Now, here is what I would call an amazing coincidence. In about 1960, my dear father, the late Herbert Stein, was Research Director of the Committee for Economic Development. The CED was composed of the Presidents and Chairmen of the largest corporations in America, including Ford Motor, GE, GM, US Steel, Texaco, 3 M, and just about any other large corporation you could think of.
It was founded in 1943 and 1944. The primary function was to make sure the U.S. did not fall back into Depression after the end of World War II. That was a real fear in those days. The means by which the CED was to help was by studying a number of key issues in the economy and drawing up papers about these issues and the most sensible way of addressing them.
These issues included international trade, business regulation, labor union policy, North American economic relations, defense, and many other issues.
The papers on these subjects were usually hashed out in rough form by the businessmen in meetings in New York, at which my father and several other CED economists were present and offered advice and data. My father would then — along with the other economists — write the papers’ first drafts, circulate them to the businessmen, get comments, and then write a final draft. (This process was remarkably similar to what we did in the speechwriting staff at the Nixon and Ford White Houses.)
Generally, my father did the great majority of the work, research, analysis, and drafting.
There was one economist on the staff, however, who was so outstandingly brilliant and hard-working that my father did not re-write him but instead learned from him and was thoroughly impressed by him.
That man was Edward F. Denison, a Midwesterner with genuine genius in data and interpretation.
In the summer of 1960, more or less, I was allowed to be an “office boy” in the Research Department’s office at 1000 Connecticut Avenue, Northwest, Washington, D.C. By a stroke of luck, my main task was to proofread, then mimeograph (yes, mimeograph) the seminal work that Dr. Denison had done for CED on the Sources of Economic Growth. This was my introduction to macro and it was a doozey. It was like being asked to mimeograph the beginning chapter of The Wealth of Nations.
As far as I knew then and as far as I know now, Dr. Denison’s work was the first to use actual statistics stretching back over long periods of time to show what factors acted in big or small ways to create economic growth, and which factors worked to inhibit economic growth. Bear in mind, Dr. Denison did this work with mountains of books and pamphlets, a Marchant calculator with a hand-operated crank, and a slide rule. There were no computers, no Google.
Insofar as I am aware, this work is still the Bible for what the sources of economic growth have been. And I got to read it — just for spelling errors or typos, to be sure, not in any way to comment on Dr. Denison’s work — when I was 15.
What I learned so long ago — when Ike was still President — stayed with me. Recently I did an Internet search of Dr. Denison’s work and it refreshed my mind on this crucial subject.
Now, when all of the Presidential candidates are promising to give 40 acres and a mule to every American in order to stimulate growth, when “bread and circuses” and “free stuff” and bash the corporations are the order of the day in ideas for economic growth, it might be of some use to reflect on what a sober, genuinely scientific economist who was absolutely nonpartisan (I am pretty sure he was a Democrat but a moderate Democrat, as most of the Democrats were then) thought about economic growth and where it comes from.
Education: Dr. Denison showed in great detail how more education for more people, especially technical and scientific education, made for more growth. It is vital to recall that in those days, there was no political test for what was science.
Now, if you disagree with the dominant sects in “science” about climate, you are ostracized and your work ignored. In Dr. Denison’s day, it was not science if it required the brute force of the mob to make it unassailable. To Dr. Denison, science was about making things and processes faster, cheaper, and of better quality. There were no political tests.
Likewise, in those days, education was something quantifiable. It was not whatever was politically correct. There was not one education for white people and one education for persons of color. There was just education and if you did not belong in college, you were not in college.
The application of scientific and technical advances. The education part was to lead to the technological advances: Once a breakthrough was proved to work, it was to be invoked and used. Again, this was to be done on a measurable basis. Dr. Denison, I believe, would have been surprised to see that much more efficient means of energy production, such as the use of fossil fuels, was being attacked and curtailed for reasons of political and scientific fads and fantasies in favor of taxpayer-favored solutions like solar power. He (I believe) would have considered such behavior as counterproductive in the absence of a clear need for it. He had data that showed that adopting innovation rapidly in manufacturing, agriculture, and everywhere else made for more rapid growth.
