based on strike action and class conflict to one based on wage restraint and productivity growth. In all of this, the Marshall Plan resembled the “structural adjustment programs” the International Monetary Fund imposed on borrowers in the developing world during the nineties, but on a larger scale and with much better public relations. As Marshall had foreseen, tackling the food bottleneck was beneficial both materially and psychologically. One Dutch baker displayed a sign that read, “More than half of your daily bread is baked with Marshall wheat.” Wherever the red-white-and-blue Marshall shield could be seen, its motto resonated: “For European Recovery: Supplied by the United States of America.” The most important strings attached to such supplies were the ones tying Europe to the new American model of managerial capitalism.

Behrman goes still further, however. He also sees the Marshall Plan as having been instrumental to the process of European economic integration, presaging today’s European Union in the Organization for European Economic Cooperation. And he accepts the claim that the Marshall Plan defused potentially revolutionary situations in Western Europe and helped prevent a Communist tide from engulfing West Berlin, Italy, and perhaps even France. He has no interest in the once fashionable arguments of Cold War revisionists that the Plan was—in the memorable phrase of Stalin’s economic adviser Yevgeny Varga-—“a dagger pointed at Moscow.” If the Soviets chose to decline Marshall Aid for themselves and their clients, more fools they. The notion that Marshall and his colleagues aimed at “economic and political subjugation of European countries to American capital,” to quote another Soviet source, is presented as unworthy of serious consideration.

His is a timely book, reminding us of the good things that the United States has achieved within living memory. Not for nothing do economists call aid payments “unrequited transfers.” It is also useful to recall just how poisonously partisan Washington was after 1947, as Joseph McCarthy’s witch hunt gathered momentum. This was no golden age of cross-party consensus. Yet there is a need for caution. Historians have a duty to immerse themselves in contemporary testimony, as Behrman has clearly done. But they must also beware of uncritically accepting contemporary judgments....

Ultimately, the North Atlantic Treaty mattered more than the Marshall Plan in checking the Soviet advance. In all likelihood, then, Western Europe could have pulled through without the Marshall Plan. But it certainly could not have pulled through without the United States. At the time that Marshall made his speech in Harvard Yard, no one could be sure that all would turn out for the best in postwar Western Europe. No one could even be sure that the United States would deliver on Marshall’s pledge. All people could remember was the sad sequence of events that had followed the previous World War, when Western Europe was swept by general strikes and galloping inflation, while the United States Senate reneged on Woodrow Wilson’s “plan” for a new order based on collective security. The Marshall Plan was not the only difference between the two postwar eras, but, to West Europeans struggling to make ends meet, it was the most visible manifestation of American good will—and a mirror image of the Soviet policy of mulcting Eastern Europe. This, more than its macroeconomic impact, explains its endurance in the popular imagination. At a time when, according to the Pew Research Center, only thirty-nine per cent of Frenchmen and thirty per cent of Germans have a positive view of the United States, that is something worth remembering, and pondering.