Z **Archived from Fall 2008** American Economic History

Review Lecture: Evans 10 Monday December 15 4-6 PM

Review Lecture: Evans 10 Monday December 15 4-6 PM

Projected Grades as of December 5

FYI, projected grades as of December 5 are now up at http://bspace.berkeley.edu/ under the "Econ 113" tab.

Because that is all that bspace will accept, the grades are on the 95-A, 85-B, 75-C, 65-D scale.

Productivity Slowdowns and New Economies P

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The Productivity Slowdown:

Causes of the productivity slowdown:

• Environmental expenditures
• Oil shocks
• Excessively-young labor force
• Reagan deficits: did they play a role in the productivity slowdown?
• Most likely scenario: a bunch of things hitting at once...

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The productivity slowdown gave us an 'age of diminished expectations':

• The "revolt of the haves"
• Government budgets in crisis--end of the "fiscal dividend"
• Grinchy politics?
  • The blue-collar workers of Macomb County, Michigan

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The Democratic political strategy:

• Hope among Democrats that fast productivity growth would produce a kinder, gentler, more social democratic politics
• Hope so far in vain...

The Democratic economic strategy:

• Eisenhower Republicans
• 2.5% x (0.05 + 0.05 + 0.05) = 0.375% per year
  • Cumulates over eight years to 3%
• But by 2000 we have a 10% gap
  • Now a 17% gap
• People don't feel it--perhaps because of rising inequality?
• But the productivity gap is there: where does it come from?
  • 3% from deficit reduction
  • 1% from capital inflow
  • 2% from better unemployment rate performance--a dividend of faster productivity growth
  • 4% from computers

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The productivity speedup of the 1990s:

* Computers, computers, computers...
* The fastest-growing and most important leading sector ever seen...
* How big?: a 20% per year fall in the prices of things that make up 5% of the economy gives you 1% per year in direct productivity growth from computers alone
* Why did it take so long for the information technology revolution to get going?
    * The Solow question

Why isn't Silicon Valley getting really rich anymore?

* Answer: because its customers are getting really good deals; the industry is now much more competitive now, which means that the surplus flows through to customers rather than sticking with entrepreneurs and capitalists...

What does the future hold?

* Likely answer: more of the same...

Economics 113 Final Paper

Due Monday December 15, at lecture, 4 PM. 1500 words.

In your view, what are the two (or three, or four) most important lessons to be drawn about America today from the study of American economic history? Why are these the most important lessons? And how do they change what we ought to think about the state of America and its economy today?

The Inflation of the 1970s and the Crisis of American Social Democracy

20081124: Looking South and Looking East

Looking South: Engerman and Sokoloff:

What Has Happened in the New World?

• Four areas:
  • U.S.-Canada
  • Mexico-Brazil
  • Caribbean + slave Brazil
  • Southern cone
• U.S.-Canada very rich: rest not so. Why?
  • $80K per worker per year in the U.S. $10K-$20K more common in Latin America..
  • All have (or had) favorable land-labor ratios after conquest and plagues...
  • All had abundant natural resources...
  • All "began" with an abundance of land relative to labor...
  • Southern cone keeping up with North America until the 1930s--I will not deal with that today...
• Two lines of explanation: problems of slavery and ex-slavery; problems of mainland Latin America
  • The Puzzle: We Explain United States Growth as Markets + Resources = Accumulation + Technology
  • But what happens when we go to Latin America?
    • From the perspective of 1700, the United States is a marginal new-world economic area
    • Yet Latin America today lags far behind the United States and Canada
  • To explain U.S. vs. Latin America, you need "institutions"
    • What are institutions?
    • Where do institutions come from?
• Three Theories of Institutions:
  • "Legal origins" (Shleifer et al.)
  • "Tropical diseases and grab and run" (Acemoglu et al.)
  • Engerman and Sokoloff
    • A historians' story--which means, "it's complicated"
    • Legal origins is broadly wrong--or at least overemphasized
    • Grab-and-run due to tropical diseases also greatly overemphasized
• Factor endowments
  • Indigenous population oppression
  • Resource curse--slavery
    • Slavery in the Connecticut River valley
    • Slavery in New York City
  • Key paragraph: "The British colonies in the New World evolve quite distinct societies and sets of institutions.... The majority that failed shared certain salient features with Latin America.... [These features] allowed for average standards of living that were high at that time... [but] less well suited for the realization of sustained economic growth..."
  • "Non-white" a proxy for savage economic (and political!) inequality
  • European migrant standards of living 2x or more those in Europe throughout the colonial period--$1000 of today's dollars per capita per year
  • European standards of living 4x those in Europe in slave-staple-hacienda colonies--$2000 of today's dollars per capita per year
  • Staple crops: sugar, coffee, rice, tobacco, cotton easily produced by slave labor in the Caribbean and Brazil. Haiti 3x as rich as United States in 1790?
  • Extensive indigenous populations in Mexico and Peru
    • Less than 20% of Mexican, Peruvian population "white" as of 1800
• Economic and political equality a very good thing
  • Land policy
  • Immigration policy
  • (Mercantilist) trade policy
  • Middle-class demand for manufactures: "American system"
    • Timing of industrialization
  • Education
    • Other human capital: familiarity with technology or markets

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Looking East: Alesina et al.:

20081119: Post-WWII Stabilization Policy

Economics 113 Syllabus: Fall 2008

Economics 113: American Economic History

This File: http://tinyurl.com/43sufu; http://delong.typepad.com/american_economic_history/2008/08/economics-113-s.html

J. Bradford DeLong [email protected] Evans 601: Lecture: 4 LeConte; MW 4-5:30

Andrej Milivojevic [email protected]: Sections: T4-5 87 Dwinelle, W8-9 61 Evans
Marc Gersen [email protected]: Sections: F2-3 55 Evans, F3-4 55 Evans
Matthew Sargent [email protected]: Sections: M9-10 85 Evans, Th1-2 45 Evans

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For those unfamiliar with U.S. history, Marty Olney recommends John Faragher et al (2005), Out of Many (New York: Prentice-Hall)

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W Aug 27: OVERVIEW

• Lecture Notes: Administration and Overview; Why Are We Here? On the Lecture and the University;
• Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080827.mp3
• Required Readings: Walton and Rockoff, "The American Economy in Historical Perspective"; Six Families Budget Their Money, 1884

Sections Aug 28-Sep 3: Welcome, supply and demand (one page introduction due)

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W Sep 3: Amerindians, Conquistadores, Explorers, Settlers, and Empires

• Lecture Notes: 10000 BC to 1800; Pre-Industrial Growth Accounting
• Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080903.mp3
• Required Readings: Walton and Rockoff, "Founding the Colonies; Bartholomew Gosnold Sails Along Northeastern North America, 1602:; Jared Diamond (1987), "The Worst Mistake in the History of the Human Race," Discover; Jared Diamond (2008), "Why Did Human History Unfold Differently On Different Continents For The Last 13,000 Years?"
• Malthusian Economy Problem Set (due September 10): http://delong.typepad.com/american_economic_history/2008/09/20080903-malthu.html

Sections Sep 4-10: Basic geography

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M Sep 8: Colonists, 1600-1776

• Lecture Notes: "Growth Accounting, Natural Resources, and Pre-Civil War America"; Notes for September 8
• Lecture Audio: http://www.j-bradford-delong.net/2008_mov/20080908.m4a
• Required Readings: Walton and Rockoff, "Colonial Economic Activities," "Economic Progress and Wealth"; Inventory of the Possessions of Thomas Springer, 1804; Peter Temin (1966), “Labor Scarcity and the Problem of American Industrial Efficiency in the 1850's”; "I Wove To-day": Elizabeth Fuller Grows Up in Rural Massachusetts

W Sep 10: Westward, Ho!

• Lecture Notes: Notes for September 10;
• Required Readings: Walton and Rockoff, "Land and the Early Western Movements," "Agriculture's Western Advance"; "We Are Not Entirely Out of Civilization"

W Sep 10: Malthusian economy problem set due

Sections Sep 11-17: Who benefited from slavery? Reading: Who Benefited Most from North American Slavery?

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M Sep 15: Slavery and Its Legacy, 1600-1929

• Lecture Notes: http://delong.typepad.com/american_economic_history/2008/09/20080915-econ-1.html
• Required Readings: Walton and Rockoff, "The Entrenchment of Slavery and Regional Conflict," "War, Recovery, and Regional Divergence"; Claudia D. Goldin and Frank D. Lewis (1975), "The Economic Cost of the American Civil War: Estimates and Implications," Journal of Economic History, Vol. 35, No. 2. (Jun., 1975), pp. 299-326; "Is It Not Enough that We Are Torn From Our Country and Friends?": Olaudah Equiano Describes the Horrors of the Middle Passage, 1780s; Additional Reading (necessary background for problem set 2)

W Sep 17: Government, 1600-1870

• Lecture Notes:
• Required Readings: Walton and Rockoff, "English Mercantilism and the Colonies," The Constitution," "Public vs. Private Initiative on the Natural Waterways," "The Canal Era," "The Iron Horse, "The First Bank of the United States," "The Second Bank of the United States," "Experiments in State Banking Controls, "Protection from Foreign Competition"; John R. Nelson, Jr. (1979), "Alexander Hamilton and American Manufacturing: A Reexamination"; Nathaniel Hawthorne Travels the Erie Canal

Sections Sep 18-24: Review

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M Sep 22: Review Mock Midterm

M Sep 22: Slavery benefit problem set due at lecture

W Sep 24: MIDTERM 1

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M Sep 29: Financial Crisis Teach in

W Oct 1: Technologies, Factories, and Trade, 1870-1929

• Lecture Notes: Growth Accounting, 1865-1929: The Great Traverse
• Required Readings: Walton and Rockoff, "Industrial Expansion and Concentration"; Claudia Goldin and Lawrence Katz (1999) “Human Capital and Social Capital: The Rise of Secondary Schooling in America, 1910-1940,” Journal of Interdisciplinary History](http://www.nber.org/papers/W6439); J. Bradford DeLong, “Did J.P. Morgan’s Men Add Value?”; Andrew Carnegie's Ode to Steelmaking; A Mule Spinner Talks About Unemployment

M Oct 6: Workers, Unions, and Government, 1870-1929

• Lecture Notes:
• Required Readings: Walton and Rockoff, "The Emergence of America's Labor Consciousness," "Railroads and Economic Change"; Mark Twain Lampoons the Horatio Alger Myth; The AFL Protests Unemployment; Lincoln Steffens: The Shame of the Cities

M Oct 6: 1865-1929 Growth Accounting Problem Set due

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W Oct 8: Depressions and Panics, 1840-1933

• Lecture Notes: The Coming of the Great Depression Audio: The Coming of the Great Depression
• Required Readings: Walton and Rockoff, "Industrial Expansion and Concentration," Money, Prices, and Finance in the Post-Bellum Era," "The Great Depression"; Eugene White (1990), “The Stock Market Boom and the Crash of 1929,” Journal of Economic Perspectives 4:2 (Spring), pp. 67-83; Martha L. Olney (1999), “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930.” Quarterly Journal of Economics CXIV (February 1999): 319-335. Christina Romer (1993) “The Nation in Depression.” Journal of Economic Perspectives 7 (Spring 1993): 19-39

M Oct 13: Great Depression, continued

• Lecture Notes: The Great Depression Audio

W Oct 15: The New Deal, 1933-1941

• Lecture Notes: 20081013 Great Depression; Audio
• Required Readings: Walton and Rockoff, "The New Deal"; Margaret Weir and Theda Skocpol, "State Structures and Social Keynesianism"

W Oct 15: Simple Macroeconomics problem set due

Sections Oct 9-15: Keynes and Bernanke

M Oct 20: The New Deal, Continued

• Lecture Notes: The Gold Standard in the Twentieth Century Audio Missing

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W Oct 22: World War II and Cold War, 1941-1956

• Lecture Notes: The Global Economy; Audio
• Required Readings: Walton and Rockoff, "World War II";

M Oct 27: Mass Production, 1910-1980

• Lecture Notes: ; Audio
• Required Readings: Walton and Rockoff, "Commerce at Home and Abroad," Manufacturing, Marketing, and Industrial Productivity"; W. Devine (1983), “From Shafts to Wires: Historical Perspective on Electrification,” Journal of Economic History pp. 347-72; J. Bradford DeLong and Barry Eichengreen (1993), “The Marshall Plan: History’s Most Successful Structural Adjustment Program”; Kissing Rudy Valentino

Sections Oct 16-22: Marshall Plan and European reconstruction

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W Oct 29: Workers, Unions, and Wage Compression, 1929-1975

• Lecture Notes: American Income Inequality; Audio
• Required Readings: Walton and Rockoff, "The Rise of the Service Sector," "Unions"; Claudia Goldin and Robert A. Margo (1992), “The Great Compression”

