Larry Summers, writing in the Financial Times last week, deplored the recent progression by the United States towards a “Downton Abbey economy” of extreme inequality. In fact, his criticism was in one respect ill founded: in terms of inequality, measured by a statistic such as the Gini coefficient, the United States is already close to its peak level of 1929 and is thus significantly more unequal than Britain in the “Downton Abbey” period of around 1920. The comparison is however an interesting one, for in certain respects, behavioral and otherwise, the Downton Abbey economy of 1920 was greatly preferable to that we are experiencing today.
I have not watched “Downton Abbey” though I was quite fond of its equally soap-opera-ish 1970’s predecessor “Upstairs Downstairs.” However my youth was spent reading Dornford Yates, Bulldog Drummond, P.G. Wodehouse and other British novels covering upper-class life of that period (pure escapism even in my youth; I was no more an aristocrat than I was an international secret agent!) Thus I am perhaps more aware of what the “Downton Abbey economy” looked like than Summers – brought up in the wrong country – or the program’s present-day viewing audience, familiar only with the TV portrayal.
Britain in 1920 was only a moderately unequal society, and had become significantly more equal as a result of the Liberal government of 1905-16 and World War I. At the bottom, old age pensions had been introduced in 1908 and an embryonic social security scheme in 1911, while the need for munitions and staples such as coal during World War I had pushed the blue collar share of national remuneration sharply upwards. That redistribution was to reverse somewhat in the 1920s and 1930s, with high unemployment and the beginnings of coal mining’s decline, but in 1920 the reversal hadn’t begun, and middle class outlets such as “Punch” and the Strand Magazine were full of complaints about the impossibility of getting servants and the high cost of living.
At the Downton Abbey top, wealth was far less concentrated than in the United States. Whereas Henry Ford, John D. Rockefeller and Andrew Mellon were all dollar billionaires in 1920, Britain’s richest financier Sir Ernest Cassel, who died in 1921, was worth only 6 million pounds ($30 million) at his death. British companies were smaller and less efficient than their U.S. competitors. Their operations had been hollowed out and rendered unprofitable by the unilateral free trade shibboleth that British policymakers had worshipped since 1846, which had tilted the global “playing field” sharply against British interests faced with protected U.S. and German competition. British banking was also less productive of individual fortunes than U.S. banking/brokerage, with the industry divided between surprisingly small but innovative merchant banks and giant but sleepy clearing banks. There were a few Gatsbys in 1920 Britain, who had made their fortunes through dubious World War I supply contracts, but in the post-war economy their fortunes had ceased to grow and were even disappearing.
As for the landed aristocracy, the supposed ultra-wealthy inhabitants of Downton Abbey, if you read any of the literature of the period, or such modern scholarship as David Cannadine’s “The Decline and Fall of the British Aristocracy” you will realize that relative impoverishment was their almost universal complaint, with mass sales of country houses during the inter-war period. British agriculture, the foundation of landed fortunes, had been decimated by free trade and by the advent of a global commodity market and refrigeration after 1873. Agricultural land values were in a long period of decline that did not begin to reverse until after World War II. The houses themselves were also astonishingly cheap by today’s standards and generally poorly maintained since labor was newly expensive and maintenance funds were scarce.
If the producers of Downton Abbey had really wanted to show an aristocracy of un-paralleled wealth amidst working-class squalor and degradation they should have set the series about 75 years earlier, in one of the great early-Victorian Whig families amidst the early-industrial hardship of the Hungry Forties. Now THERE was a Gini coefficient!
A move to a “Downton Abbey economy” should not therefore imply a sharp increase in inequality, rather the opposite. In this context it is interesting to note that almost 100 years of progressive bloat of the public sector in both Britain and the United States, supposedly undertaken to reduce economic inequality, have in reality tended to increase it. Tax rates on top incomes are considerably lower than in 1920 both in the United States (now 39.6% top marginal Federal rate versus 77% in 1920, reduced to 25% under Harding and Coolidge) and in Britain (45% top marginal rate today versus 60% income tax and super tax in 1920.) However the levels at which the top rates were reached were higher then – for example British super tax, taking the marginal rate above 30%, was charged only on incomes above 2,000 pounds, equivalent to about 100,000 pounds today. Income tax was only paid by one tenth of the population in Britain, and one fortieth in the U.S.
