Recent Working Papers in American Economic History

Price Fishback How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s

NBER Working Paper No. 21925

The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners’ Loan Corporation’s purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation’s loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes.

Joseph Davis, Marc D. Weidenmier

America's First Great Moderation

NBER Working Paper No. 21856

We identify America’s First Great Moderation, a recession-free 16-year period from 1841 until 1856, that represents the longest economic expansion in U.S. history. Occurring in the wake of the debt-deleveraging cycle of the late 1830s, this “take-off” period’s high rates of economic growth and relatively-low volatility enabled the U.S. economy to escape downturns despite the absence of a central bank. Using new high frequency data on industrial production, we show that America’s First Great Moderation was primarily driven by a boom in transportation-goods investment, attributable to both the wider adoption of steam railroads and river boats and the high expected returns for massive wooden clipper ships following the discovery of gold in California. We do not find evidence that agriculture (i.e., cotton), domestic textile production, or British economic conditions played any significant role in this moderation. The First Great Moderation ended with a sharp decline in transportation investment and bank credit during the downturn of 1857-8 and the coming American Civil War. Our empirical analyses indicate that the low-volatility states derived for both annual industrial production and monthly stock prices during the First Great Moderation are similar to those estimated for the Second Great Moderation (1984-2007).

John Komlos and Brian A'Hearn respond to Bodenhorn et al on the antebellum decline in stature.

The Decline in the Nutritional Status of the U.S. Antebellum Population at the Onset of Modern Economic Growth

NBER Working Paper No. 21845

The decline in the physical stature of the American population for more than a generation beginning with the birth cohorts of the early 1830s was brought about by a diminution in nutritional intake in spite of robust growth in average incomes. This occurred at the onset of modern economic growth on account of rising inequality and an increase in food prices, which brought about dietary changes through the substitution away from edibles toward non-edibles. In a recent working paper, Bodenhorn, Guinnane, and Mroz question this consensus view, suggesting that a decline in heights in a military sample may not be representative of the population at large. They argue that increasing wages in the civilian labor market may well induce an increased proportion of shorter men to volunteer for military service thereby driving down the mean height of soldiers even if the height of the population remains unchanged. However, they neglected to examine whether labor market conditions did actually improve during the Civil War in such a way as to induce shorter men to enlist. Had they done so they would have found just the opposite: during the course of the war real compensation in the military increased by some 39% to 66% relative to civilian earnings. This should have led to an increase in military heights if the logic of their model were accurate, when in fact they declined. Both the historical evidence and an assessment of the model indicate that failing to consider patriotism as a powerful motive for enlisting was another serious error. A thorough analysis of the Union Army height data, considering recruiting periods as short as 90 days during which labor market conditions could not have changed markedly indicates that there can be no doubt at all that the decline in the height of soldiers beginning with the birth cohorts of the early 1830s is representative of the trend in the physical stature of the male population at large. The implication is that there was a widespread diminution in nutritional status of the population in the antebellum period.

Ellis Tallman and Gary Gorton

How Did Pre-Fed Banking Panics End?

How did pre-Fed banking crises end? How did depositors' beliefs change? During the National Banking Era, 1863-1914, banks responded to the severe panics by suspending convertibility; that is, they refused to exchange cash for their liabilities (checking accounts). At the start of the suspension period, the private clearing houses cut off bank-specific information. Member banks were legally united into a single entity by the issuance of emergency loan certificates, a joint liability. A new market for certified checks opened, pricing the risk of clearing house failure. Certified checks traded at a discount to cash (a currency premium) in a market that opened during the suspension period. Confidence was restored when the currency premium reached zero.

What I've Been Listening To

Liz Covart’s Ben Franklin’s World is a podcast on early American history. Recently she has teamed with the Omohundro Institute to produce podcasts on Doing History. I was a fan of the old Making History podcast and I am happy to see someone again trying to fill this niche.