Sections Oct 23-29: Feminism

M Nov 3: Focus on Women, 1870-present

• Lecture Notes:
• Required Readings: Walton and Rockoff, "The Changing Role of Women in the Labor Force"; Gavin Wright (1991), “Understanding the Gender Gap: A Review Article,” Journal of Economic Literature: 1153-63; Sue Bowden and Avner Offer (1994), “Household Appliances and the Use of Time” Economic History Review 47: 725-748; Claudia Goldin (2004) "The Long Road to the Fast Track" NBER WP 10331; Frances Willard Discovers the Bicycle

M Nov 3: Practice Second Midterm Out: http://tinyurl.com/dl20081103

Sections Oct 30-Nov 5: Intergenerational inequality

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W Nov 5: Focus on African-Americans, 1900-present

• Lecture Notes: Audio
• Required Readings: Walton and Rockoff, "Minorities"; J. Smith and Finis Welch (1989), "Black Economic Progress after Myrdal," JEL (June), pp. 519-40, 557-61; Werner Troesken, “Race, Disease, and the Provision of Water in American Cities, 1889-1921,” Journal of Economic History 61 (September 2001): 750-776

Sections Nov 6-12: Review

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M Nov 10: Review

W Nov 12: MIDTERM 2

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M Nov 17: Focus on Immigrants, 1870-present

• Lecture Notes: Immigration Audio
• Required Readings: Walton and Rockoff, "Immigration, Politics, and Economic Effects," "The New Immigration"; Norman Asing: We Are Not the Degraded Race You Would Make Us

W Nov 19: Stabilization, Full Employment, and Inflation, 1950-present

• Lecture Notes: Stabilization Policy: http://tinyurl.com/dl20081119 Audio
• Required Readings: Walton and Rockoff, "Money, Banking, and the Business Cycle After World War II"; J. Bradford DeLong (1996), “Keynesianism, Pennsylvania Avenue Style: Some Economic Consequences of the Employment Act of 1946,” Journal of Economic Perspectives, 1996, vol. 10, issue 3, pages 41-53

Sections Nov 13-19: Alesina and the U.S.-Western Europe comparison

• Required Readings: Alberto Alesina, Edward Glaeser, and Bruce Sacerdote (2001), “Why Doesn’t the U.S. Have a European-Style Welfare System?”

W Nov 19: Family immigration story 500 word paper due

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M Nov 24: Comparisons: Looking East and Looking South: Why Has There Been so Little Social Democracy in the United States? Why Has America Been so Successful?

• Lecture Notes: Audio
• Required Readings: Emma Goldman: "I Will Kill Frick"; Stanley Engerman and Kenneth Sokoloff (1994), "Factor Endowments: Institutions, and Differential Paths of Growth Among New World Economies"

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M Dec 1: The End of the American Dream? The Productivity Slowdown, the Inflation of the 1970s, and the Great Widening

• Lecture Notes: The Inflation of the 1970s
• Required Readings: Walton and Rockoff, "Real Wages"; J. Bradford DeLong, "America's Only Peacetime Inflation: The 1970s"; Thomas Piketty and Emmanuel Saez (2003), "Income Inequality in the United States"

W Dec 3: The Productivity Speedup of the 1990s

• Lecture Notes: Audio

• Required Readings: Walton and Rockoff, "Achivements of the Past, Challenges for the Future"; Paul David (1990), “The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox,” American Economic Review, pp. 355-60; Blinder and Yellen, The Fabulous Decade

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M Dec 8: The Crisis of Social Insurance: Pensions and Doctors

• Lecture Notes:
• Required Readings: Ronald Lee and Jonathan Skinner (1999), “Will Aging Baby Boomers Bust the Federal Budget?” Journal of Economic Perspectives 13 (Winter 1999): 117-140; David Cutler (2002), “Health Care and the Public Sector”

Sections Dec 4-10: New economy models

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M Dec 15: Resources, Suburbs, Global Warming: Limits? Final Review: Review Lecture: Evans 10 Monday December 15 4-6 PM

• Required Readings: Nicholas Stern et al., "The Stern Review on Global Climate Change" http://www.hm-treasury.gov.uk/media/4/3/Executive_Summary.pdf; http://www.hm-treasury.gov.uk/media/A/6/Postscript.pdf; http://www.hm-treasury.gov.uk/media/1/8/Technical_annex_to_the_postscript_P1-6.pdf

M Dec 15: 1500 word final paper due

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Th Dec 18: FINAL EXAM 8-11AM

20081017 Immigration

The Old Immigration and the New Immigration:

• An immigrating nation?
• Not so much since 1930--at least not on the national level...
• Immigrating regions--and non-immigrating regions...
• Did immigrants ever look like "old" America?
  • Paddy-wagon, welsh, Dutch treat, Dutch courage, Dutch uncle, liberty cabbage...

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• An immigrating nation?
• About as much as Australia...
• Less so than Canada...

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• Two immigrations...
• An immigration of the skilled and relatively well-off from Eurasia...
• An immigration of the unskilled and relatively poor from Latin America...
  • Disquisition on the meaning of "skill"...

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• The political reaction...
• Economic impacts...
• Sociocultural impacts...
• Political impacts...

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• How would you redraw this graph?

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"Immigration and National Wages: Clarifying the Theory and the Empirics"

Gianmarco I.P. Ottaviano, (Universita’ di Bologna and CEPR)
Giovanni Peri, (University of California, Davis and NBER)

July 2008

http://www.econ.ucdavis.edu/faculty/gperi/Papers/OP_redux_july_2008.pdf

This paper estimates the effects of immigration on wages of native workers at the national U.S. level. Following Borjas (2003) we focus on national labor markets for workers of different skills and we enrich his methodology and refine previous estimates. We emphasize that a production function framework is needed to combine workers of different skills in order to evaluate the competition as well as cross-skill complementary effects of immigrants on wages. We also emphasize the importance (and estimate the value) of the elasticity of substitution between workers with at most a high school degree and those without one. Since the two groups turn out to be close substitutes, this strongly dilutes the effects of competition between immigrants and workers with no degree. We then estimate the substitutability between natives and immigrants and we find a small but significant degree of imperfect substitution which further decreases the competitive effect of immigrants. Finally, we account for the short run and long run adjustment of capital in response to immigration.

Using our estimates and Census data we find that immigration (1990-2006) had small negative effects in the short run on native workers with no high school degree (-0.7%) and on average wages (-0.4%) while it had small positive effects on native workers with no high school degree (+0.3%) and on average native wages (+0.6%) in the long run. These results are perfectly in line with the estimated aggregate elasticities in the labor literature since Katz and Murphy (1992). We also find a wage effect of new immigrants on previous immigrants in the order of negative 6%.

Focus on African Americans...

Focus on African Americans:

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Focus on African-Americans

• Jim Crow and the post-Civil War South
  • Breaking southern biracial populism
  • Underinvestment in education
• The Great Migration to the North
  • Vicious discrimination in the north
  • But much higher wages than found in the south
  • Large scale residential segregation creates:
    • Northern ghettoes--places where land values were dropping because of the attractiveness of suburbs
    • Social pathologies...
• The Civil Rights Movement
  • The end of legal discrimination
  • How much difference does it make? Less than you would hope. Ferocious educational disparities persist--and in some cases are amplified as ghetto school quality falls. And in addition there is...
  • Illegal discrimination
    • How much illegal discrimination? Hard to tell...
    • Testers say "a lot". But the market can route itself around some discrimination...
    • Regression studies say "a lot": but employers know things that statisticians do not...
    • Amount surely falling over time...
  • Affirmative action and its dilemmas...

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Focus on Women:

Claudia Goldin:

The first cohort, graduating college from the beginning of the twentieth century to the close of World War I, had either "family or career." The second, graduating college from around 1920 to the end of World War II, had "job then family." The third cohort – the college graduate mothers of the "baby boom" – graduated college from around 1946 to the mid-1960s and had "family then job." The fourth cohort graduated college from the late 1960s to the late 1970s. Using the NLS Young Women I demonstrate that 13 to 18 percent achieved "career then family" by age 40. The objective of the fifth cohort, graduating from around 1980 to 1990, has been "career and family," and 21 to 28 percent (using the NLS Youth) have realized that goal by age 40. I trace the demographic and labor force experiences of these five cohorts of college graduates and discuss why "career and family" outcomes changed over time...

Economics 113 Practice Midterm

Economics 113 Practice Midterm

A. One-Sentence Identifications: For each of the fifteen terms below, briefly state the importance of each of the following people/places/things/concepts for American economic history since 1890 or so. A good strategy is to tie each ID into one or more of the major factors of production: land, labor, capital, technology, and institutions:

Gold standard; New Deal; Marshall Plan; Plessy vs. Ferguson; General Motors; Theodore Roosevelt; J.P. Morgan; American Federation of Labor; Congress of Industrial Organizations; John Maynard Keynes; Great Depression; Panic of 1907; high-school movement; Herbert Hoover; Pullman strike.

B. One-Paragraph Discussions: Write one paragraph (three to six sentences) answering each of the following questions:

1. What are the arguments for the belief that the high level of stock prices in August-September 1929 reflected justified if optimistic confidence in the future of the American economy? What are the arguments against?
2. Why was America a largely laissez-faire economy before the Great Depression? And how did the coming of the Great Depression change Americans' beliefs about the role of government?
3. What were the arguments for and against immigration in the generation before the Great Depression? How do they compare to the arguments for and against immigration today?

C. Essay: Write an essay on the following topic:

Outline the major changes in the economic position of African-Americans over the twentieth century. Draw up a balance sheet.

D. A Comparative Business Cycle Exercise:

Start with the simplest possible Keynesian model of the economy:

Y = C + I; production Y equals consumption C plus investment I C = cY; consumption C is a constant fraction c of income Y

1. Solve for Y as a function of the marginal propensity to consume c_y and investment I.
2. If the marginal propensity to consume c were to fall from 0.75 to 0.5, what would you expect to happen to the size of fluctuations in Y if fluctuations in I remained of the same magnitude?
3. Between the pre-WWII era and the recent past, the marginal propensity to consume had fallen from 0.75 to 0.5, and yet the size of fluctuations in Y had fallen by three-quarters. What would you conclude about the changing size of fluctuations in investment I?

20081029 American Income Inequality

American Inequality

The Top Tenth:

Within the Top Tenth:

The Top Ten Thousand:

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A Closer Look:

Differences in Log Earnings:

Wage Ratios:

Decomposing:

Start with the 1940 distribution:

Change the Xs (characteristics):

Change the betas (prices):

Change the residuals:

Before 1940:

After WWII:

20081027 American Economic History: The Furnace Where the Future Is Being Forged

Investment, Resources, Invention, and Technological Change

• America is:

  • Resource rich
  • Skilled labor abundant
  • Energetic, entrepreneurial labor abundant (to have crossed an ocean...)

• America is also capital rich, and new capital rich--hence technologically advanced ** The furnace where the future is being forged...

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Labor and Capital

America's Commitment to Education:

• Iowa: Claudia Goldin and Larry Katz look at Iowa high schools
• America has a very strong and very early commitment to general education
• Europe: why not provide people with the education they'll need early (answer: people change jobs, the economy changes, the background knowledge base is very important)
• Europe: educate the working classes and they'll ask for more (response: yes, that's the point)
• America's commitment to human capital as a very powerful multiplier of productivity

America and Unions: The Early Stages:

• America has a long history of labor unions
• America has a long, bloody labor history
  • Pinkertons
  • Federals--Grover Cleveland vs. John Peter Altgeld in the breaking of the Pullman strike
  • Early unions: Knights of Labor
  • Early unions: IWW
  • Union threat: the IWW and Henry Ford's $5 day.
    • Just because unions don't have lots of members and win lots of strikes doesn't mean that they are unimportant

America and Unions: Craft Unions:

• Craft unions: the AFL
• Craft unions: the AMA
• After WWI: the Palmer Raids and the Red Scare
• The 1920s: Welfare Capitalism
• Legal doctrines: Lochner and its friends

America and Unions: The Great Depression and After:

• Sit-down strikes
• Industrial unionism--the CIO
• The AFL-CIO
• The UMW and the Teamsters
• The NLRA and the NLRB
• The War Labor Board
• The Taft-Hartley Act

• Rolling Back Unionized America

  • Lawyers
  • Right-to-work
  • Interstate competition
  • International competition *Monopoly and voice faces of unionism

• The situation today: public-sector unions have a powerful edge. private sector unions... not so...

• What role has globalization played in the erosion of union power? Uncertain...

