Author: Vincent Geloso

Rent-Seeking Rebels of 1776

Vincent Geloso Economics, History, Law, Liberty , , , , ,

Since yesterday was Independence Day, I thought I should share a recent piece of research I made available. A few months ago, I completed a working paper which has now been accepted as a book chapter regarding public choice theory insights for American economic history (of which I talked about before).  That paper simply argued that the American Revolutionary War that led to independence partly resulted from strings of rent-seeking actions (disclaimer: the title of the blog post was chosen to attract attention).

The first element of that string is that the Americans were given a relatively high level of autonomy over their own affairs. However, that autonomy did not come with full financial responsibility.  In fact, the American colonists were still net beneficiaries of imperial finance. As the long period of peace that lasted from 1713 to 1740 ended, the British started to spend increasingly larger sums for the defense of the colonies. This meant that the British were technically inciting (by subsidizing the defense) the colonists to take aggressive measures that may benefit them (i.e. raid instead of trade). Indeed, the benefits of any land seizure by conflict would large fall in their lap while the British ended up with the bill.

The second element is the French colony of Acadia (in modern day Nova Scotia and New Brunswick). I say “French”, but it wasn’t really under French rule. Until 1713, it was nominally under French rule but the colony of a few thousands was in effect a “stateless” society since the reach of the French state was non-existent (most of the colonial administration that took place in French North America was in the colony of Quebec). In any case, the French government cared very little for that colony.   After 1713, it became a British colony but again the rule was nominal and the British tolerated a conditional oath of loyalty (which was basically an oath of neutrality speaking to the limited ability of the crown to enforce its desires in the colony). However, it was probably one of the most prosperous colonies of the French crown and one where – and this is admitted by historians – the colonists were on the friendliest of terms with the Native Indians. Complex trading networks emerged which allowed the Acadians to acquire land rights from the native tribes in exchange for agricultural goods which would be harvested thanks to sophisticated irrigation systems.  These lands were incredibly rich and they caught the attention of American colonists who wanted to expel the French colonists who, to top it off, were friendly with the natives. This led to a drive to actually deport them. When deportation occurred in 1755 (half the French population was deported), the lands were largely seized by American settlers and British settlers in Nova Scotia. They got all the benefits. However, the crown paid for the military expenses (they were considerable) and it was done against the wishes of the imperial government as an initiative of the local governments of Massachusetts and Nova Scotia. This was clearly a rent-seeking action.

The third link is that in England, the governing coalitions included government creditors who had a strong incentives to control government spending especially given the constraints imposed by debt-financing the intermittent war with the French.  These creditors saw the combination of local autonomy and the lack of financial responsibility for that autonomy as a call to centralize management of the empire and avoid such problems in the future. This drive towards centralization was a key factor, according to historians like J.P. Greene,  in the initiation of the revolution. It was also a result of rent-seeking on the part of actors in England to protect their own interest.

As such, the history of the American revolution must rely in part on a public choice contribution in the form of rent-seeking which paints the revolution in a different (and less glorious) light.

James Buchanan on racism

Vincent Geloso Economics, History , , , , , , ,

McLean

Ever since Nancy MacLean’s new book came out, there have been waves of discussions of the intellectual legacy of James Buchanan – the economist who pioneered public choice theory and won the Nobel in economics in 1986. Most prominent in the book are the inuendos of Buchanan’s racism.  Basically, public choice had a “racist” agenda.  Even Brad DeLong indulged in this criticism of Buchanan by pointing that he talked about race by never talking race, a move which reminds him of Lee Atwater.

The thing is that it is true that Buchanan never talked about race as DeLong himself noted.  Yet, that is not a sign (in any way imaginable) of racism. The fact is that Buchanan actually inspired waves of research regarding the origins of racial discrimination and was intellectually in line with scholars who contributed to this topic.

Protecting Majorities and Minorities from Predation

To see my point in defense of Buchanan here, let me point out that I am French-Canadian. In the history of Canada, strike that, in the history of the province of Quebec where the French-Canadians were the majority group, there was widespread discrimination against the French-Canadians. For all intents and purposes, the French-Canadian society was parallel to the English-Canadian society and certain occupations were de facto barred to the French.  It was not segregation to be sure, but it was largely the result of the fact that the Catholic Church had, by virtue of the 1867 Constitution, monopoly over education. The Church lobbied very hard  in order to protect itself from religious competition and it incited logrolling between politicians in order to win Quebec in the first elections of the Canadian federation. Logrolling and rent-seeking! What can be more public choice? Nonetheless, these tools are used to explain the decades-long regression of French-Canadians and the de facto discrimination against them (disclaimer: I actually researched and wrote a book on this).

Not only that, but when the French-Canadians started to catch-up which in turn fueled a rise in nationalism, the few public choice economists in Quebec (notably the prominent Jean-Luc Migué and the public choice fellow-traveler Albert Breton) were amongst the first to denounce the rise of nationalism and reversed linguistic discrimination (supported by the state) as nothing else than a public narrative aimed at justifying rent-seeking attempts by the nationalists (see here and here for Breton and here and here for Migué). One of these economists, Migué, was actually one of my key formative influence and someone I consider a friend (disclaimer: he wrote a blurb in support of the French edition of my book).

Think about this for a second : the economists of the public choice tradition in Quebec defended both the majority and the minority against politically-motivated abuses. Let me repeat this : public choice tools have been used to explain/criticize attempts by certain groups to rent-seek at the expense of the majority and the minority.

How can you square that with the simplistic approach of MacLean?

Buchanan Inspired Great Research on Discrimination and Racism

If Buchanan didn’t write about race, he did set up the tools to explain and analyze it. As I pointed out above, I consider myself in this tradition as most of my research is geared towards explaining institutions that cause certain groups of individuals to fall behind or pull ahead.  A large share of my conception of institutions and how state action can lead to predatory actions against both minorities and majorities comes from Buchanan himself!  Nevermind that, check out who he inspired who has published in top journals.

