Will the "roaring 20s" come back?
Published May 6, 2021
One hundred years ago a worldwide pandemic ended. Known as the “Spanish flu” – although the virus did not begin in Spain – the pandemic killed an estimated 20 to 50 million people worldwide and almost 700,000 in the US. To date, the death toll in the US from the Covid-19 pandemic is 570,000, and this is based on three times the population as in 1920.
Yet, despite the horror of the Spanish flu, the US economy came rapidly back. Indeed, the decade of the 1920s is commonly called the “Roaring 20s.” This raises an interesting question. Once the Covid-19 pandemic is ended, could history repeat itself and culminate in a second “Roaring 20s”?
First, let me give some background on the Roaring 20s. Several factors drove the decade’s economic boom. Europe had been decimated by World War I. While a participant at the end of the war, the US homeland and economy escaped largely unharmed. Europe looked to the US to help feed it, and this created tremendous revenues for American farmers. Since farming commanded a much larger share of the economy then, when farmers gained, so did the thousands of small towns dominating the country’s landscape. Both of my grandfathers were farmers in the 1920s, and they referred to the decade as “the time of money.”
The 1920s can also be considered the beginning of the modern consumer economy. Households benefited from the spread of electricity and the mass production of game-changing innovations like automobiles, refrigerators, home appliances, radio, and indoor plumbing. The development of consumer credit allowed these big-ticket items to be purchased over time, thereby giving more households access to them.
These consumer-oriented improvements significantly improved the average household’s quality of life. Food kept longer, housework was easier, entertainment and news were available at all times, and trips became faster.
The Roaring 20s economy was not without its challenges. Business investors who were smart enough to make and sell the new innovations of the era were handsomely rewarded. As a result, income inequality rose to new levels. Also, the efficiencies brought by new machinery often meant fewer workers were needed in production. This especially occurred in farming. Thousands of farm families moved from farms to new jobs in the cities. Both of my grandfathers made this adjustment.
It’s easy to see numerous similarities between today’s economy and the economy of the 1920s. Both followed the challenges of a worldwide pandemic. Both benefited from numerous innovations. Both had the excitement of recovering the life that existed before the pandemic and making it even better.
There are also similar challenges. After dropping for several decades, income inequality today is approaching 1920 levels. Large shifts in the workforce have also occurred, and many economists think these will accelerate in coming years. Technology has been driving much of these shifts, but lingering concerns about individuals working in close proximity are expected to create new shifts.
Economists expect today’s economy to “boom” for the rest of 2021 and perhaps into 2022, with economic growth hitting near historic rates. But much of this “roaring economy” will be due to the natural rebound from the Covid-19 recession, as well as from the $6 trillion federal government stimulus programs.
Hence, the real test of whether we are on the verge of another roaring 20s will be a couple years away. What will determine the outcome?
One important factor will be national public policy. National public policy in the 1920s saw the first test of “supply-side economics.” Supply-side economics is the theory that reducing tax rates will stimulate the economy so much that tax revenues will actually rise, rather than fall. Federal income tax rates were slashed during the 1920s. Supporters say this action created incentives for business spending and hiring that propelled the economy to new levels of prosperity.
Today it appears the opposite approach is being taken, called “demand-side economics.” The notion is the economy is ultimately driven by the productivity and prosperity of individuals. Proponents say that equipping individuals with the proper skills and social support will increase their income-earning ability, which in turn will translate into more buying and more jobs. Rather than cutting tax rates, rates may be increased to fund the needed programs for skill training and support backup.
Another important determinant will be the level and impact of innovations in the 2020s. Will artificial intelligence, robots, remote working, autonomous driving, renewable energy, and others match the impacts of autos, appliances, radio, and electricity of the 1920s?
It will be interesting to watch how the two decades of the 20s ultimately compare. Will the 21st century version win? Or will we go the other way – like the 1929 crash? You decide
Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.