Investment Banking: Routing Around Capital Market Failures:

• The coming of the corporation: limited liability and professional management
• Who guards the guardians? Example: Leland Stanford (and Huntington, and Hopkins, and Crocker), the Central Pacific, and British investors...
• Separation of ownership from management creates all kinds of principal-agent and management-monitoring problems
• How to solve them? Finance capitalism. J.P. Morgan and the "Money Trust"
• Complaints about the Money Trust: Louis Brandeis: "personal power is unAmerican"
• Complaints about the Money Trust: the Northern Securities Panic
• Progressive attack on the Money Trust fails--until 1933 comes

* Finance After the Great Depression:*

• With the coming of FDR, the Progressive Era program for taming the Money Trust is dusted off and put into action:
• The exaltation of management at the expense of ownership and monitoring
• The end of utility empires--the PUHC Act
• The separation of investment from commercial banking
• The large-scale provision of information
• The level playing field
• The Berle-Means problem: managers select themselves, so how are stockholders' interests guarded?
• The Galbraithian "technostructure"

Recent Finance:

• The coming of the 1980s
  • Junk bonds
  • Takeovers
• Rapidly-climbing CEO pay
• The reintegration of high finance
• How well do our financial markets really work? It's still an open question

Upward Mobility

Horatio Alger and Benjamin Franklin

Europe is supposed to be about who your family is America is supposed to be about who you are--although it was one of Napoleon's generals who said that "I am my ancestors" Abraham Lincoln's belief: anyone who wants to can move up--a combination of: Plenty of room at the top Lots of immigrants to (temporarily) fill in at the bottom A fairly equal distribution of wealth meaning that starts were not too far apart All This Changes in the Middle of the Gilded Age:

The Closing of the Frontier and the Great Immigration Wave

No more free land--direct effects (can't homestead) and indirect effects (immigrants now put downward pressure on real wages) Immigrants: are the "new immigrants" not from northwest Europe American? In the case of Asians, the answer is "obviously no" "Races" in Pennsyvlania in 1910: whites, blacks, slavs, Latins... The peak of American inequality Ending the Gilded Age

Progressives The New Deal picks up the Progressive Era program, and enacts it Immigration restrictions play an uncertain but probably large role Social democracy and social insurance... Minimum wages Unions again Middle-Class America

The Great Compression in wages Unions? Wartime (WWII, that is)? Social changes Supply and demand? Free land again--this time free land to buy a house within commuting distance of anywhere... The Returns to Skill

The overeducated American The enormous expansion of wage inequality since 1970 All of a sudden, position matters a lot The Anemia of Social Democracy in America

America was never as upwardly mobile a place as it thought it was... Europe was never as rigid a place as it thought it was... Increasing risk (but the "risk" of being bankrupt instead of dead is a good thing--as Martha Stewart would say--no? Why Doesn't the United States Have a European-Style Welfare State?

Racism? The myth of Horatio Alger? Another possible answer: it's just taking us a long time to build it up...

20081022 The Global Economy

World War II:

Origins of World War II

• In Germany: the Great Depression brings Hitler to power
• No Great Depression in Germany, no Hitler
• Hitler takes his Malthus too seriously
  • Believes that only a populous Germany can be a strong Germany
  • Believes that only a Germany with lots of farmland can be a populous Germany
  • Hence wants to do to the Poles and the Russians what the Americans did to the Indians
• Roosevelt eager to fight Hitler to the last Briton (and give them plenty of materiel in the meantime)
  • America not so eager
  • How eager was Roosevelt to commit America to World War II in Europe? Not clear.
  • And after Pearl Harbor it was Germany that declared war on the United States
• In Japan, the Greater East Asia Co-Prosperity Sphere
  • Takeover of Manchuria in 1931
  • War with China beginning in 1937
  • Occupation of Indo-China in 1940
  • Roosevelt's ultimatum: Withdraw from Indochina (and China?) or we'll cut off your oil
    • Dean Acheson at the State Department did indeed cut off their oil
• Pearl Harbor as the response

Rough Numbers with Respect to Military Production (as percent of Nazi Germany):

• 450%: U.S.
• 150%: Britain
• 100%: Germany
• 80%: Russia
• 25%: Japan
• 15%: Italy

The wonder is not that the allies won given that they decided to fight

• The wonder is that they decided to fight to the end
• The wonder is that the axis powers held on for so long.
  • Out-produced five-to-one
  • Professional excellence of the Nazi Army...
  • Professional excellence of the start-of-war Japanese fleet...

50 million dead in World War II

• 6 million Jews
• 5 million Chinese civilians
• 8 million Russian civilians
• 4 million Russian POWs
• 2 million Polish civilians
• Et cetera...
• Plus all the battle and military deaths...

World War II Cured the Depression in the U.S.:

• Extraordinary levels of aggregate demand
• spending--military spending--rises to 40% of GDP
• The ten-million man army
• Unemployment down to 2% or lower
• Rosie the Riveter
• Price controls and rationing
• After WWII, few doubted Keynes's claim that government could control the economy

Trying to stop the return of the Great Depression: The Employment Act

Trying to stop the return of the Great Depression: The Marshall Plan

• Eichengreen and DeLong's interpretation of the Marshall Plan: key benefit that it allowed the good "mixed economy" guys to win the political struggle in Western Europe

  • Alternatives? Populist statists a la Peron--and stagnation
  • Alternatives? Communists--and eventual stagnation
  • Alternatives? Right-wing "hold what we have" semi-fascists

• Are Eichengreen and DeLong right?

  • Perhaps the threat from Stalin had as much to do with post-WWII "consensus" politics in Western Europe as the Marshall Plan did... * Perhaps good leadership: Schumann, Monnet, de Gasperi, Attlee, Adenauer, Erhard...

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Postwar:

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After the Postwar: Productivity Slowdown and End of the Population Explosion:

20081020 The Gold Standard in the Twentieth Century

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20081015 Climbing Out of the Great Depression

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20081013: The Great Depression

Audio: The Great Depression

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The Collapse of Real GDP, and Recovery:

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Components of Real GDP:

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The Consumption Function:

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The Semi-Stabilizing Role of Government:

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Dr. New Deal and Dr. Win-the-War:

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The Collapse of Private Investment:

• Can account, with multiplier, for essentially everything...

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The Propagation Mechanism: Three Theories for the Collapse of Investment (and Consumption):

• Friedman: Inept Federal Reserve policy and banking crises...
• DeLong and Summers: Expected deflation and self-fulfilling expectations...
• Bernanke: Bank failures and the credit channel...

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The Impulse:

????

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1928

• The construction boom is over.
• Farmers' share of the national income has dropped from 15 to 9 percent since 1920.
• Between May 1928 and September 1929, the average prices of stocks will rise 40 percent. Trading will mushroom from 2-3 million shares per day to over 5 million.

1929

• Herbert Hoover becomes President.
• Business inventories grows three times larger than the year before.
• Freight carloads and manufacturing fall.
• Automobile sales decline by a third in the nine months before the crash.
• Recession begins in August, two months before the stock market crash.
• Stock market crash begins October 24. Investors call October 29 "Black Tuesday."
• Congress passes Agricultural Marketing Act to support farmers until they can get back on their feet.

1930

• By February, the Federal Reserve has cut the prime interest rate from 6 to 4 percent. Expands the money supply with a major purchase of U.S. securities.
• However, for the next year and a half, the Fed will add very little money to the shrinking economy.
• Treasury Secretary Andrew Mellon announces that the Fed will stand by as the market works itself out: "Liquidate labor, liquidate stocks, liquidate real estate… values will be adjusted, and enterprising people will pick up the wreck from less-competent people."
• The Smoot-Hawley Tariff passes on June 17. With imports forming only 6 percent of the GNP, the 40 percent tariffs work out to an effective tax of only 2.4 percent per citizen.
• The first bank panic occurs late this year.
• Democrats gain in Congressional elections, but still do not have a majority.
• GDP falls 9.4 percent from the year before.
• The unemployment rate climbs from 3.2 to 8.7 percent.

1931

• No major legislation is passed addressing the Depression.
• A second banking panic occurs in the spring.
• GDP falls another 8.5 percent.
• Unemployment rises to 15.9 percent.

1932

• GDP falls a record 13.4 percent.
• Unemployment rises to 23.6 percent.
• Industrial stocks have lost 80 percent of their value since 1930.
• 10,000 banks have failed since 1929, or 40 percent of the 1929 total.
• The Fed makes its first major expansion of the money supply since February 1930.
• Congress creates the Reconstruction Finance Corporation.
• Congress passes the Federal Home Loan Bank Act.
• Bonus March: July 28, 1932
• Top tax rate is raised from 25 to 63 percent.
• Roosevelt: "I pledge you, I pledge myself, to a new deal for the American people."

1933

• A third banking panic occurs in March. Roosevelt declares a Bank Holiday
• "100 Days" of intensive legislative activity.
• Millionaire businessmen discuss overthrowing Roosevelt with a military coup. Talk to General Smedley Butler.
• Congress authorizes creation of the Agricultural Adjustment Administration, the Civilian Conservation Corps, the Farm Credit Administration, the Federal Deposit Insurance Corporation, the Federal Emergency Relief Administration, the National Recovery Administration, the Public Works Administration and the Tennessee Valley Authority.
• Congress passes the Emergency Banking Bill, the Glass-Steagall Act of 1933, the Farm Credit Act, the National Industrial Recovery Act and the Truth-in-Securities Act.
• U.S. goes off the gold standard.
• Roosevelt rejects Keynes' advice to begin heavy deficit spending.

1934

• Congress authorizes creation of the Federal Communications Commission, the National Mediation Board and the Securities and Exchange Commission.
• Congress passes the Securities and Exchange Act and the Trade Agreement Act.
• The economy turns around: GDP rises 7.7 percent.
• Unemployment falls to 21.7 percent. A long road to recovery begins.
• Sweden becomes the first nation to recover fully from the Great Depression.

1935

• The Supreme Court declares the National Recovery Administration to be unconstitutional.
• Congress authorizes creation of the Works Progress Administration, the National Labor Relations Board and the Rural Electrification Administration.
• Congress passes the Banking Act of 1935, the Emergency Relief Appropriation Act, the National Labor Relations Act, and the Social Security Act.
• GDP grows another 8.1 percent.
• Unemployment falls to 20.1 percent.

1936

• The Supreme Court declares part of the Agricultural Adjustment Act to be unconstitutional.
• Top tax rate raised to 79 percent.
• GDP grows a record 14.1 percent.
• Unemployment falls to 16.9 percent.
• Germany becomes the second nation to recover fully from the Great Depression

1937

• The Supreme Court declares the National Labor Relations Board to be unconstitutional.
• Roosevelt seeks to enlarge and therefore liberalize the Supreme Court.
• GDP rises 5.0 percent.
• Unemployment falls to 14.3 percent.
• World War II in Asia begins with the Japanese invasion of China.

1938

• Congress passes the Agricultural Adjustment Act of 1938 and the Fair Labor Standards Act.
• GDP falls 4.5 percent.
• Unemployment rises to 19.0 percent.
• Britain becomes the third nation to recover as it begins deficit spending in preparation for war.

1939

• GDP rises 7.9 percent.
• Unemployment falls to 17.2 percent.
• World War II in Europe begins with Hitler's invasion of Poland.

Great Depression Problem Set

Great Depression Problem Set:

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20081008 Manias, Panics, and Crashes

Audio: The Coming of the Great Depression

Robert Peel, 1844: My confidence is unshaken that we have taken all the Precautions which legislation can prudently take up against the Recurrence of a pecuniary Crisis. It my occur in spite of our Prescuamay occur in spite of our Precautions, and if it does, and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair the efficiency and probable success of those measures by which one hopes to control evil tendencies in their beginning, and to diminish the risk that extraordinary measures may be necessary...

Karl Marx, 1851: As is always the case, prosperity very rapidly encouraged speculation. Speculation regularly occurs in periods when overproduction is already in full swing... provides... temporary market outlets, while for this very reason precipitating the outbreak of the crisis and increasing its force. The crisis itself first breaks out in the area of speculation; only later does it hit production. What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as [what it really is,] a consequence of its own previous exuberance, but merely as a setback caused by the collapse of speculation....

The crisis reached its peak... all commercial transactions had come to a standstill. A deputation from the City then brought about a suspension of the Bank Act of 1844, which had been the fruit of the deceased Sir Robert Peel's sagacity.... Since his death Peel himself has been apotheosized in the most exaggerated fashion.... His power over the House of Commons was based upon the extraordinary plausibility of his eloquence. If one reads his most famous speeches, one finds that they consist of a massive accumulation of commonplaces, skillfully interspersed with a large amount of statistical data...

Karl Marx, 1867: The... decennial cycle... of periods of average activity, production at high pressure, crisis and stagnation, depends on the constant formation, the greater or less absorption, and the re-formation of the industrial reserve army or surplus-population.... The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause...