For example, take the case of the beautifully written articles of Jennifer Roback who presents racism as rent-seeking. She sets out the theory in an article in Economic Inquiry , after she used a case study of segregated streetcars in the Journal of Economic History. A little later, she consolidated her points in a neat article in the Harvard Journal of Law and Public Policy. She built an intellectual apparatus using public choice tools to explain the establishment of discrimination against blacks and how it persisted for long.

Consider also one of my personal idols, Robert Higgs who is a public-choice fellow traveler who wrote Competition and Coercion which considers the topic of how blacks converged (very slowly) with whites in hostile institutional environment. Higgs’ treatment of institutions is well in line with public choice tools and elements advanced by Buchanan and Tullock.

The best case though is The Origins and Demise of South African Apartheid by Anton David Lowenberg and William H. Kaempfer. This book explicitly uses a public choice to explain the rise and fall of Apartheid in South Africa.

Contemporaries that Buchanan admired were vehemently anti-racist

Few economists, except maybe economic historians, know of William Harold Hutt. This is unfortunate since Hutt produced one of the deepest and most thoughtful economic criticism of Apartheid in South Africa, The Economics of the Colour Bar.  This book stands tall and while it is not the last word, it generally is the first word on anything related to Apartheid – a segregation policy against the majority that lasted nearly as long as segregation in the South.  This writing, while it earned Hutt respect amongst economists, made him more or less personae non grata in his native South Africa.

Oh, did I mention that Hutt was a public choice economist? In 1971, Hutt published Politically Impossible which has been an underground classic in the public choice tradition. Unfortunately, Hutt did not have the clarity of written expression that Buchanan had and that book has been hard to penetrate.  Nonetheless, the book is well within the broad public choice tradition.  He also wrote an article in the South African Journal of Economics which expanded on a point made by Buchanan and Tullock in the Calculus of Consent. 

Oh, wait, I forgot to mention the best part. Buchanan and Hutt were mutual admirers of one another. Buchanan cited Hutt’s work very often (see here and here) and spoke with admiration of Hutt (see notably this article here by Buchanan and this review of Hutt’s career where Buchanan is discussed briefly).

If MacLean wants to try guilt by (inexistent) association, I should be excused from providing redemption by (existent) association.  Not noting these facts that are easily available shows poor grasp of the historiography and the core intellectual history.

Simply Put

Buchanan inspired a research agenda regarding how states can be used for predatory purposes against minorities and majorities which has produced strong interpretations of racism and discrimination. He also associated with vehement and admirable anti-racists like William H. Hutt and inspired students who took similar positions. I am sure that if I were to assemble a list of all the PhD students of Buchanan, I would find quite a few who delved into the deep topic of racism using public choice tools. I know better and I did not spend three years researching Buchanan’s life. Nancy MacLean has no excuse for these oversights.

Is the U-curve of US income inequality that pronounced?

Vincent Geloso Economics , , , , , , , , ,

For some time now, I have been skeptical of the narrative that has emerged regarding income inequality in the West in general and in the US in particular. That narrative, which I label UCN for U-Curve Narrative, simply asserts that inequality fell from a high level in the 1910s down to a trough in the 1970s and then back up to levels comparable to those in the 1910s.

To be sure, I do believe that inequality fell and rose over the 20th century.  Very few people will disagree with this contention. Like many others I question how “big” is the increase since the 1970s (the low point of the U-Curve). However, unlike many others, I also question how big the fall actually was. Basically, I do think that there is a sound case for saying that inequality rose modestly since the 1970s for reasons that are a mixed bag of good and bad (see here and here), but I also think that the case that inequality did not fall as much as believed up to the 1970s is a strong one.

The reasons for this position of mine relates to my passion for cliometrics. The quantitative illustration of the past is a crucial task. However, data is only as good as the questions it seek to answer. If I wonder whether or not feudal institutions (like seigneurial tenure in Canada) hindered economic development and I only look at farm incomes, then I might be capturing a good part of the story but since farm income is not total income, I am missing a part of it. Had I asked whether or not feudal institutions hindered farm productivity, then the data would have been more relevant.

Same thing for income inequality I argue in this new working paper (with Phil Magness, John Moore and Phil Schlosser) which is a basically a list of criticisms of the the Piketty-Saez income inequality series.

For the United States, income inequality measures pre-1960s generally rely on tax-reporting data. From the get-go, one has to recognize that this sort of system (since it is taxes) does not promote “honest” reporting. What is less well known is that tax compliance enforcement was very lax pre-1943 and highly sensitive to the wide variations in tax rates and personal exemption during the period. Basically, the chances that you will report honestly your income at a top marginal rate of 79% is lower than had that rate been at 25%. Since the rates did vary from the high-70s at the end of the Great War to the mid-20s in the 1920s and back up during the Depression, that implies a lot of volatility in the quality of reporting. As such, the evolution measured by tax data will capture tax-rate-induced variations in reported income (especially in the pre-withholding era when there existed numerous large loopholes and tax-sheltered income vehicles).  The shift from high to low taxes in the 1910s and 1920s would have implied a larger than actual change in inequality while the the shift from low to high taxes in the 1930s would have implied the reverse. Correcting for the artificial changes caused by tax rate changes would, by definition, flatten the evolution of inequality – which is what we find in our paper.

However, we go farther than that. Using the state of Wisconsin which had a tax system with more stringent compliance rules for the state income tax while also having lower and much more stable tax rates, we find different levels and trends of income inequality than with the IRS data (a point which me and Phil Magness expanded on here). This alone should fuel skepticism.

Nonetheless, this is not the sum of our criticisms. We also find that the denominator frequently used to arrive at the share of income going to top earners is too low and that the justification used for that denominator is the result of a mathematical error (see pages 10-12 in our paper).

