Proposal preview

Government and the Economy

Stability of government is a key feature of successful economies, whereas instability leads to uncertainty about the future that threatens individual decisions and retards investment. History is replete with governments that solved problems of violence and instability by enriching a small number of powerful elites at the expense of the vast majority of the population. As the power of these elites and economic conditions changed over time, governments needed to renegotiate the terms of the agreement between elites, change the identity of the elite groups included in the governing coalition or face consequences of civil war. Seven papers in our session consider how governments in Hawaii (“Changes in Relationships, Rules, and Elites in Hawaii”) the Cape Colony (“Expropriation with Partial Compensation”), India (“The Colonial Influence on National Policies in the South Asia Region” and “Over-Reliance on Law”), China (“Monetary and Financial Transformation in Early Twentieth-Century China” and “Political Stability and Industrial Development in Early Twentieth-Century China”), and Cuba (“How Cuba Abandoned Laissez Faire”) adjusted to changes in the economic power of elites and how their responses led to changes and persistence in institutions and social and economic outcomes. Fundamental changes in the nature and composition of the ruling coalition and institutions are, of course, not the only response that a government can make in the face of changing economic conditions and changing strength of elite groups. Major policy initiatives conducted within the framework of the existing institutions of government can, in some instances, suffice to allow adaptation to conditions of crisis. The eighth paper in our session (“The New Deal and Agricultural Investment in Machinery”) examines New Deal agricultural policies implemented in the United States during the Great Depression and consider how these policies affected investment in agricultural machinery and work animals and changed the distribution of rents to critical elites and interest groups. The ninth paper (“The Impact of World War II on the Growth of U.S. Potential Output”) questions the received wisdom that World War II laid the supply foundations for U.S. output and productivity growth in the postwar period.

Organizer(s)

  • Sumner La Croix University of Hawaii lacroix@hawaii.edu USA
  • John J. Wallis University of Maryland and NBER Wallis@econ.umd.edu USA
  • Price V. Fishback University of Arizona and NBER pfishback@eller.arizona.edu USA

Session members

  • Alexander Field, University of Santa Clara
  • Debin Ma, London School of Economics and Political Science
  • Cong Liu, Shanghai University of Finance and Economics
  • Alan Dye, Barnard College, Columbia University
  • Sumner La Croix, University of Hawaii
  • John J. Wallis, University of Maryland and NBER
  • Price V. Fishback, University of Arizona and NBER
  • Johan Fourie, Stellenbosch University
  • Anand V. Swamy, Williams College
  • Thirthankar Roy, London School of Economics and Political Science
  • Paul Rhode, University of Michigan
  • Briggs Depew, Utah State University
  • Shawn Kantor, Florida State University
  • Todd Sorenson, University of Nevada, Reno

Discussant(s)

  • Open Audience Discussion for Each Paper

Papers

Panel abstract

Stability of government is a key feature of successful economies, whereas instability leads to uncertainty about the future, threatening individual decisions and retarding investment. Governments have frequently solved problems of violence and instability by enriching a small number of powerful elites. As the power of different elites and economic conditions change, governments renegotiate agreements between elites, and change the identity of elite groups included in the governing coalition or face consequences of civil war. Seven papers consider how governments in Hawaii, Cape Colony, India, China, and Cuba adjusted to changes in the power of elites and how their responses changed social and economic outcomes. A seventh paper consider how New Deal policies affected investment in agricultural machinery and changed the distribution of rents to critical elites and interest groups. An eighth paper questions the received wisdom that WWII laid the supply foundations for post-war U.S. output and productivity.

1st half

Changes in Relationships, Rules, and Elites in Hawai'i After U.S. Annexation

Sumner La Croix, University of Hawaii, John Joseph Wallis, University of Maryland and NBER

The United States annexed the Republic of Hawaii in June 1898. Native Hawaiians, the majority of the population, overwhelmingly opposed the annexation, while most of the powerful sugar interests favored annexation The U.S. government was somewhat unsure regarding the type of government to be established in its new possession. In the Organic Act of May 1900, the U.S. Congress choose to establish an incorporated territorial government, a hybrid of an open access order and a limited access order. We use the Hawaiian Commission Report of December 1898 and Congressional debates over this issue in Winter/Spring 1900 to shed light on the intense political controversies underlying establishment of the new government. We then use roll call votes in the U.S. Senate and House of Representatives to test several hypotheses regarding the establishment of the form of territorial government as well as particular provisions of the Organic Act.