Daron Acemoglu at the Economic Rockstar Podcast

James Heckman on EconTalk

And

Valerie June

Economist's empirical judgments

The Economist article I wrote about the other day cites work by Anthony Randazzo and Jonathan Haidt. The paper “Are Economists Influenced by Their Moral Worldviews? Evidence from the Moral Foundations of Economists Questionnaire” they conclude that moral judgments influence economist’s judgments and that “the long recognized line between positive and normative analysis is much blurrier than widely understood.”

Here are the questions they asked of 131 economists. The responses are grouped by economist’s self-definitions: Keynesian, Neo-Classical, New Institutionalist, and Austrian.

The scale goes from 1 (strongly disagree) to 7 (strongly agree), with 4 corresponding to neutral. Randazzo and Haidt emphasize that there were able to show a correlation between moral views and empirical judgments, but what strikes me is that most of the scores for Neo classical and New Institutionalist (who together account for about 58% of those surveyed) on the empirical statements seem to fall between 3 and 5. In other words, they were not sure. I regard that as the correct response to most of the questions.

I am pretty confident that differences in bankruptcy rates between states are largely explained by differences in collection laws. I have studied this a lot. I do not know whether current levels of inequality are harming economic growth. I have not researched the topic. In addition, I think it is a difficult question to answer.

People who label themselves Keynesian appear to be more likely to be pretty sure about a lot of things. Austrians appear to be more likely to be pretty sure about most things.  In between them are the bulk of economists who seem inclined to resort to the economist’s traditional response: It depends. 

I think that economics provides a very useful approach to answering important questions. But you have to use economic theory to guide the hard work of empirical research. You can’t just kick back in your armchair and conjure up the answers. Unless you are very familiar with the empirical research on a question (preferably having done some of it yourself) you should be very cautious about your answer. Even if you are very familiar with the empirical research, you should still be cautious when considering complicated problems. 

Why we don't worry about cholera (in the U.S.)

Nice piece by Michael Keenan Gutierrez about eradicating cholera in New York, largely through public investment in sewers. I think he may have overemphasized the ability of the wealthy to avoid exposure. Oliver Hicks the president of the Farmers’ Loan and Trust Company, for instance, died during the 1832 outbreak. The cynic in me suspects that the deaths of the wealthy may have played a disproportionate role in promoting public investment. Bob Higgs also emphasized the importance of public investment in sewers and water filtration as a source of decreasing mortality in the U.S. in his Transformation of the American Economy, 1865-1914, which is not only mandatory reading for anyone interested in economic history, but free. I’m generally not a huge fan of the Mises Institute, but I thank them for making this book available to so many people. Here are a couple of tables from the book illustrating the impact of public investment in sewers and water filtration.

The stuff we don't agree on is the fun stuff

A lot of people have been talking about the latest Economist article about why economics is different than “science”: whereas their peers in the natural sciences can edit genes and spot new planets, economists cannot reliably predict, let alone prevent, recessions or other economic events. Whenever I read this sort of article I am left with the impression that the author doesn’t understand economics or natural sciences.

1.      It is not true that economic theory cannot predict.

a.       In the late 1990s and early 2000s demand for and prices of organic milk increased rapidly. Economic theory suggests that in the absence of barriers to entry new firms will enter the market and increase supply. The Northeast Organic Dairy Producers Alliance reported that there was a 370 percent increase in the number of organic dairy cows between 1997 and 2001.  Between 1990 and 2003 the number of organic dairy farms in Vermont increased from 3 to 60 while the number of conventional farms fell from more than 2,000 to 1,400.  Events consistent with the predictions of basic microeconomics happen all the time. The point is that it is not news.  

b.      People make much of economists not predicting the financial crisis. The only problem is that Schiller, Rajan, Schwartz, Roubini, Baker and others all gave warnings. Moreover, the recession was predicted by this very simple tool. By the way, based on that tool I am not currently predicting a recession in the near future.

