On Thursday, April 10, Joshua Hausman ’05, associate professor of economics and public policy at the University of Michigan, delivered a talk on how the markets for cars and houses influenced the United States macroeconomy in the 1920s and 1930s. The talk was this year’s Bernie Saffran Lecture, in honor of longtime Swarthmore Economics Professor and Chair Bernie Saffran, who was Hausman’s professor while he received his undergraduate degree from Swarthmore.
Hausman began the lecture by reflecting on his relationship with professor Saffran when he was a student at Swarthmore. “I was one of his last students. He was really an incredible man who had a large influence on me. I took Econ 001 with Bernie, and it really got me hooked on economics,” he said. “I recall sitting in his class and realizing that this way of thinking about the world … was called economics, and that really set me on the course to becoming an economist.”
Before starting his description of the macroeconomic impact of cars and houses, Hausman highlighted his view of the value of economic history as a source of data for macroeconomic analysis.
“For many microeconomic questions, there’s a lot of current data that you can use. So if you want to know what the effect of education on wages is, you could probably find thousands of recent observations to look at,” Hausman said. “If you want to understand the effect of financial crises on unemployment, you’re not going to have a lot of recent observations to work with, and you’re almost inevitably going to end up doing some economic history.”
When comparing the 1920s and 1930s to today, Hausman sees a number of parallels, such as the presence of new technologies, societal change, and new countries rising to prominence in the international economy. “The 1920s were a new era for the international economy in which Britain was no longer able to play a leading role and the U.S. didn’t yet want to play a leading role,” he said. “The obvious analogy to today is to the U.S. and China, where the U.S. would be like Britain in 1920 as the declining power.”
During the period between the World Wars, the United States economy was more volatile than either before or afterwards. This volatility appeared in unemployment rates, the gross national product, and inflation rates, as well as measurements such as stock prices and the amount of goods transported by rail.
“GDP, the unemployment rate, inflation, and some other variables all fluctuated more between 1919 and 1940 than they did either before World War I or after World War II,” Hausman said. “One can [also] simply look at the frequency of really severe recessions, and you see there that the 1920s and 1930s also look really different from other time periods in U.S. history.”
Car and housing purchases represented a large percentage of consumer spending in the interwar period. Since both cars and houses are durable goods, which can last significant periods of time without replacement, it is relatively easy to postpone purchasing a replacement for them.
“Delaying the purchase of a new car or a new house is fairly easy,” Hausman said. “Maybe you’d really like to buy a new house, but you’ve been living in your existing house for years. You can live there for another year, and delay the purchase of … a new house. That could occur because times are bad, because lots of people are losing their job, and it can also be simply because of uncertainty.”
According to Hausman, the economic volatility that occurred in the United States during the interwar period can be traced back to the boom in car and housing purchases during that time. This can be measured by the marginal propensity to consume, which describes how significantly changes in income and revenue impact immediate spending, versus increasing saving. Since spending on durable goods is easily postponed when income decreases, this spending changes more significantly with changes in income than other types of spending, increasing the marginal propensity to consume.
“Given that durables and construction spending can be easily postponed, they’re likely to make the marginal propensity to consume higher,” he continued. “When durables and construction spending are larger shares of an economy, that means you’re likely to have an economy that is more volatile. The implication for the interwar period is that spending on car purchases and construction contributed to macroeconomic volatility in the 1920s and 1930s.”
Hausman concluded his lecture by explaining how changes in government policy prevented similar instability in the United States economy after the interwar period. “Americans continued buying lots of cars and building lots of houses after World War II. In some cases, [they were] smaller shares of the economy, [though] still quite large, but the economy is a lot more stable,” he said. “That’s in part because policy is better. There’s a larger government, which leads to automatic stabilizers. Tax revenue automatically falls during recessions, and that helps to cushion the economy. There’s stable government employment … and there’s much better monetary policy.”
Correction: An earlier version of this article noted Hausman as an assistant professor at the University of Michigan, rather than an associate professor.