Finally, we point out that there is a large accounting problem. Before 1943, the IRS provided the Statistics of Income based on net income. After 1943, there shift between definitions of adjusted gross income. As such, the two series are not comparable and need to be adjusted to be linked. Piketty and Saez, when they calculated their own adjustment methods, made seemingly reasonable assumptions (mostly that the rich took the lion’s share of deductions). However, when we searched and found evidence of how deductions were distributed, they did not match the assumptions of Piketty and Saez. The actual evidence regarding deductions suggest that lower income brackets had large deductions and this diminishes the adjustment needed to harmonize the two series.

Taken together, our corrections yield systematically lower and flatter estimates of inequality which do not contradict the idea that inequality fell during the first half of the 20th century (see image below). However, our corrections suggest that the UCN is incorrect and that there might be more of small bowl (I call it the Paella-bowl curve of inequality, but my co-authors prefer the J-curve idea).

InequalityPikettySaez.png

On Borjas, Data and More Data

Vincent Geloso Economics , , , , , , ,

I see my craft as an economic historian as a dual mission. The first is to answer historical question by using economic theory (and in the process enliven economic theory through the use of history). The second relates to my obsessive-compulsive nature which can be observed by how much attention and care I give to getting the data right. My co-authors have often observed me “freaking out” over a possible improvement in data quality or be plagued by doubts over whether or not I had gone “one assumption too far” (pun on a bridge too far). Sometimes, I wish more economists would follow my historian-like freakouts over data quality. Why?

Because of this!

In that paper, Michael Clemens (whom I secretly admire – not so secretly now that I have written it on a blog) criticizes the recent paper produced by George Borjas showing the negative effect of immigration on wages for workers without a high school degree. Using the famous Mariel boatlift of 1980, Clemens basically shows that there were pressures on the US Census Bureau at the same time as the boatlift to add more black workers without high school degrees. This previously underrepresented group surged in importance within the survey data. However since that underrepresented group had lower wages than the average of the wider group of workers without high school degrees, there was an composition effect at play that caused wages to fall (in appearance). However, a composition effect is also a bias causing an artificial drop in wages and this drove the results produced by Borjas (and underestimated the conclusion made by David Card in his original paper to which Borjas was replying).

This is cautionary tale about the limits of econometrics. After all, a regression is only as good as the data it uses and suited to the question it seeks to answer. Sometimes, simple Ordinary Least Squares are excellent tools. When the question is broad and/or the data is excellent, an OLS can be a sufficient and necessary condition to a viable answer. However, the narrower the question (i.e. is there an effect of immigration only on unskilled and low-education workers), the better the method has to be. The problem is that the better methods often require better data as well. To obtain the latter, one must know the details of a data source. This is why I am nuts over data accuracy. Even small things matter – like a shift in the representation of blacks in survey data – in these cases. Otherwise, you end up with your results being reversed by very minor changes (see this paper in Journal of Economic Methodology for examples).

This is why I freak out over data. Maybe I can make two suggestions about sharing my freak-outs.

The first is to prefer a skewed ratio of data quality to advanced methods (i.e. simple methods with crazy-data). This reduces the chances of being criticized for relying on weak assumptions. The second is to take a leaf out of the book of the historians. While historians are often averse to advantaged data techniques (I remember a case when I had to explain panel data regressions to historians which ended terribly for me), they are very respectful of data sources. I have seen historians nurture datasets for years before being willing to present them. When published, they generally stand up to scrutiny because of the extensive wealth of details compiled.

That’s it folks.

 

Can we trust US interwar inequality figures?

Vincent Geloso Economics, History , , ,

This question is the one that me and Phil Magness have been asking for some time and we have now assembled our thoughts and measures in the first of a series of papers. In this paper, we take issue with the quality of the measurements that will be extracted from tax records during the interwar years (1918 to 1941).

More precisely, we point out that tax rates at the federal level fluctuated wildly and were at relatively high levels. Since most of our inequality measures are drawn from the federal tax data contained in the Statistics of Income, this is problematic. Indeed, high tax rates might deter honest reporting while rapidly changing rates will affect reporting behavior (causing artificial variations in the measure of market income). As such, both the level and the trend of inequality might be off.  That is our concern in very simple words.

To assess whether or not we are worrying for nothing, we went around to find different sources to assess the robustness of the inequality estimates based on the federal tax data. We found what we were looking for in Wisconsin whose tax rates were much lower (never above 7%) and less variable than those at the federal levels. As such, we found the perfect dataset to see if there are measurement problems in the data itself (through a varying selection bias).

From the Wisconsin data, we find that there are good reasons to be skeptical of the existing inequality measured based on federal tax data. The comparison of the IRS data for Wisconsin with the data from the state income tax shows a different pattern of evolution and a different level (especially when deductions are accounted for). First of all, the level is always inferior with the WTC data (Wisconsin Tax Commission). Secondly, the trend differs for the 1930s.

Table1 for Blog

I am not sure what it means in terms of the true level of inequality for the period. However, it suggests that we ought to be careful towards the estimations advanced if two data sources of a similar nature (tax data) with arguably minor conceptual differences (low and stable tax rates) tell dramatically different stories.  Maybe its time to try to further improve the pre-1945 series on inequality.

Empire effects : the case of shipping

Vincent Geloso Economics, History , , , , , , ,

I have been trying, for some time now, to circle an issue that we can consider to be a cousin of the emerging “state capacity” literature (see Mark Koyama’s amazing summary here). This cousin is the literature on “empire effects” (here and here for examples).

The core of the “empire effect” claim is that empires provide global order which we can consider as a public good. A colorful image would be the British Navy roaming the seas in the 19th century which meant increased protection for trade. This is why it is a parent of the state capacity argument in the sense that the latter concept refers (broadly) to the ability of a state to administer the realm within its boundaries. The empire effect is merely the extension of these boundaries.

I still have reservations about the nuances/limitations of state capacity as an argument to explain economic growth. After all, the true question is not how states consolidate, but how they create constraints on rulers to not abuse the consolidated powers (which in turn generates room for growth). But, it is easy to heavily question its parent: the empire effect.