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Great Depression Problem Set:

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20081006 Economics 113 Lecture: Post-Civil War Growth, Industrialization, Wages, Profits, and Inequality

Post-Civil War Growth, Industrialization, Wages, Profits, and Inequality

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Labor: Education and Immigration:

Immigration

• Gains to immigrants
• Gains to native-born consumers
• Gains to native-born capital owners
• Losses to native-born unskilled
• Francis Walker counterfactual...

Education

• Technical education
• Elementary education
• High-school education
• Homesteading the information frontier after 1890...

Inequality

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"They control the people with the people's own money." So Louis Brandeis, strong Democratic political activist, wrote of the turn of the century financiers who he saw as controlling the American economy through their domination of the commanding heights of finance. The answer that Brandeis saw was simple: separate ownership from control, so that the bankers who collected the savings of the people through the acceptance of deposits would be unable to use those savings to increase their bargaining power vis-a-vis the managers of American enterprise.

It is doubtful that Louis Brandeis's proposed solution was any solution at all. Large-scale businesses borrow from banks, true. But remove some power to control and infiuence the managers of large-scale enterprises that borrow from the bankers, and where does it go? It fiows to the managers of the oligopolies and the monopolies that no longer have to look over their shoulders to make sure that Wall Street is satisfied; it does not fiow to the "people."

But if Brandeis's cure&emdash;to destroy the "money trust"&emdash;was false cure, it was a response to a real malady. For the United States as of the turn of the twentieth century was a much more economically and socially unequal place than it had been even thirty years before.

On the eve of the American Revolution, the United States-to-be had been a relatively egalitarian society. The richest one percent of households owned perhaps fifteen percent of the total wealth in the economy&emdash;a very low value for such an inequality statistic. Even by the immediae aftermath of the Civil War wealth was still not that concentrated: the top one percent of households appear to have had a little more than a quarter of the wealth of the country.

By 1900, however, the U.S. had become the Gilded Age country of industrial princes and immigrants living in tenements of our political memory. On the one hand, Andrew Carnegie building the largest mansion in Newport, Rhode Island with gold water faucets. On the other hand, 146 largely-immigrant workers dying in the 1911 Triangle Shirtwaist Factory fire in Manhattan because the exits had been locked to keep workers from taking fabric out of the building for their own clothes.

Surveys suggest that in 1929 the richest one percent of U.S. households held something like 45 percent of national wealth, and that the concentration of wealth had been sharply rising in the 1920s. We strongly suspect that World War I had seen substantial deconcentration, as infiation eroded the value of bondholders' wealth and as high demand for labor boosted workers' earnings. It is my guess that the second was stronger than the first; that the concentration of wealth was eroded more during World War I than it was boosted in the 1920s, and that the concentration of wealth in the United States peaked sometime in the twenty years before World War I, with the richest one percent of households owning some 50% or so of total national wealth.

Growing inequality&emdash;not absolute immiserization of the working class, but a growing (relative) gap between the income and wealth of rich and poor even as industrialization raised living standards of all classes&emdash;was in a sense a natural result of the form industrialization took in nineteenth century America. Rapid accumulation of capital did tend to crowd unskilled labor out of its place in the workforce, and did tend to force unskilled laborers to reduce their relative wages in order to maintain or win back their jobs. In the nineteenth century skilled and educated workers could not easily be replaced by machines; capital could more easily substitute for unskilled workers.

In addition, the opportunities of industrialization increased the share of total product that was paid as rent and profits. As farm productivity increased, the agricultural sector shrank, releasing additional supplies of relatively unskilled workers to the urban and industrial job markets. And tthe waves of mid- and late-nineteenth century immigration included many non English speakers, who found it very difficult to acquire skills or to use the skills that they had.

The distribution of income and wealth in the slaveholding south had always been extraordinarily unequal: how could it be otherwise when one-third of the population are held as chattels? But the distribution of income and wealth in the south did not become much more equal after the Civil War. Blacks remained extraordinarily impoverished relative to whites. And even southern whites were poor relative to northern city dwellers or midwestern farmers. In a sense, the relative impoverishment of the south was to be expected given the economic and political choices southerners made. The pre Civil War south had seen its wealthy accumulate not physical capital but slaves. The acquisition of a machine raises society's total wealth and productive power available per worker. The acquisition of a slave does not: it does not raise productivity, but merely gives the slaveholder an all but unlimited right to exploit the labor of the slave. The Civil War did not impoverish the south: it merely transferred "ownership" of ex-slaves' capacities to labor from masters to the ex-slaves themselves. It did reveal how impoverished the slaveholding south had become.

Choices made after the Civil War did not help. Mechanization did not come rapidly to southern agriculture. Southern governments did not believe in a good system of public education&emdash;particularly not for black Americans. This lack of a skilled, literate, and educated workforce meant that for most of a century northern manufacturers would not risk moving their operations to the south. The south would not begin to close the relative income gap separating it from the rest of the United States until the period after the First World War.

Attempts to count the wealth of the merchant princes themselves reinforce the suspicion that the pre-World War I U.S. was more unequal than at any time before or since. A country of immigrants and plutocrats is very different from the country of yeoman farmers that the United States had been in its Founding Fathers' imagination, and in large part in reality, in the late eighteenth century.

Alexis de Tocqueville, a keen-eyed commentator on American society in the first half of the nineteenth century, had feared the growth of such a class of plutocrats, such an "aristocracy of manufacturers":

The territorial aristocracy of past ages was obliged by law, or thought itself obliged by cutom, to come to the help of its servants and relieve their distress. But the industrial aristocracy of our day, when it has impoverished and brutalized the men it uses, abandons them in time of crisis to public charity to feed them.... Between workman and master there are frequent relations but no true association.

I think that, generally speaking, the manufacturing aristocracy which we see rising before our eyes is one of the hardest that have appeared on the earth....

In the United States the rising concentration of wealth provoked a widespread feeling that something had gone wrong with the country's development. The rich (and many of the native-born not-so-rich) blamed foreigners: aliens born in China, Japan, Italy, Spain, Poland, and Russia who were incapable of speaking English, or understanding American values, or contributing to American society. Many of the middle class, especially the farmers, blamed the rich, the easterners, and the bankers. The "paranoid style" of American politics flourished.

Yet by the end of World War II all this was reversed--and the United States was a more equal country than it had been since the beginning of the Gilded Age.

World War I saw a sharp but short-lived compression of the income distribution. Wages became much more equal in the space of a few short years. But this compression was quickly undone in the 1920's, which saw "very unbalanced technological progress, with productivity advancing faster in automobilesconsumer appliances, petrochemicals, and electric utilities" then elsewhere in the economy. These sectors were skill-intensive sectors. Relative skilled workers, both white collar and blue collar, once again captured the lion's share of the increased incomes made possible by technological change. The property income share also rose somewhat in the 1920's. It is uncertain whether relatively poor and unskilled blue collar workers experienced any rise in their wages adjusted for infiation between 1920 and 1929.

The Great Depression, World War II, and the immediate post-World War II period saw a substantial levelling of the income distribution. Skilled urban workers earned ninety percent more than unskilled workers before the Great Depression; they earned some sixty percent more after World War II. Skilled manufacturing workers earned close to double what unskilled workers earned before the Great Depression; they earned only forty percent more after World War II. Similar patterns can be found in the share of income going to property rather than to labor: it, too, dropped by a third&emdash;from thirty percent to twenty percent of total national product&emdash;between the 1920's and the 1950's.

Williamson and Lindert guess that about half of the reduction in wage inequality was due to a shift in the character of technological progress after 1929. Before 1929, productivity growth had been concentrated in manufacturing industry and other sectors that required a relatively skilled workforce. As the economy's structure shifted toward these sectors where productivity was growing most rapidly, demand for and returns to skills and capital rose and demand for unskilled labor fell. After 1929, productivity growth was much more balanced: productivity in agriculture and in service sector jobs that relied on unskilled labor more than skilled labor also grew rapidly. The other half of the levelling comes from demographic factors: fewer children and more education per child both shifts the distribution of skills within the population&emdash;making more skilled and fewer unskilled workers&emdash;and diminishes the supply of unskilled workers.

The levelling of the wage distribution was also encouraged by the growth in the number of jobs that were relatively low-skilled yet also paid high wages. English engineers had always noticed that American manufacturing industries made simpler and rougher goods, used less skilled labor, and seemed to incorporate much more of the knowledge needed to run the process of production into machines and organizations, leaving much less in skilled workers' brains and hands. Some of this was simply economizing on the relevant margin&emdash;skilled workers were exceedingly scarce in America throughout the nineteenth century, and it seemed worthwhile to follow production strategies that used skilled workers as little as possible. Some of this was finding new and more productive ways of doing things.

Mass production carried this "American system" to its extreme. As Henry Ford's engineer Max Wollering said later: "Mr. Fordrealizedthat in order to create great quantities of production, your interchangeability must be fine and unique in order to accomplish the rapid assembly of units. There can't be much hand work or fitting if you are to accomplish great things." Every time a skilled worker is needed to file or adjust an already-made part before it is added to the car under construction, time is wasted.

At Ford in 1913 at most 26 percent of workers were classified as "skilled or skilled operators"&emdash;a substantially lower proportion for a substantially wider job class when compared to the 70% that Daimler employed who were "skilled workers." And Ford could build Fords with a productivity more than ten times that with which Daimler could build Mercedes cars.

Ford minimized his costs by building a capital intensive plant that was very good at building automobiles, and not for building anything else. The increase in capital intensity increased the potential risk. The productivity and profitability of the Ford plant depended on a high rate of production. Anything that threatened the pace of production&emdash;union strike or anarchist sabotage&emdash;threatened to be very expensive. Ford could employ unskilled workers in jobs that had previously required highly skilled craftsmen, but only if he kept his workforce happy.

It was difficult to keep workers happy. The rapid pace and high degree of stress on the assembly line led initially to very high turnover: new hires in a year were four times the average workforce. Ford's workers&emdash;sped-up, automated, short-term, alienated, and about to quit&emdash;seemed obvious fodder for recruitment into the International Workers of the World, and Ford's profits were very vulnerable to IWW-style wildcat action. Ford's solution was to close to triple his workers wages, to $5 a day. The company could ask its workers to become for eight hours a day a part of the production machine that the Ford engineers had designed and refined. The five dollar day assured the company that the essential human appendages to this machine would always be present.

Pre-Depression unions are usually counted as failures. Yet this "union threat" appears to have played a major role in starting the $5 day at Ford, and in setting the pattern for a system of labor relations that would dominate blue-collar assembly lines in the United States for half a century: we will pay you very high wages for unskilled, if difficult and alienating, work, and in return you will not disrupt production or smash the machines: even the likes of Herbert Hoover would, after the $5 day, say that of course firms should share their profits from mass production with their workers. This system was worthwhile for employers because it economized on expensive skilled labor. This system was worthwhile for employees because it paid them high wages. And this system was a significant contributing factor to the mid-twentieth century levelling of the American income distribution.

The restriction of immigration after 1920 also diminished the supply of unskilled, newly-arrived workers competing for low-level urban jobs. This made the distribution of income and wealth within America more equal. Note, however, that many who would have been Americans had the open-door immigration policies of the nineteenth century continued were excluded from the country. For the most part such excluded potential immigrants were far poorer than they would have been had they been allowed to come to America.

In addition to the levelling created by the drawing together of wage levels and the reduction in the share of income going to property, the distribution of income was also made more equal by the actions of the government. The New Deal of President Franklin Roosevelt saw the beginnings of a transfer system&emdash;Social Security, Supplemental Security Income, and Aid to Families with Dependent Chidren&emdash;to provide income to those who could not, for reasons of age, health, disability, or within-household demands on their time&emdash;earn money in the labor market.

The American welfare state was never seen as an income levelling tool in its own right, but only as a "safety net" to provide security against potential disasters: impoverishment in old age, disability, desertion by a husband, and so forth. The New Deal established a "social insurance" rather than a "welfare" state in that the point of the programs was as much to let the employed and relatively well off sleep easier at night by "insuring" them against porential disasters as to help raise the standard of living of the poor. The social insurance state did contribute to the levelling of the income distribution, although this was never its primary purpose. In addition, taxation became progressive. Those in higher income brackets were expected to, and until the 1980's by and large did, contribute a larger proportion of their incomes to the government in taxes than those in lower income brackets.

The post-World War II period also saw tremendous advances in civil rights. Color bars&emdash;restrictions on employment by race&emdash;were severely reduced. In the 1930's, Ford was the only Detroit automaker that would employ America's Blacks, and even Ford restricted them to a few types and locations of jobs. Marriage bars&emdash;policies that women should be fired upon marriage or upon pregnancy&emdash;were also reduced. Equality of opportunity no matter what your race or sex at least became an avowed goal. In southern rural school systems before the Brown v. Board of Education of Topeka desegregation decision, the school year for Blacks typically had only one-third as many classroom hours as the school year for whites. Even though opportunities by the 1970's still depended heavily on class and race, opportunities for upward mobility were significantly enhanced by public educational systems, public colleges, and a federal government formally unwilling to allow your right to hire, serve, or sell to whomever you chose to extended to classifications based on race.