The United States annexed the Republic of Hawaii in June 1898. Native Hawaiians, the majority of the population, overwhelmingly opposed the annexation, while most of the powerful sugar interests favored annexation The U.S. government was somewhat unsure regarding the type of government to be established in its new possession. In the Organic Act of May 1900, the U.S. Congress choose to establish an incorporated territorial government, a hybrid of an open access order and a limited access order. We use the Hawaiian Commission Report of December 1898 and Congressional debates over this issue in Winter/Spring 1900 to shed light on the intense political controversies underlying establishment of the new government. We then use roll call votes in the U.S. Senate and House of Representatives to test several hypotheses regarding the establishment of the form of territorial government as well as particular provisions of the Organic Act.

Expropriation with partial compensation: The 1834 slave emancipation and intergenerational outcomes with partial compensation

Igor Martins, Lund University, Jeanne Cilliers, Lund University, Johan Fourie, Stellenbosch University

How persistent are wealth shocks? We use the partial compensation paid to Cape Colony slave-owners following the slave emancipation of 1834 to investigate the long-run effects of a negative wealth shock. Owners received, on average, between 30-40% of the value of their slaves. This arbitrary difference between the value of the slave and the amount received is our variable of interest. We transcribe more than 8000 slave emancipation records, and match these to two novel data sources: a set of tax censuses that recorded the assets owned by slave owners, and genealogical records that link slave-owners to their children and grandchildren. Slave-owners that suffered a greater loss as a share of their total slave value lived shorter lives. So, too, did their children. We find no effect on the third generation. Our results have implications for redistributive government programmes.

How persistent are wealth shocks? We use the partial compensation paid to Cape Colony slave-owners following the slave emancipation of 1834 to investigate the long-run effects of a negative wealth shock. Owners received, on average, between 30-40% of the value of their slaves. This arbitrary difference between the value of the slave and the amount received is our variable of interest. We transcribe more than 8000 slave emancipation records, and match these to two novel data sources: a set of tax censuses that recorded the assets owned by slave owners, and genealogical records that link slave-owners to their children and grandchildren. Slave-owners that suffered a greater loss as a share of their total slave value lived shorter lives. So, too, did their children. We find no effect on the third generation. Our results have implications for redistributive government programmes.

Over-reliance on Law: Rural Credit in India, 1875-2010

Anand V. Swamy, Williams College

Indian rural credit seems perpetually in crisis. High interest rates and high rates of default are common, as are protests by borrowers who complain of exploitation by lenders. Beginning in the late 19th century and to the present-day, the State has responded with a range of legal interventions including interest rate ceilings and bans on the transfer of land. We argue these interventions have fallen short because they have not explicitly recognized that, given the low and highly variable incomes of rural Indian borrowers, they need credit as well as insurance. Lenders who accept the insurance function must tolerate delayed repayment or default, and hence charge high interest rates. Lenders who do not or cannot accept the insurance role have to strictly enforce contracts with distressed borrowers. Either way the lender is viewed as harsh. This pattern can be changed only by improvements in productivity, or by the State being...

Indian rural credit seems perpetually in crisis. High interest rates and high rates of default are common, as are protests by borrowers who complain of exploitation by lenders. Beginning in the late 19th century and to the present-day, the State has responded with a range of legal interventions including interest rate ceilings and bans on the transfer of land. We argue these interventions have fallen short because they have not explicitly recognized that, given the low and highly variable incomes of rural Indian borrowers, they need credit as well as insurance. Lenders who accept the insurance function must tolerate delayed repayment or default, and hence charge high interest rates. Lenders who do not or cannot accept the insurance role have to strictly enforce contracts with distressed borrowers. Either way the lender is viewed as harsh. This pattern can be changed only by improvements in productivity, or by the State being willing to lend and absorb losses. Legal intervention has only a modest role to play, in preventing fraud and coercion, and can be counter-productive.