This is what I am trying to do in a recent paper on the effects of empire on shipping productivity between 1760 and 1860.

Shipping is one of the industry that is most likely to be affected by large empires – positively or negatively. Indeed, the argument for empire effects is that they protect trade. As such, the British navy in the 19th century protected trade and probably helped the shipping industry become more productive. But, achieving empire comes at a cost. For example, the British navy needed to grow very large in size and it had to employ inputs from the private sector thus crowding-it out. In a way, if a security effect from empire emerged as a benefit, there must have been a cost. The cost we wish to highlight is the crowding-out one.

In the paper (written with Jari Eloranta of Appalachian State University and Vadim Kufenko of University of Hohenheim), I argue that, using the productivity of the Canadian shipping industry which was protected by the British Navy, the security effect from a large navy was smaller than the crowding-out from high-levels of expenditures on the navy.

While it is still a working paper which we are trying to expand and improve, our point is that what allowed the productivity of the Canadian shipping industry (which was protected by Britain) to soar was that the British Navy grew smaller in absolute terms. While the growth of the relative strength of the British Navy did bolster productivity in some of our tests, the fact that the navy was much smaller was the “thing in the mix that did the trick”.  In other words, the empire effect is just the effect of a ramping-down in military being presented as something else than it truly is (at least partly).

That’s our core point. We are still trying to improve it and (as such) comments are welcomed.

On the paradox of poverty and good health in Cuba

Vincent Geloso Economics, Liberty , , , , , ,

One of the most interesting (in my opinion) paradox in modern policy debates relates to how Cuba, a very poor country, has been able to generate health outcomes close to the levels observed in rich countries. To be fair, academics have long known that there is only an imperfect relation between material living standards and biological living standards (full disclosure: I am inclined to agree, but with important caveats better discussed in a future post or article, but there is an example). The problem is that Cuba is really an outlier. I mean, according to the WHO statistics, its pretty close to the United States in spite of being far poorer.

In the wake of Castro’s death, I believed it necessary to assess why Cuba is an outlier and creates this apparent paradox. As such, I decided to move some other projects aside for the purposes of understanding Cuban economic history and I have recently finalized the working paper (which I am about to submit) on this paradox (paper here at SSRN).

The working paper, written with physician Gilbert Berdine (a pneumologist from Texas Tech University), makes four key arguments to explain why Cuba is an outlier (that we ought not try to replicate).

The level of health outcomes is overestimated, but the improvements are real

 Incentives matter, even in the construction of statistics and this is why we should be skeptical. Indeed, doctors are working under centrally designed targets of infant mortality that they must achieve and there are penalties if the targets are not reached. As such, physicians respond rationally and they use complex stratagems to reduce their reported levels. This includes the re-categorization of early neonatal deaths as late fetal deaths which deflates the infant mortality rate and the pressuring (sometimes coercing) of mothers with risky pregnancies to abort in order to avoid missing their targets. This overstates the level of health outcomes in Cuba since accounting for reclassification of deaths and a hypothetically low proportions of pressured/coerced abortions reduces Cuban life expectancy by close to two years (see figure below). Nonetheless, the improvements in Cuba since 1959 are real and impressive – this cannot be negated.

Cuba1.png

 

Health Outcomes Result from Coercive Policy 

Many experts believe that we ought to try to achieve the levels of health outcomes generated by Cuba and resist the violations of human rights that are associated with the ruling regime. The problem is that they cannot be separated. It this through the use of coercive policy that the regime is able to allocate more than 10% of its tiny GDP to health care and close to 1% of its population to the task of being a physician. It ought also be mentioned that physicians in Cuba are also mandated to violate patient privacy and report information to the regime. Consequently, Cuban physicians (who are also members of the military) are the first line of internal defense of the regime. The use of extreme coercive measures has the effect of improving health outcomes, but it comes at the price of economic growth. As documented by Werner Troesken, there are always institutional trade-offs in term of health care. Either you adopt policies that promote growth but may hinder the adoption of certain public health measures or you adopt these measures at the price of growth. The difference between the two choices is that economic growth bears fruit in the distant future (i.e. there are palliative health effects of economic growth that take more time to materialize).

Health Outcomes are Accidents of Non-Health Related Policies

As part of the institutional trade-off that make Cubans poorer, there might be some unintended positive health-effects. Indeed, the rationing of some items does limit the ability of the population to consume items deleterious to their health. The restrictions on car ownership and imports (which have Cuba one of the Latin American countries with the lowest rate of car ownership) also reduces mortality from road accidents which,  in countries like Brazil, knock off 0.8 years of life expectancy at birth for men and 0.2 years for women.  The policies that generate these outcomes are macroeconomic policies (which impose strict controls on the economy) unrelated to the Cuban health care system. As such, the poverty caused by Cuban institutions  may also be helping Cuban live longer.

Human Development is not a Basic Needs Measure

The last point in the paper is that human development requires agency.  Since life expectancy at birth is one of the components of the Human Development Indexes (HDI),  Cuba fares very well on that front. The problem is that the philosophy between HDIs is that individual must have the ability to exercise agency. It is not a measure of poverty nor a measure of basic needs, it is a measure meant to capture how well can individual can exercise free will: higher incomes buy you some abilities, health provides you the ability to achieve them and education empowers you.

You cannot judge a country with “unfree” institutions with such a measure. You need to compare it with other countries, especially countries where there are fewer legal barriers to human agency. The problem is that within Latin America, it is hard to find such countries, but what happens when we compare with the four leading countries in terms of economic freedom. What happens to them? Well, not only do they often beat Cuba, but they have actually come from further back and as such they have seen much larger improvements that Cuba did.

This is not to say that these countries are to be imitated, but they are marginal improvements relative to Cuba and because they have freer institutions than Cuba, they have been able to generate more “human development” than Cuba did.