The end of formal and official racism in American society is an enormous accomplishment, and a battle that looks likely to remain won. Right wing voices complaining that federal curbs on the freedom to discriminate damaged federalism, infringed on privacy, or threatened to create economic stagnation grew weaker as time passed. And right wing complaints against equality of opportunity&emdash;that such an "ideal" deserved nothing but scorn: "a world turned upside-down indeed![T]he very idea of such a society is inherently absurd" because upward mobility on the part of the children of the poor required downward mobility on the part of the children of the rich&emdash;were greatly at odds with the consensus belief about the true nature of America. For example, Abraham Lincoln said on the eve of the Civil War:

Southern men declare that their slaves are better off than hired laborers amongst us. How little they know whereof they speak! There is no permanent class of hired laborers amongst us. Twenty five years ago, I was a hired laborer. The hired laborer of yesterday, labors on his own account today; and will hire others to labor for him tomorrow. Advancement&emdash;improvement in condition&emdash;is the order of things in a society of equals

Lincoln's free soil answer was that Blacks in the South were indeed enslaved to the Lords of the Lash, but that workers in the North were not enslaved to the Lords of the Loom, but had their own "capital" in the forms of property, tools, or skills. Their property, tools, and skills made them&emdash;even though they did not own or boss anyone&emdash;much more proprietors of their own capabilities than subjects of some lump of capital: they could always leave one employment and sell their valuable skills elsewhere. Free upward mobility&emdash;both absolute and relative&emdash;if you worked hard was the central promise of America.

The argument that America is a middle-class society, not a society of workers and capitalists, recurs throughout American history. Around 1900 German sociologists had a furious debate on why the United States had no socialist party; in the 1920's, AT&T ran advertisements showing a housewife in an apron peeling potatoes, with the caption "one of the owners of the Bell System." There is a great deal of truth in this "American ideology." But it is more true today, when college professors earn, on average, a little less than twice the average wage, then it was back in 1900 when college professors earned perhaps six times the average wage.

The levelling of the income distribution had important social consequences in the United States. It was the driving force behind a severe reduction in class distinctions. In 1900, the largest gap in social status and class was between the rich on the one hand, and the middle class and poor on the other. By the post-World War II era this had changed. America had become a "middle class society"&emdash;meaning that the major gulf lay between the poor and the rest, middle class and rich.

Around 1980 the income differential takes a substantial leap upward. In no more than five years, by far the larger part of the 1929&endash;1950 equalization of the U.S. income distribution is reversed among young workers. This shift toward greater inequality should not be overstated. So far the shift to inequality is much greater among workers with less than ten years' employment experience than among older, more experienced workers. Perhaps the gap will narrow as the present group of young workers ages. Moreover, while class and education-based income differentials have widened, status and race-based differentials have continued to fall at least through the end of the 1970's.

Moreover, this shift should be viewed with some skepticism: it is not certain that the college-high school wage differential plays the same role in the American economy today as the skilled-unskilled wage differential had at the beginning of this century. And it is not certain that the shift will be permanent. It is, however, clear that there is no longer any reason to believe that the wage distribution will narrow in the future. In the first two thirds of the twentieth century, both market forces&emdash;a shift to more balanced technological change and a declining ratio of less-skilled to more-skilled workers&emdash;and wage setting institutions&emdash;minimum wage laws and a strong union movement&emdash;worked to reduce income differentials. This allowed the relatively poor and unskilled would share fully in modern economic growth.

The determinants of the sudden upward leap in income inequality, especially among the young, in the 1980's are also somewhat uncertain. There are three possible causes: a rise in the relative numbers of the unskilled, the near-collapse of the private sector union movement under the pressure of the 1982 recession and of governmental hostility, and the large shift in the U.S. pattern of trade that came about in the 1970's and 1980's and led to the transfer to overseas of jobs for the less-skilled (and the transfer to the United States of jobs for the more skilled). Whichever of these factors is most important, there is no reason to expect the near future to see any reversal of the leap in inequality. International trade is likely to continue to increase, further reducing the employment of the less-skilled in high-wage sectors. The union movement is unlikely to recover. And the labor force is likely to continue to see a disproportionate growth in the numbers of the less skilled.

The 1970's and 1980's also saw rapid growth in the number of Americans whose households did not have access to the labor market. Divorce reduced the number of adults per household and multiplied the number of households. People choose to get divorced, and would most likely not appreciate being forced to stay together. But two households cost more to maintain than one; divorce is usually followed by a substantial drop in living standards for women and children (and a rise in living standards for men); and one parent living as the sole adult in a household trying to raise children has a very difficult time taking advantage of whatever opportunities can be found in the labor market. The declining economic position of lesser-skilled males, coupled with the rise in female-headed households with no access to the labor market and with reductions in public sector support together caused something extraordinary to happen in the 1970's and 1980's: the proportion of the population living in poverty increased.

The "poverty" line, as calculated by the U.S. government, does not shift upward as time passes and as expectations of what is needed to maintain a minimum decent standard of living rise. The poverty line is that amount of money required to purchase a fixed basket of commodities: the proportion living in poverty is the proportion of the population that do not attain a fixed absolute level of material well being. The proportion of the U.S. population falling below the poverty line in 1990 was about 13 1/2 percent&emdash;as large a proportion as it had been in 1966. The two decades from 1949 to 1969 saw the poverty rate using the official definition fall from about 32 percent to about 12 percent; the two decades of the 1970's and 1980's saw the poverty rate remain stagnant or rise.

This was the first two decade period in United States history in which anything at all similar had happened: previous decades that saw poverty rise, like the disastrous Great Depression-ridden 1930's, were followed by decades like the 1940's which saw tremendous economic growth and poverty reduction. The 1970's and 1980's marked the first time when, over the span of a generation, the rising tide of economic and productivity growth had failed the lift the boats of America's poor.

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Capital, Finance, and Technology Intermixed:

• John D. Rockefeller and company
• Standard Oil
• Capital and finance
• Winner-take-all--or winner-take-much--economies
• Technology and capital
• Dilemmas of corporate control
• J.P. Morgan and company...

From Shafts to Wires:

• Newcomen and Watt
• Edison and Tesla
• Shafts
• Wires
• Mass production
• "Fordism"
• IWW
• AFL

Today in Financial History

The TED Spread:

Housing Prices:

Stock Market:

Unemployment:

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From Calculated Risk:

Calculated Risk: MONDAY, SEPTEMBER 29, 2008

Cliff Diving by Calculated Risk

Dow off 6%.

S&P 500 off 7%.

NASDAQ off 7%.

With the failure of the bailout in the House, the question is now what? There is the possibility of some arm twisting and another vote tomorrow. Another possibility is that the bill will be revised in some way to garner a few more votes....

Bailout Plan Fails in House by Calculated Risk

Yes 205 No 228 ... Dow off 500 points. The vote failed....

House Vote Nears on Bailout Plan by Calculated Risk

Here is the debate on C-SPAN. Voting now ... will take about 15 minutes (so about 1:45 PM ET)....

Fed to significantly expand "the capacity to provide U.S. dollar liquidity" by Calculated Risk

From the Fed:

In response to continued strains in short-term funding markets, central banks today are announcing further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity. Central banks will continue to work together closely and are prepared to take appropriate steps as needed to address funding pressures.

Meanwhile the TED Spread from Bloomberg is at a record 3.48! Ouch....

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Conventional open-market operations work on the liquidity premium--they either relax a cash-in-advance constraint keeping aggregate demand low, or relax a relatively-safe-investments-look-unprofitable animal spirits constraint keeing investment and thus aggregate demand low. For the past year the problem has not been that safe interest rates have been low--far from it. The problem has been that risky asset values have been low (partly because a lot of risky assets are backed by investments that weren't fundamentally very profitable, and partly because risk premia are high because the supply of risky assets is great and the mobilized risk-bearing capacity of the private market is not that large).

So the natural answer appears to be open-market operations working not on the liquidity premium but on the risk premium--Operation Twist on a Pan-Galactic scale.

Paul Krugman has thoughts:

The humbling of the Fed: Not a day has gone by since this crisis began that I haven’t been thankful that Ben Bernanke is the chairman of the Fed; had events gone a bit differently (thank you Harriet Meiers!) the post might well have gone to some unqualified Bush loyalist.

That said, the Fed’s experience in this crisis has been humbling; getting traction has proved harder than BB himself suggested in his pre-crisis writings. Here are my thoughts on why....

[T]he Fed... is a very big player, but not that big compared with the market as a whole — the Fed has roughly $800 billion each of assets and liabilities in a $50 trillion credit market. And conventional monetary policy consists, basically, of enlarging or contracting the Fed’s balance sheet. Why does the size of a financial player constituting less than 2 percent of the credit market matter? The answer is that the Fed’s liabilities are special: nobody else has the right to create monetary base, which can in turn be used either as currency or as bank reserves. When the Fed expands the money supply, the key thing isn’t that it’s buying Treasury bills, it’s the fact that it’s doing so by expanding the monetary base.... But in March, and again this week, interest rates on T-bills fell close to zero — liquidity trap territory. What does that do to the Fed’s role?... [O]nce T-bills have a near-zero interest rate... the two sides of the Fed’s balance sheet become perfect substitutes.... [T]he liquidity trap makes conventional monetary policy impotent.

But why not purchase stuff other than T-bills? This can be thought of as changing the composition of the Fed’s balance sheet, rather than enlarging it; and Ben Bernanke, in happier days, thought that might be an effective policy in a liquidity trap. There are, however, three reasons to be doubtful about this stuff:

1. The Fed is now trying to move a much bigger rock: it is, in effect, trying to raise the price of financial assets other than T-bills by selling T-bills and buying other stuff. There’s only (yes, “only”) $800 billion of monetary base....

2. T-bills and other assets, such as long-term bonds, are probably much better substitutes for each other than T-bills are for monetary base — money is unique as a medium of exchange....

3. The reason T-bills are an imperfect substitute for, say, corporate bonds — to the extent they are — is risk. Therefore, the reason changing the composition of the Fed’s balance sheet can move prices, to the extent it can, is because the Fed is taking on risk. This isn’t a role the central bank is meant to play; you’re sliding over into fiscal policy.

Nonetheless, I guess the Fed had to try the “Bernanke twist.” And it did — the old Fed balance sheet, in which T-bills were the vast bulk of assets, is no more. But the effects have been disappointing, especially weighed against the risk, which I know is making Fed officials very nervous.... So Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong.

Krugman's (2) seems to be wrong, for the reason he gives in his (3): T-Bills are not close substitutes for mortgage-backed securities. If they were close substitutes, we wouldn't have a problem. It's the huge risk premium that makes them fail to be close substitutes--if the risk premium fell, things would be very different.

But I am not sure that (3) is right: taking on risk doesn't seem to me to be well-described as fiscal policy any more than as conventional open-market operation monetary policy. It is something else. I'm calling it open-market operations on the risk premium, but that is not a very good name.

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As I have said before, I find it helpful to group all the things the Fed and Treasury have done, are doing, and might do into three baskets, each corresponding to a different stage of the seriousness of the financial crisis and the soundness of the financial system.

Stage I policies: dealing with a liquidity panic These are the "Bagehot rule" policies: the central bank acts to keep the economy at the "good equilibrium" in a panic when multiple equilibria--a good "confidence" equilibrium and a bad "panic" equilibrium--are possible. It does so lending freely to solvent but illiquid institutions at a penalty rate on collateral that would be good in normal timrs. Emergency discount window operations are of this kind. The conventions that the discount rate should be higher than the bank-to-bank federal funds market rate and that borrowing from the discount window should create a stigma and a presumption of a higher degree of future regulatory and counterpary scrutiny are part of the "penalty rate" charged for asking for such help from the central bank. The idea is that institutions that have gotten themselves short of reserves and need emergency liquidity should feel some pain as a result of the systemic risk they caused.

Stage II policies: These the are conventional consensus monetary policies--the central bank as central planner making the price in the short-term money market an administered price in the interest of maintaining full employment and price stability. It raises and lowers the market rate of interest to keep it near the Wicksellian natural rate of interest. It uses open-market operations to buy Treasury securities for cash to flood or drain the market with liquidity, and so push down or up real borrowing costs (thus encouraging or discouraging investment) and push up or down the cash values of all kinds of debt. In the case of a financial crisis, if there was worry about the liquidity or solvency of the system before, the hope is that stage II policy open-market purchases will drive such worry away by boosting the asset values and reducing the debt carrying costs of "banks"--that is, any financial intermediary that lends long and promises liquidity by borrowing short. The idea behind these policies is to keep the good equilibrium at the right place as far as employment and price stabilization is concerned--and, in an emergency, to do what it can to make sure that the good near full-employment equilibrium exists.

