Do Economic Downturns Have a Silver Lining?

Do economic downturns provide a long term boost to the growth of potential output? The answer, based on an examination of Depression era experience, is nuanced. TFP growth across the 1930s resulted from the confluence of three tributaries. The first was the continuing high rate of TFP growth within manufacturing, the result of the maturing of a privately funded research and development system. The second was associated with spillovers from the build out of the surface road network, which boosted private sector productivity, particularly in transportation and wholesale and retail distribution. The third influence, which I call the adversity/hysteresis effect, reflects the ways in which crisis sometimes leads to new and innovative solutions with persistent effects. In the absence of the economic downturn, we would probably have gotten roughly the same contribution from the first two tributaries. The experience of railroads during the Depression, on the other hand, illustrates the potential of the third