2.       No empirical research produces certainty. One of my primary objectives when teaching quantitative methods is to emphasize that statistical inference does not produce certainty. Whether you are historian sifting through primary sources or an economist analyzing a random sample or the population you are trying to understand a bigger picture that you can never actually see directly and fully. Statistical inference does not provide certainty; it enables you to quantify your uncertainty.

And by the way, economists didn’t do this.

3.       Not surprisingly, natural scientists do not possess a giant pile of knowledge that they all hold with certainty.

a.       How many universes exist?

b.      How many planets are in our solar system? Nine. No. Eight. Wait. It’s nine. I think.

c.       Until relatively recently, most astronomers thought that the expansion of the universe was decelerating.

4.       If they had such certain knowledge who would want to study them? Why would any intelligent and curious person want to study a discipline that has all the answers? Students in principles courses want the answers. People who go on to graduate school do it because of the questions. I really don’t think people become physicists because they want to be able to pass on all the known certainties about the universe. The stuff we don’t agree on is the fun stuff!

5.       As for the method of generating knowledge, McCloskey noted quite a while ago (apparently while no one was listening) that economists, physicists, sociologists, chemists, historians, etc. are all really doing the same thing. They are trying to come up with something new to say and then persuade other people that they are right. Natural scientists can often use controlled experiments to generate persuasive evidence, but not always. Economists often cannot run controlled experiments, but sometimes they can.  

6.       In short, I find the whole “Is Economics A Science” debate pointless.

Noah Smith on Slavery and Economic Growth

In the long run, most wealth is produced, not plundered. Slavery created bad institutions that inhibited industrialization.

Yesterday I wrote about the response on Twitter to this statement by Noah Smith and said that today I would write about my thoughts on this statement.

In general, I tend to agree with Smith, largely because plunder is not a sufficient condition for economic growth and innovation and investment are. Plunder has existed throughout human history, and for most of human history it did not lead to sustained economic growth. Spain and Portugal did plenty of plundering, and it did not lead to economic growth. Switzerland became rich without much plundering. That said, the economic history of the United States had plenty of both plunder and productivity improvement.

Economists generally define economic growth as increases in real GDP per capita. That simply means that on average people produce more goods and services than they did the year before. There are basically two ways to increase output per person. First, you can give people more resources to work with: more natural resources and more capital. Second, you can figure out ways to get more output from the resources you have: you can create a cotton gin, or a spinning jenny, or ways to refine crude oil into kerosene. Both were at play in American economic growth.

Both the South and the North increased the amount of natural resources through movement to the West. This is probably the most obvious role for plunder in American economic growth: appropriation of land from Native Americans. But growth was not solely attributable to increases in land. Capital increased as well. Capital is anything that has been produced in order to increase production in the future. People most often associate capital with machines and equipment, but roads, ports, and canals are important examples of capital as well. There was a lot of new capital in the North, both public and private. Investment in canals and railroads was more extensive in the North than in the South. There were also more buildings, more mills, more agricultural equipment, etc. But neither the increases in land or capital would have really transformed economic life. Simply increasing the amount of land, the number of sawmills, and the number of spinning wheels and looms would not have led to modern economic growth. The fundamental source of growth was improvement in productivity, coming up with new and better ways to do things. These changes in technology were not just in cotton textiles and railroads and the other things people associate with industrialization. The North was still an agricultural economy and much of the growth came from improvements in crops, livestock and farm machinery, see Olmstead and Rohde’s Creating Abundance and David McClelland’s Sowing Modernity: America’s First Agricultural Revolution .These changes in technology are what made 1900 different than 1800 and 2000 different than 1900. Can they be attributed to the cotton economy of the South?

Cotton accounted for about 4 % of U.S. GDP. That is a lot for one sector of the economy. After all, Fogel estimated that GDP would have only been about 4 % lower in 1890 if you had wiped out all the railroads. The point is that even during the antebellum period the US economy was highly diversified. No one thing could drive growth. Four percent is big, but it does not make slave produced cotton the driving force behind economic growth.