Cuba2.png

Our Conclusion

Our interpretation of Cuban health care provision and health outcomes can be illustrated by an analogy with an orchard. The fruit of positive health outcomes from the “coercive institutional tree” that Cuba has planted can only be picked once, and the tree depletes the soil significantly in terms of human agency and personal freedom. The “human development tree” nurtured in other countries yields more fruit, and it promises to keep yielding fruit in the future. Any praise of Cuba’s health policy should be examined within this broader institutional perspective.

On British Public Debt, the American Revolution and the Acadian Expulsion of 1755

Vincent Geloso Economics, History , , , , , , , ,

I have a new working paper out there on the role of the Acadian expulsion of 1755 in fostering the American revolution.  Most Americans will not know about the expulsion of a large share of the French-speaking population (known as the Acadians) of the Maritimes provinces of Canada during the French and Indian Wars.

Basically, I argue that the policy of deportation was pushed by New England and Nova Scotia settlers who wanted the well-irrigated (thanks to an incredibly sophisticated – given the context of a capital-scarce frontier economy – dyking system) farms of the Acadians. Arguing that the French population under nominal British rule had only sworn an oath of neutrality, they represented a threat to British security, the settlers pushed hard for the expulsion. However, the deportation was not approved by London and was largely the result of colonial decisions rather than Imperial decisions. The problem was that the financial burden of the operation (equal to between 32% of 38% of the expenditures on North America – and that’s a conservative estimate) were borne by England, not the colonies.

This fits well, I argue, into a public choice framework. Rent-seeking settlers pushed for the adoption of a policy whose costs were spread over a large population (that of Britain) but whose benefits they were the sole reapers.

The problem is that this, as I have argued elsewhere, was a key moment in British Imperial history as it contributed to the idea that London had to end the era of “salutary neglect” in favor of a more active management of its colonies.  The attempt to centralize management of the British Empire, in order to best prioritize resources in a time of rising public debt and high expenditures level in the wars against the French, was a key factor in the initiation of the American Revolution.

Moreover, the response from Britain was itself a rent-seeking solution. As David Stasavage has documented, government creditors in England became well-embedded inside the British governmental structure in order to minimize default risks and better control expenses. These creditors were a crucial part of the coalition structure that led to the long Whig Supremacy over British politics (more than half a century). In that coalition, they lobbied for policies that advantaged them as creditors. The response to the Acadian expulsion debacle (for which London paid even though it did not approve it and considered the Acadian theatre of operation to be minor and inconsequential) should thus be seen also as a rent-seeking process.

As such, it means that there is a series of factors, well embedded inside broader public choice theory, that can contribute to an explanation of the initiation of the American Revolution. It is not by any means a complete explanation, but it offers a strong partial contribution that considers the incentives behind the ideas.

Again, the paper can be consulted here or here.

On doing economic history

Vincent Geloso Economics, History , , , , , , , , , , ,

I admit to being a happy man. While I am in general a smiling sort of fellow, I was delightfully giggling with joy upon hearing that another economic historian (and a fellow  Canadian from the LSE to boot), Dave Donaldson, won the John Bates Clark medal. I dare say that it was about time. Nonetheless I think it is time to talk to economists about how to do economic history (and why more should do it). Basically, I argue that the necessities of the trade require a longer period of maturation and a considerable amount of hard work. Yet, once the economic historian arrives at maturity, he produces long-lasting research which (in the words of Douglass North) uses history to bring theory to life.

Economic History is the Application of all Fields of Economics

Economics is a deductive science through which axiomatic statements about human behavior are derived. For example, stating that the demand curve is downward-sloping is an axiomatic statement. No economist ever needed to measure quantities and prices to say that if the price increases, all else being equal, the quantity will drop. As such, economic theory needs to be internally consistent (i.e. not argue that higher prices mean both smaller and greater quantities of goods consumed all else being equal).

However, the application of these axiomatic statements depends largely on the question asked. For example, I am currently doing work on the 19th century Canadian institution of seigneurial tenure. In that work, I  question the role that seigneurial tenure played in hindering economic development.  In the existing literature, the general argument is that the seigneurs (i.e. the landlords) hindered development by taxing (as per their legal rights) a large share of net agricultural output. This prevented the accumulation of savings which – in times of imperfect capital markets – were needed to finance investments in capital-intensive agriculture. That literature invoked one corpus of axiomatic statements that relate to capital theory. For my part, I argue that the system – because of a series of monopoly rights – was actually a monopsony system through the landlords restrained their demand for labor on the non-farm labor market and depressed wages. My argument invokes the corpus of axioms related to industrial organization and monopsony theory. Both explanations are internally consistent (there are no self-contradictions). Yet, one must be more relevant to the question of whether or not the institution hindered growth and one must square better with the observed facts.

And there is economic history properly done. It tries to answer which theory is relevant to the question asked. The purpose of economic history is thus to find which theories matter the most.

Take the case, again, of asymetric information. The seminal work of Akerlof on the market for lemons made a consistent theory, but subsequent waves of research (notably my favorite here by Eric Bond) have showed that the stylized predictions of this theory rarely materialize. Why? Because the theory of signaling suggests that individuals will find ways to invest in a “signal” to solve the problem. These are two competing theories (signaling versus asymetric information) and one seems to win over the other.  An economic historian tries to sort out what mattered to a particular event.

Now, take these last few paragraphs and drop the words “economic historians” and replace them by “economists”.  I believe that no economist would disagree with the definition of the tasks of the economist that I offered. So why would an economic historian be different? Everything that has happened is history and everything question with regards to it must be answered through sifting for the theories that is relevant to the event studied (under the constraint that the theory be consistent). Every economist is an economic historian.

As such, the economic historian/economist must use advanced tools related to econometrics: synthetic controls, instrumental variables, proper identification strategies, vector auto-regressions, cointegration, variance analysis and everything you can think of. He needs to do so in order to answer the question he tries to answer. The only difference with the economic historian is that he looks further back in the past.