Stage III policies: These come after stage I policies aimed at curing a temporary inability to turn assets into cash at any but fire-sale prices have failed to repair matters have been exhausted. These come after the stage II policies of using normal tools of monetary stabilization to lower interest rates across the entire spectrum--flooding the system with liquidity--have failed to ease worries that one's counterparties are still insolvent or still at risk of becoming illiquid at an awkward moment.

The purpose of stage III policies is to boost demand relative to supply for risky assets, and thus to operate on the margin that is the spread in prices and yields between safe assets like Treasury securities and the risky assets whose falling prices are threatening the stability of the financial system and the macroeconomic flow of investment. It is not enough for the central bank to turn the short-term safe interest rate into an administered price, and set it at a low value (stage II). It is not enough to provide unlimited liquidity at a penalty rate (stage I). Instead, the Fed or the Treasury or both must make the price of risk or the quantity of risky assets or both an administered price. Just as for more than half a century there has been a consensus that the level of the short-term interest rate is too important a price to be left to a market full of easily spooked and not very rational financiers, so stage III leads us to the conclusion that the price of risk is also too important a price to be left to the market.

How are we to model these three stages?

Start with a version of Bernanke-Gertler: financial intermediaries can operate in one of two modes: well-capitalized or poorly-capitalized. When financial intermediaries are well-capitalized, they themselves have little problem borrowing on a large scale and serving as conduits for the flow of funds between savers and investors. Thus market demand for risky financial assets is relatively high:

And, given the (fixed in the short run) supply of risky financial assets like mortgages and private-sector bonds, the prices of such financial assets are relatively high as well--which gives businesses an incentive to expand their capital stocks and thus put people to work in the investment-goods industries:

But there is another mode of operation: if financial intermediaries are poorly-capitalized they themselves will have great problems borrowing--savers will fear the moral hazard problems that arise when those who manage their money don't themselves have a large stake in the game, and a financial intermediary without a large equity cushion leads savers to ask the American question "if you're so smart, why aren't you rich?" and shy away. So if financial intermediaries are poorly-capitalized, supply and demand looks very different:

with low demand for financial assets, a low equilibrium price of financial assets--and no incentive for businesses to expand their capital stocks, and mass unemployment, and depression.

The kicker is that large declines in the prices of financial assets--a panic--can switch financial markets from one mode to the other, because their is a large range over which declining prices do sufficient damage to financial intermediaries' capital and reputation to cause the demand curve to slope the wrong way--in what I was taught to call the "Krugman Backwards-S" demand curve:

which produces two stable equilibrium--a good, high-price, high-investment, full-employment one, and a bad, low-price, low investment depression one. The task of central banking is to keep the financial markets and the economy at the good equilibrium, and keep it from jumping to the bad one. These are crisis stage I policies--the good equilibrium is where it should be; monetary policy is appropriate; the problem is that some shock has destroyed confidence and the economy is threatening to jump to the bad, low-value, high-unemployment equilibrium. The correct response is "Bagehot rule" policies: lend freely to financial institutions that are caught short of cash so they don't have to liquidate good assets at fire-sale prices, but lend at a penalty rate so they do feel the pain appropriate to the amount of systemic risk that we have had.

Now let's jump back in time to 2001-2002. It is the aftermath of the collapse of the tech boom and of 911. The Federal Reserve has lowered interest rates to try to forestall deflation and keep the economy near full employment. By lowering interest rates it made safe assets less attractive, and thus pushed demand for risky assets outward--raising the prices of (which is the same thing as lowering the interest rates of) risky financial assets:

The outward push became larger because of two additional factors: Asia's policy of low-currency valuation and thus of providing interest-rate subsidies to America's borrowers, and relaxed lending standards coupled with real estate exuberance. In an environment in which any newly-created financial asset could be sold for a high price, construction companies undertook to build lots more houses--and thus pushed the supply of financial assets out to the right between 2002 and 2006 as all of these new houses--5 million more than trend construction--needed mortgages:

Now comes 2007: an end to irrational exuberance and a little bit of bad macroeconomic news pushes demand for financial assets back to the left. At first--last summer--the Federal Reserve thinks that its job is simply to maintain confidence, to keep the economy at the good equilibrium by making everybody understand that the Fed was not going to let the economy get to the bad, depression equilibrium. But over the fall it became clear that such "Panic Stage I" policy wasn't going to be enough:

Providing liquidity to the market in order to maintain confidence--following Bagehot's rule of lending freely at a penalty rate to organizations that could offer collateral that would be acceptable in normal times--wasn't going to be enough to avoid a depression because it was no longer a matter of maintaining confidence that banks and other financial intermediaries were and would remain well-capitalized. Why wasn't it enough? Because they weren't well capitalized. The good equilibrium was in the wrong place--had too low a price of financial assets and thus too low a level of economic activity and too high a level of unemployment. And perhaps the good equilibrium did not exist at all.

So over the winter the Federal Reserve moved on to "Panic Stage II" policy: fight the possibility of deflation and depression by doing what they did in 2002, and lowering safe interest rates in order to boost private-sector demand for risky assets. Banks borrow short and lend long. Reduce interest rates and you boost the value of their long-term assets by more than the value of their short-term liabilities. With more of a net worth cushion and with a lower cost of borrowing, their demand for risky assets will expand--the good equilibrium will move to the right place for the macroeconomy, or the good equilibrium will reappear (we hope).

That gets us to last spring, when the Federal Reserve had done almost all that it could do in the way of reducing interest rates on safe assets, of trying to recreate the good equilibrium. Yet as we see now financial markets were still not calmed, were still not confident that the good equilibrium exists.

So the Fed moved on to Stage III policies. We do two things. First, we have the Federal government reduce the supply of risky financial assets by having the government buy or guarantee (thus making the assets no longer risky, you see). Second, we have the Federal government "encourage" the financial sector to recapitalize itself, thus pushing the demand up and to the right, like so:

And so pushing up the prices and reducing the interest rates charged on financial assets, making the good equilibrium reappear, and keeping us out of depression, like so:

That, in a nutshell with simple graphs, is what we are doing.

Five more notes:

First, last spring Larry Summers had good arguments that we had then set in motion enough policy moves to resolve the crisis and save the world economy from depression. We had implicitly guaranteed the unsecured debt of every large investment bank in the United States. And we had greatly strengthened the implicit guarantee of Fannie and Freddie. That should have been enough. But clearly it wasn't.

Second, I don't believe that after this the price of risk will ever again become a free-market price, just as after the Great Depression the short-term price of liquidity--the short term interest rate--ever became a free-market price. The federal government, in one form or another, is going to be in the business of insuring debt securities against steep declines in value. Securities that are not so insured will simply not be traded. What Fannie Mae did for "conforming" home loans, the Treasury or some other government agency will do for derivative securities. It will offer insurance, charge for that insurance, and supervise and oversee financiers much more strictly.

Third, the market fundamentalists in other sectors will need to be quiet for quite a while. We have just seen financial markets rife with moral hazard, agency, and adverse selection problems crash spectacularly. Is this a situation in which we should move health care--also rife with moral hazard, agency, and adverse selection problems--toward a free market configuration? No. Market regulation needs to be smart. But first market regulation needs to be.

Fourth, there is now no time for tolerance of the three objections to this analysis and this plan of action, roughly: (1) it's immoral, (2) it's unfair, and (3) it can't work in the long run. To expand a bit:

1. It's immoral because people have a right to be treated like adults--which means that they have a right not to be rescued by the government from the consequences of their bad judgment, and we are violating that right.

2. It's unfair because feckless greedy financiers who caused the problem ought to lose money and aren't--or aren't losing enough money--and because feckless greedy imprudent thriftless borrowers who caused the problem ought to lose money and aren't--or aren't losing enough money.

3. It won't work--at least not in the long run.

I dismiss objection (1). It is made, mostly, by those who speak for the Princes of Wall Street. Note that the Princes of Wall Street themselves are not opposed to what the Federal Reserve and the Treasury and the congress doing--anything, anything at all that promises to raise asset prices is something that each of the Princes of Wall Street would trade at least one of their organs of generation for. But those who speak for the Princes of Wall Street--well, they really believed that the Princes earned their fortunes by virtue of their virtue--their intelligence, their nerve, their skill, and their willingness to run great risks for great rewards. The idea that there is a public safety net to catch the Princes when they all fall off the tightrope at once--that they are not actually rugged Randite individualists running great risks--that they are people in the right place at the right time with enough low animal cunning to cover themselves with glue and then step outside at 57th and Park or on Canary Wharf as the money blows by so that a bunch of the money sticks to them--well, this strikes those who speak for the Princes of Wall Street on the editorial page of the Wall Street Journal or in Investors' Business Daily as a betrayal of the moral order.

The response to objection (1) is that the people who make it need to grow up. There is no more a John Galt or a Jane Galt than there is a Santa Clause. There are no Randites in a financial crisis--or no even quarter-sane Randites. The fact that there is a safety net in a financial crisis is something that has been obvious to everything with a spinal column for at least a century and a half--that's what central banks are for, for Jeebus's sake! The Princes of Wall Street did not earn their fortunes by virtue of their virtue, their intelligence, their nerve, their skill, and their willingness to run great risks, et cetera, et cetera, low animal cunning, glue, money sticks as it blows by.

The response to objection (2) is "tough." Yes, it is important to design the elements of the rescue package in such a way as to give as few windfalls as possible to the undeserving feckless, greedy, imprudent, thriftless, et cetera. We will do what we can within the law to make sure as few gains ill-gotten survive going forward. But as Federal Reserve vice chair Don Kohn says, it is bad public policy to hold the jobs of tens of millions hostage in an attempt to teach a few feckless financiers (or even somewhat more thriftless borrowers) even a much-deserved lesson.

The response to objection (3) is that it was first made by Karl Marx at the end of the 1840s: that the problem is not overspeculation but rather overproduction, and cannot for long be solved by paliatives that address overspeculation only:

Karl Marx and Friedrich Engels: Neue Rheinische Zeitung Revue (1850): Speculation regularly occurs in periods when overproduction is already in full swing. It provides overproduction with temporary market outlets... but then precipitating the outbreak of the crisis and increasing its force.... What appears to the superficial observer to be the cause of the crisis is not overproduction but excess speculation, but this is itself only a symptom of overproduction. The subsequent disruption of production does not appear as a consequence of its own previous exuberance but merely as a setback caused by the collapse of speculation...

Marx was wrong then--the business cycles of the 1850s were not the harbingers of a world-wide communist revolution and not the expression of the dialectical contradictions of capitalism. "Overproduction" does not necessitate a crash. "Overproduction" simply means that the economy has built a lot of capital, and that a bunch of that capital is not going to be worth what the rich people who invested in it had hoped, and in the aftermath the economy's real interest rate will be low. Big whoop--a low long-term real interest rate. All historical evidence suggests that stage III policies can work. And that avoiding them definitely for reasons of ideological purity does not work.

Fifth, later on we should talk more about the corollary to the refutation of objection (1)--the fact that there has always been a safety net for the rich makes it an obvious matter of simple justice that there be a safety net for the poor and the middle class as well. But for the present the important thing is to make sure that people who argue for tax cuts for the rich or for welfare-state program cutbacks for the poor should not be allowed to disrupt the formulation of public policy when there is serious public busienss to be done.

20080929 Econ 113 Lecture: America Industrializes

America Industrializes

Growth Accounting:

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• Walton and Rockoff, "Industrial Expansion and Concentration"

• Claudia Goldin and Lawrence Katz (1999) “Human Capital and Social Capital: The Rise of Secondary Schooling in America, 1910-1940,” Journal of Interdisciplinary History](http://www.nber.org/papers/W6439)

• J. Bradford DeLong, “Did J.P. Morgan’s Men Add Value?”

• Andrew Carnegie's Ode to Steelmaking

• A Mule Spinner Talks About Unemployment

• Growth Accounting, 1865-1929

20080927 Growth Accounting Problem Set

Due October 6 in lecture:

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20080927 Growth Accounting, 1865-1929: The Great Traverse

Growth Accounting, 1865-1929: The Great Traverse

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20080917 Econ 113 Lecture: Government, Manufacturing, Other Topics

20080917 Econ 113 Lecture: Government, Manufacturing, Other Topics

Slavery Cleanup:

• Reconstruction:

  • 40 acres and a mule
  • The terrorists win in the end
  • Jim Crow and one kind of freedom

• Effect on American politics:

  • Since Andrew Jackson, two great parties
    • The party of property (and opportunity)
    • The party of solidarity (and safety nets)
  • Both useful (usually); tension healthy (usually)
  • After 1865, for 65 years lots of white northerners who vote Republican because Lincoln freed the slaves
  • After 1865, for 130 years lots of white southerners who vote Democratic because Lincoln freed the slaves
  • Now over, but a strange wild ride while it was going on

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Claudia D. Goldin and Frank D. Lewis (1975), "The Economic Cost of the American Civil War: Estimates and Implications," Journal of Economic History, Vol. 35, No. 2. (Jun., 1975), pp. 299-326

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The Role of Government Back Before the Civil War

• Indian removal
  

• Transportation improvements
  

• Public finance

• Industrial policy
• Tariff
• Financial regulation

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Public finance:

• Alexander Hamilton: debt, banks, and manufactures.
  