But Baptist’s argument is essentially that cotton provided the stimulus for growth in the North. As I have pointed out previously his attempt at calculating the spillover effects of cotton are nonsense. The biggest problem with them is that he just makes up the numbers, but even if he had produced the numbers through research it doesn’t make any sense to compare them to GDP.

Putting aside Baptist’s nonsense calculation, his argument is actually pretty old and has not stood the test of time. It is essentially the argument that Doug North made in   The Economic Growth of the United States, 1790-1860. It seemed like a reasonable story given the evidence that Doug had collected, but subsequent research generated evidence that contradicted the theory. First, work by a number of economic historians (Gallman, Hutchison and Williamson, and Herbst) found that Doug’s theory tended to underestimate the degree of regional self-sufficiency and overestimate the importance of interregional trade. The evidence did not support the conclusion that cotton was the driving force behind economic growth. Second, much of the work done on early industrialization has emphasized the role of intraregional trade. Much of early industrialization appears to have been directed at local demand not demand from the South or Europe. Notable contributions on this subject were made by  Diane Lindstrom Economic Development in the Philadelphia Region  and more recently by David Meyer Roots of American Industrialization or see his essay on Industrialization in EH.Net’s Encyclopedia.

 Finally, there are reasonable arguments supported by evidence that slavery had a negative effect on long run trends in per capita GDP. The more a region depended on slave labor in the past the lower its per capita income now.

These figures are from the working paper by Nathan Nunn “Slavery, Inequality and Economic Development in the Americas: An Examination of the Engerman-Sokoloff Argument (October 2007). There is no question that slaveholders benefited from slavery, but that does not mean that the economy as a whole was better off as a result of slavery. The evidence generally supports the claim that slavery was associated with institutions that were not conducive to economic growth.

By the way, all of the studies I have mentioned are actual empirical studies. Their authors did the hard work of collecting and analyzing evidence, rather than setting in an office in, for example, Ithaca making up numbers.

Finally, I will note that enslaved people may have made contributions to economic growth that aren’t included in Baptist’s story. The McCormick reaper is one of the most famous innovations in American economic history. McCormick was from Virginia, and, according to at least some accounts, an enslaved blacksmith, Jo Anderson, was instrumental in helping him develop a working reaper.  I think this example actually supports Smith’s view about the negative effects of slavery. The vast majority of enslaved people did not even have this sort of limited opportunity to contribute to the sort of technological innovations that produce economic growth. How much more rapid might economic growth have been if African Americans had the same opportunities as Americans of European descent to exploit their ingenuity? How much more rapid might economic growth be now if African Americans had the same opportunities as others? 

More Obnoxious Nonsense from Ed Baptist

Noah Smith tweeted this today.

 In the long run, most wealth is produced, not plundered. Slavery created bad institutions that inhibited industrialization.

Which prompted the following back and forth on Twitter.

1. Josh Mound ‏@JoshuaMound  4h4 hours ago

Josh Mound Retweeted Noah Smith

@Ed_Baptist The following tweet seems to be almost the polar opposite of one of your book's main args, right?

Josh Mound added,

Noah Smith @Noahpinion

In the long run, most wealth is produced, not plundered. Slavery created bad institutions that inhibited industrialization.

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2. Ed Baptist ‏@Ed_Baptist  4h4 hours ago

@JoshuaMound The emergence of cotton slavery in the US South is pretty highly correlated with the Industrial Revolution.

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3. Josh Mound ‏@JoshuaMound  4h4 hours ago

@Ed_Baptist Right, he goes on to say that b/c North industrialized first it shows slavery was inefficient, which is also opp of your book.

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4. Josh Mound ‏@JoshuaMound  4h4 hours ago

@Ed_Baptist It's a pretty clear case of economists abstract anti-empirical theorizing on historical issues that totally misses actual facts.