The problem with this systematic approach is the efforts needed by practitioners.  There is a need to understand – intuitively – a wide body of literature on price theory, statistical theories and tools, accounting (for understanding national accounts) and political economy. This takes many years of training and I can take my case as an example. I force myself to read one scientific article that is outside my main fields of interest every week in order to create a mental repository of theoretical insights I can exploit. Since I entered university in 2006, I have been forcing myself to read theoretical books that were on the margin of my comfort zone. For example, University Economics by Allen and Alchian was one of my favorite discoveries as it introduced me to the UCLA approach to price theory. It changed my way of understanding firms and the decisions they made. Then reading some works on Keynesian theory (I will confess that I have never been able to finish the General Theory) which made me more respectful of some core insights of that body of literature. In the process of reading those, I created lists of theoretical key points like one would accumulate kitchen equipment.

This takes a lot of time, patience and modesty towards one’s accumulated stock of knowledge. But these theories never meant anything to me without any application to deeper questions. After all, debating about the theory of price stickiness without actually asking if it mattered is akin to debating with theologians about the gender of angels (I vote that they are angels and since these are fictitious, I don’t give a flying hoot’nanny). This is because I really buy in the claim made by Douglass North that theory is brought to life by history (and that history is explained by theory).

On the Practice of Economic History

So, how do we practice economic history? The first thing is to find questions that matter.  The second is to invest time in collecting inputs for production.

While accumulating theoretical insights, I also made lists of historical questions that were still debated.  Basically, I made lists of research questions since I was an undergraduate student (not kidding here) and I keep everything on the list until I have been satisfied by my answer and/or the subject has been convincingly resolved.

One of my criteria for selecting a question is that it must relate to an issue that is relevant to understanding why certain societies are where there are now. For example, I have been delving into the issue of the agricultural crisis in Canada during the early decades of the 19th century. Why? Because most historians attribute (wrongly in my opinion)  a key role to this crisis in the creation of the Canadian confederation, the migration of the French-Canadians to the United States and the politics of Canada until today. Another debate that I have been involved in relates to the Quiet Revolution in Québec (see my book here) which is argued to be a watershed moment in the history of the province. According to many, it marked a breaking point when Quebec caught up dramatically with the rest of  Canada (I disagreed and proposed that it actually slowed down a rapid convergence in the decade and a half that preceded it). I picked the question because the moment is central to all political narratives presently existing in Quebec and every politician ushers the words “Quiet Revolution” when given the chance.

In both cases, they mattered to understanding what Canada was and what it has become. I used theory to sort out what mattered and what did not matter. As such, I used theory to explain history and in the process I brought theory to life in a way that was relevant to readers (I hope).  The key point is to use theory and history together to bring both to life! That is the craft of the economic historian.

The other difficulty (on top of selecting questions and understanding theories that may be relevant) for the economic historian is the time-consuming nature of data collection. Economic historians are basically monks (and in my case, I have both the shape and the haircut of friar Tuck) who patiently collect and assemble new data for research. This is a high fixed cost of entering in the trade. In my case, I spent two years in a religious congregation (literally with religious officials) collecting prices, wages, piece rates, farm data to create a wide empirical portrait of the Canadian economy.  This was a long and arduous process.

However, thanks to the lists of questions I had assembled by reading theory and history, I saw the many steps of research I could generate by assembling data. Armed with some knowledge of what I could do, the data I collected told me of other questions that I could assemble. Once I had finish my data collection (18 months), I had assembled a roadmap of twenty-something papers in order to answer a wide array of questions on Canadian economic history: was there an agricultural crisis; were French-Canadians the inefficient farmers they were portrayed to be; why did the British tolerate catholic and French institutions when they conquered French Canada; did seigneurial tenure explain the poverty of French Canada; did the conquest of Canada matter to future growth; what was the role of free banking in stimulating growth in Canada etc.

It is necessary for the economic historian to collect a ton of data and assemble a large base of theoretical knowledge to guide the data towards relevant questions. For those reasons, the economic historian takes a longer time to mature. It simply takes more time. Yet, once the maturation is over (I feel that mine is far from being over to be honest), you get scholars like Joel Mokyr, Deirdre McCloskey, Robert Fogel, Douglass North, Barry Weingast, Sheilagh Ogilvie and Ronald Coase (yes, I consider Coase to be an economic historian but that is for another post) who are able to produce on a wide-ranging set of topics with great depth and understanding.

Conclusion

The craft of the economic historian is one that requires a long period of apprenticeship (there is an inside joke here, sorry about that). It requires heavy investment in theoretical understanding beyond the main field of interest that must be complemented with a diligent accumulation of potential research questions to guide the efforts at data collection. Yet, in the end, it generates research that is likely to resonate with the wider public and impact our understanding of theory. History brings theory to life indeed!

Ending supply management would not cost $30b

Vincent Geloso Current Events , , , , , ,

In Canada, the debates over supply management – the system of production quotas and import duties limiting the supply of dairy and poultry products – has intensified in recent years.  For ten years now (literally), I have been writing, testifying and researching this insane system which moves the supply curve leftwards (even if some try to deny it in some non-nonsensical arguments stating that prices would be higher if the supply increased).

One of the groups that has been spewing non-sense is, obviously, the dairy farmers union. In one of their often-made claim, which some politicians are taking up, is that ending the policy would cost $30 billions.

That is incorrect, widely off the mark and not properly contextualized.

First of all, the number relates to the market value of the quotas (see here). Many farmers bought the quotas many years ago at a much lower price and as such, compensation would be slightly below the $30 billions. More importantly, most quotas are acquired through mortgages by farmers. These mortgages represent a value of $30 billions (capital and interest). However, farmers are riskier borrowers than governments. If the government bought back all the mortgages, it would actually become the borrower (it would hold the liability). However, since the Canadian government is at a lesser risk of insolvency than farmers, it can easily renegotiate with banks for a haircut. In fact, banks would easily accept this. They know that the government won’t default on this which means the risks on their balance sheets have just dropped dramatically and they now hold a much safer asset. I guess that they would be willing to negotiate a form of haircut on the assets that would be somewhere between the new (risk-adjusted) value and the old value.