How Cuba Abandoned Laissez Faire: The interwar origins of sugar crop controls

Alan Dye, Barnard College, Columbia University

In the interwar period, government controls came to define the Cuban economy. Often the transition from a noninterventionist orientation in the early republican period to government-mandated restrictions on the sugar crop and on hiring foreign labor is attributed to the Revolution of 1933 and the rise of the populist political regimes in the 1930s of Ramón Grau San Martín and Fulgencio Batista. This paper shows, to the contrary, that the transition toward interventionist policies began in the 1920s and originated not out of the politics of populism but by a national and transnational business elite experimenting with collaborative or collusive measures, including quotas on production and exports, marketing pools, and an international cartel, trying to stabilize the sugar market and correct a persistent disturbance of the market from the First World War. It was not revolutionaries but capitalists who inaugurated what became core policies of the Revolution of 1933.

In the interwar period, government controls came to define the Cuban economy. Often the transition from a noninterventionist orientation in the early republican period to government-mandated restrictions on the sugar crop and on hiring foreign labor is attributed to the Revolution of 1933 and the rise of the populist political regimes in the 1930s of Ramón Grau San Martín and Fulgencio Batista. This paper shows, to the contrary, that the transition toward interventionist policies began in the 1920s and originated not out of the politics of populism but by a national and transnational business elite experimenting with collaborative or collusive measures, including quotas on production and exports, marketing pools, and an international cartel, trying to stabilize the sugar market and correct a persistent disturbance of the market from the First World War. It was not revolutionaries but capitalists who inaugurated what became core policies of the Revolution of 1933.

The colonial influence on national policies in the South Asia region

Tirthankar Roy, London School of Economics

The economic impact of European colonial rule in the tropical regions is a much-discussed subject. Not so much discussed is the impact of colonialism on the making of nation states and national policy after colonial rule ended. Within a relatively small geographical region like South Asia, there were significant similarities as well as enormous diversity in the manner in which national governments engaged with the economy after British colonial rule ended (1947-8). The paper offers a comparative history of the four countries of the region that had been parts of the British Empire - India, Pakistan, Bangladesh, and Sri Lanka - to show why colonialism could shape very different trajectories of economic change.

The economic impact of European colonial rule in the tropical regions is a much-discussed subject. Not so much discussed is the impact of colonialism on the making of nation states and national policy after colonial rule ended. Within a relatively small geographical region like South Asia, there were significant similarities as well as enormous diversity in the manner in which national governments engaged with the economy after British colonial rule ended (1947-8). The paper offers a comparative history of the four countries of the region that had been parts of the British Empire - India, Pakistan, Bangladesh, and Sri Lanka - to show why colonialism could shape very different trajectories of economic change.

2nd half

The Impact of World War II on the Growth of U.S. Potential Output

Alexander J. Field, Santa Clara University

Claims that the experience of economic mobilization between 1942 and 1945 laid the supply foundations for output and productivity growth in the United States after the war have formed the basis of the conventional wisdom for decades. This paper argues, in contrast, that the extraordinary mass production of ships, aircraft, and other munitions had little relevance for the postwar period because the wartime output mix and implicit factor prices were unique to that period, never to be repeated. Between 1941 and 1948, total factor productivity within manufacturing declined. Considering together the effects on TFP, the labor force, and the physical capital stock, the impact of World War II on the level and trajectory of US potential output following the war was, on balance, almost certainly negative.

Claims that the experience of economic mobilization between 1942 and 1945 laid the supply foundations for output and productivity growth in the United States after the war have formed the basis of the conventional wisdom for decades. This paper argues, in contrast, that the extraordinary mass production of ships, aircraft, and other munitions had little relevance for the postwar period because the wartime output mix and implicit factor prices were unique to that period, never to be repeated. Between 1941 and 1948, total factor productivity within manufacturing declined. Considering together the effects on TFP, the labor force, and the physical capital stock, the impact of World War II on the level and trajectory of US potential output following the war was, on balance, almost certainly negative.