The freest possible international trade: Dr. Denison believed that if Americans could buy an equivalent good or service more cheaply from outside the U.S., we would grow more rapidly. His reasoning and data were similar to the hypotheses of Adam Smith. All Americans are consumers. Only some are workers and proprietors. If we favor consumers, there is more net income which can be used to buy new goods and services and more Americans will be employed and more dividends will be available to retirees.
Now, it’s important to note that Dr. Denison was not running for office. He did not have to cater to particular voting blocs. He just told the truth: the economy will be better off when we get the cheapest possible supplies.
He also recognized that the U.S. was an exporting power (though not large as a percentage of the economy). If we bought and invested around the world, and the rest of the world prospered, there would be more potential customers for U.S. goods and services. In those days, the U.S. was a far greater share of the global economy than it is now. Our workers had far better machinery than the rest of the world. Some would say changes since then have made free trade obsolete. I think Edward F. Denison would have said there is no alternative, and that to try to live behind tariff walls in a free trade world is to invite disaster.
Insofar as I am aware, this work by Dr. Denison, while politically taboo today, is not seriously challenged by economists. To repeat, we simply cannot be a high wage island in a world of low wage jobs unless we import cheap, add a lot of well-paid value by education and innovation, and then export. Think Apple. Low or no tariffs and a super well-trained labor force were and are what lead to growth.
The greatest degree of freedom and the most modest possible regulation: Dr. Denison was a great believer in workplace safety and clean air and water. But he also had data that excess regulation was a dead hand acting against production and innovation. He would have been staggered, disbelieving, if you told him that a President could add almost 400,000 pages (not words — pages) in the Code of Federal Regulations in seven years, as Mr. Obama has done — and Mr. Bush 43 was not far behind.
Alas, he is not here to be asked, but I suspect he would have assigned to this degree of regulation a high share of the responsibility for low growth.
Freedom of action and thought: He saw that free people, able to actuate their hopes and desires, would be far more productive than people in command economies. He saw that excessive regulation would have moved in the unwelcome direction of a command economy. In this way, Samuelson, Friedman and Hayek all converged.
Transportation and communication: Dr. Denison believed that the speedy delivery of goods and services was crucial to creating nationally integrated manufacturing and supply. Here, I believe, he would be delighted with the results of modern life. He would be amazed and overjoyed at how much more reliable and fast today’s communication and transportation are. Thank you, FedEx. Thank you, Internet.
Steady and predictable government economic policy: At the time Dr. Denison worked on this project, the whole strange notion that lowering taxes would raise revenues had not been floated in the choppy sea of ideas. In the 1940s, 1950s, and 1960s, we had far higher taxes than today’s rates, often ran surpluses, and also had extremely fine rates of growth. He would have been puzzled that we abandoned this template for an idea written on a napkin.
He was concerned that we have a balanced budget over the business cycle — an interest of my father’s as well — and that government economic policy be predictable and consistent.
He believed business should be able to plan around fiscal and monetary policy that was consistent, except in times of recession, when government deficit spending would be needed to stabilize the economy. In times of recession, he would have believed in surpluses to drain excess demand.
Anti-trust: like all major economists, he believed that monopolies were anti-growth. He would be delighted at what we have now in manufacturing, resources, and communications. He might wonder about Google and Microsoft.
There is much more to Dr. Denison’s work. Later in his life he studied growth rates of other industrial nations. He seemed to me to be saying some people are just naturally more industrious than others — for example, the Germans and the Japanese. I believe he would have been extremely impressed at what the absence of regulation and the granting of freedom of action have meant in China and throughout the East.
I do not recall that Dr. Denison wrote that government action requiring equality or government control of the wage structure would improve growth rates. That is a hot topic now, of course. It was not in those days. Yet economic growth rates were much higher then than now when the subject is red hot. I don’t know how he would have reacted to the idea that if some people are much richer than others that retards growth. He probably thought it was “unlovely,” as Frank Knight, a great economist, said, for there to be extremes of wealth. But I am guessing he would now have seen how it would inhibit growth. I may be wrong.
Of course there is much more to be said about all of this — much, much more. But my father called Dr. Denison a “model economist” and so he was. Perhaps some small measure of attention might be given to this serious scholar’s work on a subject of extreme importance: What generates economic growth and what works against it.
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