• U.S. Revolutionary War hyperinflation: $241 million continental dollars worth $1 million gold dollars by the end of the war.
  
• Value of Revolutionary War debt tripled as debt assumption was discussed and debated.
• Alexander Hamilton believed that an America which owed lots of rich merchants lots of money--an America that "assumed" the debts the states had run up during the Revolutionary War and were not likely to pay--would be a stronger and better America.
• Thereafter: federal government finances small: tariffs and land sales...internal immprovements and military...

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Industrial policy and tariff:

Megasthenes: the coming of cotton to the Mediterranean...

David Ricardo: Why didn't the U.S. become one big unindustralized Canada?

Hamilton's "Report on Manufactures." The tariff...

Could the tariff have been good for the country?

Answer--yes, if the infant industry argument holds.

What is the infant industry argument?

There has to be some benefit--external to the firm and to the worker--from production. Future productivity has to be positively influenced by past production in order to make it beneficial in the long run to upset the Ricardian pattern of comparative advantage. The infant industry argument is plausible, but not certain, for the case of U.S. textile manufacture. Even so, it's not good for the cotton-exporting tariff-paying south. The history of the cotton textile business: Samuel Slater, Francis Cabot Lowell, Lowell Massachusetts, et cetera...

The Crystal Palace exhibition: What is special about American industry?

• Eli Whitney
• Interchangeable parts
• The "American System"
• Resource-using technological style.

Consequences for post-Civil War industrialization...

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Financial regulation:

• First and Second Banks of the United States
• Andrew Jackson
• Free banking
  • Bank note reporter
• First financial crisis: 1859

c. 1800-1860 Five hundred fold depreciation of the cowrie in Uganda: When cowrie shells are first introduced to Uganda at the end of the eighteenth century two are sufficient to purchase a slave. Thereafter the wholesale importation of cowries causes inflation with the result that by 1860 one thousand cowries are needed for such a purchase...

1780 Bank of Pennsylvania founded: This is the first American bank to be established since the declaration of independence from Britain. It is basically a temporary means of raising funds for the American army which is in a desperate financial situation
1782 Bank of North America begins operations: It was granted a charter by Congress the previous year. It fulfils a wide range of banking functions and is a great commercial success
1783 Unpaid soldiers prevented from looting the Bank of North America: This stimulates opposition to the bank, as much of the public sympathises with the soldiers, and the legality of the bank is later challenged by Pennsylvania's representatives
1784 Bank of New York and Bank of Massachusetts both open
1785 Bank of America's Congressional charter is revoked: However the bank subsequently acquires a new charter from the state government of Delaware
1786-1787 Shay's Rebellion in Massachusetts Captain Shay leads a rebel force of debtors, disaffected farmers and ex-soldiers to try and secure debt relief, issues of paper money, and other reforms. The rebellion is put down
1789 US Constitution gives Congress power over money creation: The States are not allowed to coin money, issue bills of credit or make anything except gold and silver legal tender
1791 Bank of the United States receives a 21 year charter
1792 US Coinage Act: The Dollar is adopted as the unit of account, based on a bimetallic standard, subdivided into 100 cents. Foreign coins are supposed to lose their status as legal tender within 3 years of the US coins coming into circulation
1794 US Mint Starts Operations: The Mint in Philadelphia is the first purpose-built structure authorized by the United States 1800 Number of banks in the US reaches 29: Their number has increased from just 4 in 1790, despite fears that the Bank of the United States would enjoy monopoly powers preventing the rise of new banks
1802 Barings buys 2,220 shares in the Bank of the United States: The number of British shareholders grows in the years leading up to the date when the bank's charter is due for renewal
1803 The Louisiana Purchase doubles the size of the United States: Napoleon, being short of cash, offers to sell Louisiana to the United States for 15 million dollars. Two British banks, Barings and Hopes, agree to lend the money to the US government and, despite the wars, transfer it to Napoleon
1811 Bank of the United States' charter is not renewed: Public opposition to British shareholders, suspicion that the bank is exceeding its constitutional powers, and opposition from those who believe that banking should be controlled by the states not the Federal government, are responsible for the demise of the bank
1812-1814 War between the United States and Britain: Inflation takes off in the United States. This is only partly because of the war. Without the restraining hand of the Bank of the United States there is a huge increase in the number of banks issuing notes with very little specie backing. This experience swings opinion in favour of creating a new national bank
1816 Second Bank of the United States founded: The bank begins the task of restoring the convertibility of paper notes. It also restrains other banks from making excessive issues of notes
1818-1819 Various US states levy taxes on the branches of the Second Bank: The Second Bank of the United States refuses to pay these taxes and wins its case in the Supreme Court
1824 Illinois declares all branches of the Second Bank illegal: This decision is overturned by the US Supreme Court
1824 Clearing system developed by Boston banks: The Suffolk Bank of Boston, in co-operation with 6 other local banks, begins the development of a system of clearing inter-bank accounts
1828 Andrew Jackson elected President of the USA: Jackson has been suspicious of banks ever since he read the history of the South Sea Bubble
1829 New York State passes Safety Fund Act: This tightens up conditions for chartering banks and contains provisions foreshadowing later developments in deposit insurance
1832 President Jackson vetoes early renewal of the Second Bank's charter
1833 Jackson removes US government deposits from the Second Bank: the deposits are placed in selected State Banks which come to be known as pet banks
1834 US Coinage Act: This makes a slight reduction in the value of silver relative to gold in order to encourage more gold to be brought to the mint. However, it hastens the disappearance of much of the remaining silver in circulation.
1836 President Jackson issues his Specie Circular: The circular lays down that future purchases of government land must be paid in gold or silver, or their strict equivalent, rather than in local notes or promises to pay. This has the effect of swelling the US government's coffers with specie
1837 US States acquire legal power to issue paper money: This reverses attempts to uphold the constitutional denial of the power of the states to emit bills
1837 Free Banking movement triumphs in Massachusetts: The free banking movement claims that citizens have a right to set up banks rather than being dependent on a privilege granted by the state. The State of Massachusetts passes an act in accordance with these principles
1837 US banking crisis: The uncontrolled, chaotic expansion of banking in the US is slowed, then partly reversed by a financial crisis in which every bank is forced to suspend specie payment of notes. The crisis leads to a depression in the economy which lasts until 1843
1841 The Second Bank of the United States crashes: By this time it is simply a private bank and no longer a national institution. When it ran into difficulties during the 1837 crisis it was still the largest bank in the world, but it finally crashes in 1841
1848 Gold Rush in California: The discovery of gold in California leads in the following decade to a massive increase in the production of gold coins by the mint with the result that in practice the US moves away from bimetallism towards a gold standard
1853 US Subsidiary Coinage Act: The silver content of half-dollars, quarters and dimes is reduced by about 7% making it no longer worthwhile to sell them to silver metal dealers. Therefore the new coins remain in circulation
1857 World-wide banking crisis starts in the US: In the month of October 1,415 US banks are forced to suspend specie payments. Because of huge European, especially British, investment in the US the effects are felt on the other side of the Atlantic. In Germany many of the new idustrial banks founded in the early 1850s fail. However recovery from the crisis is rapid

20080917: Economics 113: American Economic History: Mock Midterm

Economics 113: American Economic History: Mock Midterm

A: One-Sentence Identifications (25 points): Briefly state--one sentence--for each of the following people/places/things/concepts its importance for American economic history up through the Civil War. A good strategy is to tie each ID into one or more of the major factors of production: land, labor, capital, technology, and institutions.

Alexander Hamilton, Leland Stanford, Eli Whitney, smallpox, Hernan Cortez, Erie Canal, Northwest Ordinance, Louisiana Purchase, 1808, Mississippi River, American system of manufactures, Missouri-Mississippi-Ohio River system, Royal Proclamation of 1763, corn, sugar islands, cotton gin.

B: One-Paragraph Discussions (25 points): Write one paragraph (three to six sentences) answering each of the following questions:

1) Why did the United States develop differently from Latin America in the colonial period?

2) Why was the United States one of the richest countries in the world at the time of its founding?

3) Why was America a relatively equal country (for white guys) until after the Civil War?

4) British observers before the Civil War wrote back that America was a labor-scarce economy. What difference did they think this scarcity of labor made for American economic development before the Civil War?

5) What was the role of the availability of natural resources as a key factor driving American econonic growth before 1865?

C: Essay: Write an essay on one and only one of the two following topics (25 points):

1) As of the start of the twentieth century, the American economy was almost universally regarded as successful. What were the major aspects of this economic success? Why did they come to pass? Why did so much go so right for the American economy?

2) For those of us who have read a few too many alternate history novels: How would the U.S. economy have been different in 1860 if the U.S. government had followed a zero-tariff policy since 1787?

D: Problem (25 points):

Begin with our growth equation for preindustrial growth in living standards:

g(y) = (1/3)(g(N)-g(L)) + (2/3)g(E)

where g(y) is the growth rate of output per worker, g(N) is the growth rate of available natural resources, g(L) is the growth rate of the labor force, and g(E) is the growth rate of labor efficiency--which in the preindustrial age we fix at 0.9% per year.

1) In preindustrial America up until 1860, the growth rate of natural resources g(N) was 4.2% per year and the rate of growth of the labor force g(L) was 3.0% per year. What was the rate of growth of output per worker g(y)?

2) Suppose that the rate of population growth over any extended period is governed by a semi-Malthusian equation:

g(L) = 2% per year + g(y)

Is this consistent with your answer to (1) above?

3) According to the growth equation and the semi-Malthusian population equation, what would have been the growth rate of output per worker g(y) before the Civil War if the rate of growth of available natural resources g(N) had been zero--if Imperial Britain had remained in control and had, for geopolitical reasons, penned the colonists east of the Appalachians?

4) According to the growth equation and the semi-Malthusian population equation, what would have been the growth rate of the labor force g(L) before the Civil War if the rate of growth of available natural resources g(N) had been zero--if Imperial Britain had remained in control and had, for geopolitical reasons, penned the colonists east of the Appalachians?

5) Explain, in a paragraph or two, how this counterfactual alternate-history "little America" would likely have been different in 1860 than America actually was.

20080915 Econ 113 Lecture: Slavery

Slavery:

• The Slave Trade
  

• Adam Smith expected slavery to come to a rapid end after 1776.

  • Inefficient--slave has no incentive
    • An incentive-compatible system produces a larger economic pie
    • And people can decide on a system better for everyone--a system that's still unequal, but not as brutal and vicious
  • Adam Smith was wrong. Why?

• Household slavery vs. plantation slavery
  

• What maintains slavery?

  • Extreme cheapness of slaves--makes vicious discipline credible
  • Extreme control--slaves cannot run away
  • Extreme monitoring--easy to see if slaves are working hard
  • Extreme value of what the slaves make

• Slavery in history: Caesar; classical Roman slavery; Arabic slavery; Mamelukes...

• The American South

  • Quick end of indentured servitude
  • The assumption that everyone black was a slave makes control easy
  • Plantation staple crops make monitoring easy?
  • Cheapness? That ended after 1807
  • Still slavery persisted: why?

• The persistence of southern slavery

  • Evsey Domar's argument: free land made it impossible to strike the emancipatory bargain (Marx: Swann River Colony)
  • Cotton gin (which gives you another staple crop you can grow for which monitoring is easy)
  • Geographical distribution of slavery:
    
    • Plantation south--slavery
    • Mountain south--not much slavery
    • North--little slavery
    • Border state antislavery--Cassius Clay--get rid of the "Peculiar Institution"--no desire to free African Americans
    • The northern desire to see slavery set on the "course of ultimate extinction"

• But why a Civil War?

  • John C Calhoun: concurrent majorities
  • Slavery in the territories
    • Bleeding Kansas

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Abraham Lincoln and the Republican Party:

Abraham Lincoln, 1858:

I am not, nor ever have been, in favor of bringing about in any way the social and political equality of the white and black races, that I am not nor ever have been in favor of making voters or jurors of negroes, nor of qualifying them to hold office, nor to intermarry with white people... I as much as any other man am in favor of having the superior position assigned to the white race. I say upon this occasion I do not perceive that because the white man is to have the superior position the negro should be denied every thing. I do not understand that because I do not want a negro woman for a slave I must necessarily want her for a wife. My understanding is that I can just let her alone...