The New Deal and Agricultural Investment in Machinery and Work Animals: Cotton Farms During the Great Depression

Todd Sorensen, University of Nevada, Briggs Depew, Utah State University, Price Fishback, University of Arizona and NBER, Shawn Kantor, Florida State University and NBER, Paul Rhode, University of Michigan and NBER

During the worst depression in American History, farms increased their use of farm machinery. In the cotton South the rise occurred at every tenure level. A large part of this rise was stimulated by the introduction of New Deal farm programs. Our regression analysis suggests that the introduction of AAA payments to farmers to take land out of production accounted for about half of the increase in the real value of farm machinery between 1930 and 1940. The AAA led to more tractors and automobiles per farm. The strong impact of the AAA was distributed across farms operated by full owners, part owners, tenants and share croppers. Some of the rest of the increase in farm machinery is associated with the New Deal's introduction of various types of farm loans that provided funds for mortgages, production loans, access to electricity, and disaster loans.

During the worst depression in American History, farms increased their use of farm machinery. In the cotton South the rise occurred at every tenure level. A large part of this rise was stimulated by the introduction of New Deal farm programs. Our regression analysis suggests that the introduction of AAA payments to farmers to take land out of production accounted for about half of the increase in the real value of farm machinery between 1930 and 1940. The AAA led to more tractors and automobiles per farm. The strong impact of the AAA was distributed across farms operated by full owners, part owners, tenants and share croppers. Some of the rest of the increase in farm machinery is associated with the New Deal's introduction of various types of farm loans that provided funds for mortgages, production loans, access to electricity, and disaster loans.

Monetary and Financial Transformation in early 20th-century China

Debin Ma, London School of Economics

This paper surveys the phenomenal transformation of banking and finance, public debt and monetary regimes during 1900-1937, a period of great political instability in Chinese history. We highlight the role of institutions as seen in the form of a business dominated quasi-political structure that rested on the institutional nexus of Western treaty ports (with Shanghai being the most important) and China Maritime Customs service, a relatively autonomous tax bureaucracy. This financial-fiscal mechanism laid the institutional foundation for the rise of modern Chinese banks, a viable market for public debt and increasing supply of reputable convertible bank notes. Drawing from my ongoing research in collaboration with Professors Dan Li and Liuyan Zhao, I show the impact of financial transformation on money market integration, public finance and money supply in 1900-1937.

This paper surveys the phenomenal transformation of banking and finance, public debt and monetary regimes during 1900-1937, a period of great political instability in Chinese history. We highlight the role of institutions as seen in the form of a business dominated quasi-political structure that rested on the institutional nexus of Western treaty ports (with Shanghai being the most important) and China Maritime Customs service, a relatively autonomous tax bureaucracy. This financial-fiscal mechanism laid the institutional foundation for the rise of modern Chinese banks, a viable market for public debt and increasing supply of reputable convertible bank notes. Drawing from my ongoing research in collaboration with Professors Dan Li and Liuyan Zhao, I show the impact of financial transformation on money market integration, public finance and money supply in 1900-1937.

Political Stability and Industrial Development in Early Twentieth-Century China

Cong Liu, Shanghai University of Finance and Economics

This paper studies Chinese industries during the "Warlord Era" in the early twentieth century. From 1916 to 1927, China was de facto controlled by warlords and experienced frequent regional fights. At the same time, its industrial sector gradually developed. This paper investigates the impact of political environment on industrial investments. I hand collect data on domestic fights, foreign settlements, and provincial warlords to capture multiple dimensions of political stability. Combined with firm entry information, I construct a county-level panel dataset from 1905 to 1925. Using industrial investments as the outcome variable, I find that industries developed were not military-oriented. Rather, they responded to shocks from international trade. In addition, the abnormal changes in provincial warlords, which often suggested an unstable political environment, reduced investments. Temporary regional fights showed no negative impact on new firm entry.

This paper studies Chinese industries during the "Warlord Era" in the early twentieth century. From 1916 to 1927, China was de facto controlled by warlords and experienced frequent regional fights. At the same time, its industrial sector gradually developed. This paper investigates the impact of political environment on industrial investments. I hand collect data on domestic fights, foreign settlements, and provincial warlords to capture multiple dimensions of political stability. Combined with firm entry information, I construct a county-level panel dataset from 1905 to 1925. Using industrial investments as the outcome variable, I find that industries developed were not military-oriented. Rather, they responded to shocks from international trade. In addition, the abnormal changes in provincial warlords, which often suggested an unstable political environment, reduced investments. Temporary regional fights showed no negative impact on new firm entry.