Public spending (including local government) was around 25% of GDP in Britain in 1920, and about 15% of GDP in the United States, compared to 40% plus in both countries today. It must indeed be questioned what benefits the public have gained, either in greater equality or better services, from the massive rise in public spending since the Downton Abbey period, which itself was inflated from pre-World War I days.
Apart from smaller government and less inequality, the Downton Abbey economy had a number of other advantages over today’s:
First, total factor productivity growth was much greater. The decade saw the most rapid adoption of the advances in power and transportation that had grown up from the 1880s and the result was U.S. TFP growth of around 2% annually, about double the recent rate. This generated an explosion in living standards during the decade. In Britain, TFP growth was somewhat slower, but the return to the Gold Standard in 1925 at an overvalued parity, combined with the continuance of unilateral free trade policies, especially damaging after World War I had eroded Britain’s competitive position, caused unemployment to soar. However for most Britons the 1930s, in which Britain grew rapidly amid global gloom, were to make up for 1920s underperformance.
Second, the Downton Abbey economy had much lower asset prices, because of higher interest rates and much easier construction procedures. Shares paid higher dividends and were much lower valued in terms of assets and earnings, while leverage ratios were infinitely more conservative. The world was used to a Gold Standard in which leverage could kill you in a downturn; thus was much more careful about incurring it. Real estate was valued at its rebuilding cost, and rebuilding costs were much lower than today, because there were no planning approvals and no environmental impact statements. I have written several times about the extraordinary inflation of infrastructure costs, from the 1920-27 Holland Tunnel’s $48 million, equivalent to $700 million in today’s prices to the outrageous projected $9 billion of the recently cancelled Trans-Hudson Tunnel, functionally an identical project. In Downton Abbey’s world, real estate costs were modest and new infrastructure projects were built on time, at a fraction of today’s real cost.
Third, the Downton Abbey world had positive real interest rates and no inflation psychology. Consequently savers could be assured that their efforts in saving would not be destroyed by inflation, or by being dumped into an overvalued bubble stock market. While World War I had brought a doubling in prices in Britain and the United States, everyone expected that this process would be largely reversed, probably by a British return to the Gold Standard – and indeed, until World War II, those expectations were realized. For people planning their lives, it was a much easier era. In peacetime, money was a solid store of value, not something that had to be monitored constantly for inflationary erosion.
Finally, both the economic system and the financial system were carried on with high standards of integrity, higher in Britain than in the United States, but higher in both countries than today. Banks, corporations and managers relied heavily on their reputation, and those doing business with them made careful enquiries about that reputation. There were few fallible government regulations, no bailouts and little leverage. A notable feature of the Bernard Madoff Ponzi scheme of 2008 was that it was able to attract about 500 times as much money in real terms as the $3 million collected in 1920 by the original Charles Ponzi – and carry on for about 40 times as long as Ponzi’s eight months. The ability of Madoff to grow so big and last so long is a testimony to the futility of modern regulation and the sad decline in modern ethical standards in blue-chip houses.
The Downton Abbey economy had its downsides. Exchange rates were already unstable because of World War I, and apparently solid economies like Germany could collapse into trillion-percent hyperinflation. The globalization of the pre-1914 world was already a memory, and would remain one until the 1980s as protectionism was rapidly increasing (and was already at damaging levels in the United States.) Still, there were further strengths – the 1920s’ rapid surge in well-paid manufacturing jobs in the automotive and other sectors, for example — while the world’s modest population of about 2 billion made environmental constraints irrelevant at a global level, albeit painfully relevant locally.
Summers’ demonization of the Downton Abbey economy today is as misguided as his cheerleading for wasteful trillion-dollar public spending bonanzas five years ago. On balance, provided we could keep today’s living standards and medical care, a return to the Downton Abbey economy would be an enormous improvement.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)