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5. Marshall Steinbaum ‏@Econ_Marshall  4h4 hours ago

@JoshuaMound For the record (and as @Ed_Baptist & I have discussed) abstract economic theorizing need not be wrong. http://economics.mit.edu/files/8975 

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6. Ed Baptist ‏@Ed_Baptist  4h4 hours ago

@Econ_Marshall @JoshuaMound agreed! But let's mark our theories to data and analysis.

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10:53 AM - 20 Jan 2016 · Details

The remarkable thing about this is Baptist’s assertions about economists' abstract anti-empirical economic theorizing and the need to “mark our theories to data.” 

This, again, is Baptist’s argument on the economic significance of slavery

In 1836, the total amount of economic activity―the value of all the goods and services produced―in the United States was about $1.5 billion. Of this, the value of the cotton crop itself, total pounds multiplied by average price per pound―$77 million―was about 5 percent of that entire gross domestic product. This percentage might seem small, but after subsistence agriculture, cotton sales were the largest single source of value in the American economy. Even this number, however, barely begins to measure the goods and services directly generated by cotton production. The freight of cotton to Liverpool by sea, insurance and interest paid on commercial credit―all would bring the total to more than $100 million (see Table 4.1).

                Next come the second- order effects that comprised the goods and services necessary to produce cotton. There was the purchase of slaves―perhaps $40 million in 1836 alone, a year that made many memories of long marches forced on stolen people. Then there was the purchase of land, the cost of credit for such purchases, the pork and the corn bought at the river landings, the axes that the slaves used to clear land and the cloth they wore, even the luxury goods and other spending by the slaveholding families. All of that probably added up to about $100 million more.

            Third order effects, the hardest to calculate, included the money spent by millworkers and Illinois hog farmers, the wages paid to steamboat workers, and the revenues yielded by investments made with the profits of the merchants, manufacturers, and slave traders who derived some or all of their income either directly or indirectly from the southwestern fields. These third order effects would also include the dollars spent and spent again in communities where cotton related trades made a significant impact another category of these effects is the value of foreign goods imported on credit  sustained the opposite flow of cotton. All these goods and services might have added up to $200 million. Given the short term of most commercial credit in 1836, each dollar “imported” for cotton would be turned over about twice a year: $400 million. All told more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million odd slaves― 6 percent of the total US population―who in that year toiled in labor camps on slavery’s frontier.”

Put aside the fact that he is comparing GDP to things that are not counted in GDP. The really important thing to notice about Baptist’s argument is this

“perhaps $40 million”

“probably added up to about $100 million more”

“might have added up to $200 million.”

These are not estimates based upon examination of historical sources; Baptist simply made the numbers up. Even the one table that he refers to does not actually contain the suggested information. This is the empirical work, the marking to data, that he engages in. Baptist’s argument is supported by neither logic nor evidence. Apparently, Baptist’s supporters have either not actually read the book, or they find this kind of “evidence” persuasive. If you find Baptist persuasive you should probably stop reading this blog.  

Tomorrow, I’ll write about my thoughts on Smith’s initial statement.

New in Business History

The Business History conference has posted the Program for the 2016 Annual Meeting.

There are many interesting looking sessions. For instance

4.D  Reinterpreting Early Twentieth-Century U.S. Financial Markets
Location TBA
     Chair:  Edward Fertik, Yale University
     Discussant:  David Weiman, Barnard College

Leslie Hannah, London School of Economics
Reinterpreting Corporate Finance: Did the U.S. Really Lag Europe Before 1914?

Mary O’Sullivan, Université de Genève
A Failed Revolution: The U.S. Securities Markets, the Call Market, and the Federal Reserve Act

Eric Hilt, Wellesley College, and Carola Frydman, Kellogg School of Management
Investment Banks as Corporate Monitors in the Early Twentieth Century

The last issue of the 2015 volume of Business History Review is out. The editor's note describes the contents