Secondly, who the hell said the quotas needed to be bought back in one shot? Farmers could be offered a choice between many options. First, there would be the option buy-back plan that gives them 50% (in government t-bills) of the value of the share of the mortgage that they paid. The second would be a higher percentage spread out over many years. The third could be over 100% of the value of the permit in tax credits. Basically, if a farmer has paid $200,000 of a $1,000,000 mortgage, the government would commit to pay the difference to the creditor institution and offer more than $200,000 in tax breaks to farmers and their families. For example, a farmer with a tax liability of 25,000$ every year would end up paying no taxes for 10 years (as such, he would 125% of the value of his quota). As such, the cost is spread over 10 years making this a $3 billion expense annually.

And what about the context? Well, according to the famous article (recently published) on the burden of supply management, the cost in higher prices is equal to 0.84% of household income. In short, this means 0.84% of the Canadian economy or $17.3 billion a year or $173 billion over 10 years. Now, this is annually – the savings are recurrent – and the estimates does not account for the fact that productivity gains might finally allow Canadian farms to benefit from the international increase in demand. So, the $173 billion figure is pretty conservative and yet, the inaccurate $30 billion figure accounts only for roughly 17.3% of the benefits. In terms of return on investments, I am pretty sure this qualifies as a great move through which you would not even need to go down the Australian route (imposing a transitory tax for ten years).

I am sorry, but there is no way that the cost of the buyback should be considered a deterrent especially if a buyback plan is spread out over many years.

How dairy farmers unions in Canada are distorting the facts about supply management

Vincent Geloso Economics, Politics , , , , , , ,

Under heat recently as President Trump has criticized supply management in Canada and retaliated against it, the different provincial associations representing dairy farmers have moved on the offensive. To promote the virtues of this system meant to reduce production in order to prop up prices through the use of trade tariffs, production quotas and price controls (how can we call those virtues), these unions have produced numerous infographics to make their case. It is even part of what they dub their These-infographics-show-that-diary-prices-are-lower-in-Canada-than-elsewhere, that milk is still a cheap drink relative to other type of drinks and those prices, supposedly, increase more slowly than elsewhere. All of these graphics are dishonest and must be dismantled.

The most egregious of these infographics – present in the “lobby day kit” – shows the price of milk in Australia (1.55 CAD), Canada (1.45 CAD) and New Zealand (1.65 CAD). They are seemingly using 2014 prices. First of all, they use data that conflicts massively with the reports of Statistics Canada that suggest that milk prices hover between 2.33$ to 2.48$ per liter.  Their data is provided by AC Nielsen but no justification is presented as to why they are better than Statistics Canada. The truth is that it is not better. Participants in Nielsen surveys come from a self-selected pool of storeowners who wish to participate and are then selected by Nielsen to be part of the data collection. Then, they can record prices. It should be mentioned that not all regions of Canada are covered in the data. Although the Nielsen data does have some uses (especially with regards to market studies), it hardly measures up Statistics Canada when comes the time to evaluate price levels. This is because the government agency collects information from all regions and tries a broader sweep of retailers in order to create the consumer price index.

But an even larger problem is that, in their comparison of prices, they don’t mention that New Zealand taxes milk. In New Zealand, all food items are subjected to sales tax, which is not the case in Canada and Australia. Hence, when they compare retail prices, they are comparing prices that exclude taxes and prices that include taxes. One would like to find if they acknowledge this fact in the methodological mentions, but there are none!

Using prices available at Numbeo.com and Expatisan.com and the exchange rates made available by the Bank of Canada, we can correct for this problem of theirs. Simply changing prices source leads to a massively different result with regards to Australia whose milk prices are lower than in Canada. Secondly, once we adjust for the sales tax in New Zealand, we find that prices in New Zealand are lower than in Canada. In fact they are lower than in one of Canada’s cheapest market, Montreal (let alone Toronto or Vancouver).  So the infographic they show in order to lobby governments is a fabrication.

Table 1: The real price of milk

Using Numbeo.com (regular milk)
Unadjusted Adjusted for taxes
 Australia  $           1.59  $                 1.59
 New Zealand  $           2.26  $                 1.97
 Canada  $           1.99  $                 1.99
 Using Expatisan.com (whole milk)
 Unadjusted  Adjusted for taxes
 Sydney  $           1.82  $                 1.47
 Wellington  $           2.42  $                 2.10
 Montreal  $           2.87  $                 2.87

Source: Numbeo.com and Expatisan.com, consulted May 16th 2014 and the Bank of Canada’s currency converter. Note: using the Statistics Canada price would make Canada’s situation even worse by comparison.

This is part of a pattern of deceit since they also massage data for numerous other graphs that are presented to Canadians in efforts to convince them of the virtues of supply management. One other example is an infographic that presents a figure of nominal milk prices in Australia before and after the abolition of supply management. Given that prices seem more volatile after 2000 and that they increase more steeply, they try to make us believe that liberalization was a failure. This is not the case. Any sensible policy analyst would deflate nominal prices by the general price index to control for inflation. When one does just that using the data from the Australian Bureau of Statistics, one sees that real prices stabilized in the first ten years of deregulation after increasing roughly 15% in the decade prior. And since 2010, real prices have been falling constantly.

Other examples abound. In one instance, the Quebec union of dairy farmers circulated an infographic meant to show that nominal prices for dairy products increased faster in the United States than in Canada. Again, they omit inflation. Since 1990 (their own starting date), prices of dairy products have risen more slowly than inflation – indicating a decline in real prices. In Canada, the opposite occurred – inflation increased more slowly than dairy prices indicating an increase of the real price.

The debate around supply management is complicated. The policy course to adopt in order to improve agricultural productivity and lower prices for Canadians is hard to pinpoint. But whatever position one may hold, no one is well-served by statistical manipulations offered by the unions representing dairy farmers.

