Economic growth concepts and applications

Economic Growth

The 1920s saw an economic boom in the United States, fueled by a number of different factors both economic and technological. Mass production allowed for improved productivity, increased consumption and a shift from in import-oriented economy to an export-oriented one. Economically, the 1920s were characterized by supply side economics, in particular broad-based income tax cuts in 1921, 1924 and 1926; and by a shift to a gold exchange standard. Each of these factors will be discussed in turn in analyzing the economic boom of the 1920s.

A number of technological developments were critical to the economic boom of the 1920s. Communication technologies and mass production both facilitated strong economic growth. The assembly line, Taylorism and other productivity improvements allowed for an industrial boom. The U.S. economy was flush with cash as the result of not only tax cuts but also repayment of war loans from European nations, and this allowed for increased investment in factories and industrial output. The U.S. became an export-oriented economy during this period, and was now a creditor to the world (Schultz, no date).

At the outset of the 1920s, Americans were unable to consume much of this output -- wages were low and taxes high. Increased domestic consumption was fueled by a number of critical factors. A series of tax cuts in 1921, 1924 and 1926 allowed Americans to retain and spend more of their income (de Rugy, 2003). Even with this expansion of consumer spending power, the proliferation of industrial product on which to spend money was great, and increasing consumption relied heavily on the advent of installment credit, which allowed consumers to utilize debt to make their purchases (DeLong, 1997).

War reparations from Germany to European nations were funneled to the United States, the result of massive wartime borrowing on the part of those European nations. This influx of capital into the U.S., combined with rapidly growing industrial output, led to a shift in the U.S. economy from one with an emphasis on imports to one with an emphasis on exports. The shift to the gold exchange standard further facilitated this, as foreign exchange was ultimately converted to gold, and U.S. wealth grew rapidly in the 1920s (Smiley, 2010).

There were a number of beneficiaries from this economic expansion. On average, most Americans benefited from the expansion in terms of increased wealth and living standards and the federal government saw its revenues increase (de Rugy, 2003). However, wealth disparity grew rapidly during this period as well. By 1929, the richest one percent of U.S. households held 45% of national wealth, in stark contrast to the first one hundred plus years of the nation's history (DeLong, 1997). With declining immigration and birthrates during the decade, the rise in economic wealth was nevertheless able to find its way to the pockets of working Americans, despite the increase in wealth disparity that was occurring.

However, when the 1920s ended, it became clear that some of those beneficiaries did not benefit much at all, as wealth in the middle class and lower class became substantially eroded by the onset of the Depression. At the time, benefits were widespread but only for the wealthier classes were those benefits substantial enough to weather future economic storms.