Abraham Lincoln, 1858:

I agree with Judge [Stephen] Douglas [that the Negro] is not my equal in many respects-certainly not in color, perhaps not in moral or intellectual endowment. But in the right to eat the bread, without the leave of anybody else, which his own hand earns, he is my equal and the equal of Judge Douglas, and the equal of every living man... http://en.wikipedia.org/wiki/Lincoln-Douglas_debates_of_1858

Frederick Douglass, 1876:

We are here to express, as best we may, by appropriate forms and ceremonies, our grateful sense of the vast, high, and preeminent services rendered to ourselves, to our race, to our country, and to the whole world by Abraham Lincoln.... He was preeminently the white man’s President, entirely devoted to the welfare of white men. He was ready and willing at any time during the first years of his administration to deny, postpone, and sacrifice the rights of humanity in the colored people to promote the welfare of the white people of this country.... I concede to you, my white fellow-citizens, a pre-eminence in this worship at once full and supreme. First, midst, and last, you and yours were the objects of his deepest affection and his most earnest solicitude. You are the children of Abraham Lincoln. We are at best only his step-children; children by adoption, children by forces of circumstances and necessity.... His great mission was to accomplish two things: first, to save his country from dismemberment and ruin; and, second, to free his country from the great crime of slavery. To do one or the other, or both, he must have the earnest sympathy and the powerful cooperation of his loyal fellow-countrymen. Without this primary and essential condition to success his efforts must have been vain and utterly fruitless. Had he put the abolition of slavery before the salvation of the Union, he would have inevitably driven from him a powerful class of the American people and rendered resistance to rebellion impossible. Viewed from the genuine abolition ground, Mr. Lincoln seemed tardy, cold, dull, and indifferent; but measuring him by the sentiment of his country, a sentiment he was bound as a statesman to consult, he was swift, zealous, radical, and determined... http://www.teachingamericanhistory.org/library/index.asp?documentprint=39

• The military history of the Civil War

  • Two ways to look at it:
  • Way #1: Bull Run, General Jackson, Shiloh, General Grant, First Valley Campaign, Seven Days, General Lee, New Orleans, Second Bull Run, General Longstreet, Antietam, General McClellan, Fredericksburg, Chancellorsville, Stone's River, Vicksburg, Gettysburg, General Longstreet, Chickamagua, General Thomas, Chattanooga, Wilderness, Spottsylvania, Second Valley Campaign, General Sheridan, Cold Harbor, General Sherman, Atlanta, Siege of Richmond, March to the Sea, Nashville, Appomatox Courthouse, John Wilkes Booth
    
  • Way #2:
    • Union 22 million; Confederacy 5 million whites, 4 million Blacks
    • Union 2.5 million soldiers; Confederacy 900,000 soldiers
    • Union 300,000 dead, 300,000 maimed; Confederacy 300,000 dead, 300,000 maimed
    • Union 500,000 discharged; Confederacy 200,000 deserted
    • April 1865: Union 1.5 million; Confederacy 100,000

• The Civil War started out as the War for the Union

  • From the War for the Union to the War Against Slavery
  • The march south and the radicalization of northern opinion

• Reconstruction:

  • 40 acres and a mule
  • The terrorists win in the end
  • Jim Crow and one kind of freedom

• Effect on American politics:

  • Since Andrew Jackson, two great parties
    • The party of property (and opportunity)
    • The party of solidarity (and safety nets)
  • Both useful (usually); tension healthy (usually)
  • After 1865, for 65 years lots of white northerners who vote Republican because Lincoln freed the slaves
  • After 1865, for 130 years lots of white southerners who vote Democratic because Lincoln freed the slaves
  • Now over, but a strange wild ride while it was going on

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Claudia D. Goldin and Frank D. Lewis (1975), "The Economic Cost of the American Civil War: Estimates and Implications," Journal of Economic History, Vol. 35, No. 2. (Jun., 1975), pp. 299-326

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Who Benefited Most?

http://www.scribd.com/doc/5472870/null

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Problem Set:

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"Cotton Is King" Problem Set

Due at lecture on Monday, September 22:

http://braddelong.posterous.com/delong-econ-113-cotton-is-king

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20080910 Econ 113 Lecture: Westward Ho!

Political Independence:

• April 1775 - August 1782 Revolutionary War
• July 4, 1776 Declaration of Independence
• 1777 Articles of Confederation
• 1787 Constitutional Convention
• 1788 Constitution Ratified
• 1789 Washington Inaugurated
• 1791 Bill of Rights passed

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Indian Removal:

Andrew Jackson's speech to the Cherokee tribe, March 7, 1835:

You are now placed in the midst of a white population. Your peculiar customs... have been abrogated by the great political community among which you live; and you are now subject to the same laws which govern the other citizens of Georgia and Alabama.... Most of your people are uneducated, and are liable to be brought into collision at all times with their white neighbors. Your young men are acquiring habits of intoxication. With strong passions, and without those habits of restraint which our laws inculcate and render necessary, they are frequently driven to excesses which must eventually terminate in their ruin. The game has disappeared among you, and you must depend upon agriculture and the mechanic arts for support. And, yet, a large portion of your people have acquired little or no property in the soil itself, or in any article of personal property which can be useful to them. How, under these circumstances, can you live in the country you now occupy? Your condition must become worse and worse, and you will ultimately disappear, as so many tribes have done before you. . . .

I have no motive, my friends, to deceive you. I am sincerely desirous to promote your welfare. Listen to me, then, while I tell you that you cannot remain where you are now. Circumstances that cannot be controlled, and which are beyond the reach of human laws, render it impossible that you can flourish in the midst of a civilized community. You have but one remedy within your reach; and that is, to remove to the West and join your countrymen, who are already established there...

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Canals and Rivers:

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Railroads:

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Factories:

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National Population:

1790: 3.9M people, $1100 1840 17.1M people, $1800 1860 31.4M people, $2000

City sizes: 1790: NY 33, PH 29, BO 18; 1840: NY 313, Balt 102, NO 102, PH 93; 1860 NY+Brooklyn 1081, PH 565, Balt 212.

Why this pattern? Transport: Erie Canal, C&O Canal, Mississippi-Missouri-Ohio river system. The coming of the railroad to keep NO from surpassing NY... New York Central RR, Pennsylvania RR...

SF in 1860: 15th among American cities with 57K people...

Conquest: Northwest territories, inland southeast and War of 1812, Louisiana Purchase, Florida, Texas, Mexican Cession, Oregon Territory, Alaska "Seward's Folly", Hawaii. Conquest keeps land abundant, hence keeps wages high.

Relatively fast increase in output per capita in the U.S. before 1860. A puzzle that growth was so fast. The puzzle set out for your inspection... Implication: an enormous increase in effective land and natural resources per worker from 1790 to 1860. Population grows. Accessible natural resources grow significantly faster...

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Handout on growth accounting, resources, and the pre-Civil War U.S.:

http://www.scribd.com/doc/5447130/null

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Alexander Hamilton: Debt, Banks, and Manufactures.

U.S. Revolutionary War hyperinflation: $241 million continental dollars worth $1 million gold dollars by the end of the war.

Value of Revolutionary War debt tripled as debt assumption was discussed and debated.

Alexander Hamilton believed that an America which owed lots of rich merchants lots of money--an America that "assumed" the debts the states had run up during the Revolutionary War and were not likely to pay--would be a stronger and better America. Why did he believe this? Megasthenes: the coming of cotton to the Mediterranean...

David Ricardo: Why didn't the U.S. become one big unindustralized Canada?

Answer: the tariff

Could the tariff have been good for the country?

Answer--yes, if the infant industry argument holds.

What is the infant industry argument? There has to be some benefit--external to the firm and to the worker--from production. Future productivity has to be positively influenced by past production in order to make it beneficial in the long run to upset the Ricardian pattern of comparative advantage.

The infant industry argument is plausible, but not certain, for the case of U.S. textile manufacture.

Even so, it's not good for the cotton-exporting tariff-paying south.

The history of the cotton textile business: Samuel Slater, Francis Cabot Lowell, Lowell Massachusetts, et cetera...

Peter Temin's article: the American system

The Crystal Palace exhibition What is special about American industry Eli Whitney Interchangeable parts The "American System" Resource-using technological style.

Consequences for post-Civil War industrialization...

Northern Industry/Slavery Lecture Notes: Econ 113: American Economic History: Fall 2007

Industry

Alexander Hamilton: Debt, Banks, and Manufactures.

U.S. Revolutionary War hyperinflation: $241 million continental dollars worth $1 million gold dollars by the end of the war.

Value of Revolutionary War debt tripled as debt assumption was discussed and debated.

Alexander Hamilton believed that an America which owed lots of rich merchants lots of money--an America that "assumed" the debts the states had run up during the Revolutionary War and were not likely to pay--would be a stronger and better America. Why did he believe this? Megasthenes: the coming of cotton to the Mediterranean...

David Ricardo: Why didn't the U.S. become one big unindustralized Canada?

Answer: the tariff Could the tariff have been good for the country?

Answer--yes, if the infant industry argument holds. What is the infant industry argument?

There has to be some benefit--external to the firm and to the worker--from production. Future productivity has to be positively influenced by past production in order to make it beneficial in the long run to upset the Ricardian pattern of comparative advantage. The infant industry argument is plausible, but not certain, for the case of U.S. textile manufacture. Even so, it's not good for the cotton-exporting tariff-paying south. The history of the cotton textile business: Samuel Slater, Francis Cabot Lowell, Lowell Massachusetts, et cetera...

Peter Temin's article: the American system:

The Crystal Palace exhibition What is special about American industry Eli Whitney Interchangeable parts The "American System" Resource-using technological style. Consequences for post-Civil War industrialization...

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Northern Agriculture Lecture: Econ 113: American Economic History: Fall 2007

Notes: Northern Agriculture Lecture: Econ 113: American Economic History: Fall 2007

Trying to do something different: a very quick rush through pre-Civil War U.S. economic history to create space in the syllabus to cover post-WWII history.

This week and next week spent trying to do four things:

Northern agrarian westward expansion Early industrialization as a result of the tariff Why did slavery--which people like Adam Smith thought was bad even for the slaveholder and was on the way out--grow and strengthen in pre-Civil War America The Civil War--600K dead, 600K maimed; could there have been a better way?

Accumulation

Alice Hanson Jones... data from estates...

Top 20% of households have about 60% of wealth...

Median Wealth Estimates as of 1774:

Region Land Slaves Other New England $2800 -- $1200 Middle States $4800 -- $3200 South $4000 $1600 $2400 Note that slaves were fully a third of southern wealth, according to AHJ... Big skew in slave ownership...

20080908 Econ 113 Lecture: Colonists and Pre-Civil War Expansion

During the pre-industrial early-modern period, 1400-1700, high Eurasian civilizations projected power across oceans in six ways...

• Prestige voyages
• Seaborne Trade-Piracy Empires
• Conquest and Occupation: encomienda/hacienda/mining
• Slave Raiding:
• Plantation Agriculture: use slaves to grow plantation crops: coffee, sugar, tobacco
• Small-Farmer Settlement:
  • Religious motive
  • Company profit motive (except for the Hudson's Bay Company, didn't work)
  • Get-a-farm motive

The sixth--small farm settlement--was, to contemporaries, the least attractive--it was what you did when you couldn't do anything else. The sixth was also, in the long run, the most important...

The pre-industrial world was poor:

But America was relatively rich up until independence:

Smithian Growth:

The colonies that were to become the United States--at least the northern United States--as Adam Smith's Utopia:

• Literate and entrepreneurial population
• Good legal infrastructure
• Market exchange
• Abundant land (means high output per worker)
• Free land (means high wages)
  • Later on we are going to contrast this picture with Engerman and Sokoloff's picture of Latin America: populations to exploit and ways to exploit them create extreme inequality... which has poisonous consequences....

And the colonial economy prospers...

Population:

1600 1,000
1640 24,000
1680 150,000
1700 260,000
1730 650,000
1780 2,700,000

Output:

How to even claim to measure output? Nevertheless, we have heroic guesses...

Year Y/Pop in 2008$
1710 $880
1775 $1,200
1840 $1,800

Of course:

1929 $9,100
2008 $48,000

Politics:

Year Settlement/Event
1607 Jamestown
1608 Quebec
1620 Plymouth
1624 New Amsterdam
1630 Massachusetts Bay Company
1643 Swedesboro, Pennsylvania
1640-1660 English Revolution
1689 "Glorious Revolution" in England
1754-1763 French and Indian War; Mercantile System; Royal Proclamation of 1763

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Why Is Independence Important for American Economic History?:

Pre-Industrial Growth Accounting: http://www.scribd.com/doc/5447130/null

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We can see Malthusian pressure starting:

% urban: 5% 1790, 11% 1840, 20% 1860; "urban" means "2500 or more"...

But pressure relieved by the westward migration:

How did the westward migration happen?