On Evonomics, Spelling and Basic Economic Concepts

Vincent Geloso Economics, Liberty , , , ,

I am a big fan of exploring economic ideas into greater depth rather than remaining on the surface of knowledge that I accumulated through my studies. As such, I am always happy when I see people trying to promote “alternatives” within the field of economics (e.g. neuroeconomics, behavioral economics, economic history, evolutionary economics, feminist economics etc.). I do not always agree, but it is enjoyable to think about some of the core tenets of the field through the work of places like the Institute for New Economic Thinking. However, things like Evonomics do not qualify for this.

And this is in spite of the fact that the core motivation of the webzine is correct: there are problems with the way we do economics today (on average). However, discomfort towards the existing state of affairs is no excuse for shoddy work and holding up strawmen that can be burned at the stake followed by a vindictive celebratory dance. The most common feature of those who write for Evonomics is to hold such a strawman with regards to rationality. It presents a caricature where humans calculate everything with precision and argue that if, post-facto, all turns out well then it was a rational process. No one, I mean no one, believes that. The most succinct summary  of rationality according to economists is presented by Vernon Smith in his Rationality in Economics: Constructivist and Ecological Forms. 

Such practices have led me to discount much of what is said on Evonomics and it is close to the threshold where the time costs of sorting the wheat from the chaff outweighs the intellectual benefits.

This recent article on “Dierdre” McCloskey may have pushed it over that threshold. I say “Dierdre” because the author of the article could not even be bothered to write correctly the name of the person he is criticizing. Indeed, it is “Deirdre” McCloskey and not “Dierdre”. While, ethymologically, Dierdre is a variant of Deirdre from the Celtic legend that shares similarities to Tristan and Isolde, the latter form is more frequent. More importantly, Dierdre is name more familiar to players of Guild Wars. 

A minor irritant which, unfortunately, compounds my poor view of the webzine. But then, the author of the article in question goes into full strawman mode. He singles out a passage from McCloskey regarding the effects of redistributing income from the top to the bottom. In that passage, McCloskey merely points out that the effects of equalizing incomes would be minimal.  The author’s reply? Focus on wealth and accuse McCloskey of shoddy mathematics.

Now, this is just poor understanding of basic economic concepts and it matters to the author’s whole point. Income is a flux variable and wealth is a stock variable. The two things are thus dramatically different. True, the flux can help build up the stock, but the people with the top incomes (flux) are not necessarily those with the top wealths (stock). For example, most students have negative net worth (negative stock) when they graduate. However, thanks to their human capital (Bryan Caplan would say signal here), they have higher earnings. Thus, they’re closer to the top of the income distribution and closer to the very bottom of the wealth distribution.  My grandpa is the actual reverse. Before he passed away, my grandpa was probably at the top of the wealth distribution, but since he passed most of his time doing  no paid work whatsoever, he was at the bottom of the income distribution.

Nevermind that the author of the Evonomics article misses the basic point of McCloskey (which is that we should care more about the actual welfare of people rather than the egalitarian distribution), this basic flaw in understanding why the difference between a stock and flux leads him astray.

To be fair, I can see why some people disagree with McCloskey. However, if you can’t pass the basic ideological Turing test, you should not write in rebuttal.

Differences in life expectancy within Canada, 1921 to 2011

Vincent Geloso Economics, History ,

I’ve been playing around with some data for a paper I have been trying to write about the economic history of Canada in the 20th century. In the process, I assembled the data from the Base de données sur la longévité canadienne regarding life expectancy at birth. Then, I thought that it would be interesting to see how large were the differences between the provinces and how fast did they close. They closed pretty dramatically during the 20th century – see for yourself.

LifeExpectancyCanada

The GDP, real wages and working hours of France since the 13th century

Vincent Geloso Economics, History , , ,

Every few years, an economic historian in training spends thousands of hours in archives assembling a long quantitative essay. It’s the work of monks (in fact, when you go far back in history, you also end up working with monks and nuns – which was my case on Canadian economic history). It’s the kind of work that requires patience, attention to details and (did I say it already?) patience.

I did that for my own work on Canadian economic history. For two years, I locked myself in the archives of two religious congregations to collect and transcribe close to a million price and wages information. For these two years, I did not write one single paper. I just collected the data and constituted a list of the papers I could write. However, once its finished, you may party like a sailor fresh off the boat because you end up with a wealth of data to answer hundreds of questions. When I finished my own thing on Canada, I was thrilled as I thought it constituted a great advance in quantitative knowledge (which I could use to assess tougher historical questions).

However, compared to the work of Leonardo Ridolfi, my own work looks like a dwarf (I confess envy here).  Ridolfi spent hundreds of hours assembling a quantitative essay on France’s economy since 1250. This is monumental!  France has generally been a statistical abyss (except for demography and some price series) especially when compared to England. Yet, the country is highly relevant to western economic history. After all, the question of why did the Industrial Revolution take place in Britain is the mirror of asking why it did not happen in France. As a result, Ridolfi’s work fills one of the largest voids in the field of economic history and will end up being one of the most cited dissertations for the next ten years I expect.

He constructed estimates of real wages, prices, incomes and working hours. As such, he provided the widest possible statistical portrait possible which (I wont get into details here) circumvents tons of empirical complications that may limit the quality of each variable taken separately (see for example the manner in which GDP is calculated and the role that estimating working hours plays).

I invite anyone interested in economic history to read his work. But, I will give you the main conclusion I gathered: France was not as poor as many believed. I recently pointed this out in an article which I am trying to get published, but Ridolfi’s work proves my point beyond my wildest expectations. I assembled the most relevant figures below.

Ridolfi.png

On the reversal of fortune, urbanization and Canada

Vincent Geloso Economics, History , , , , , , , , , ,

One of the more famous articles of economist Daron Acemoglu is his 2002 article on the reversal of fortunes where he points out that countries colonized by Europeans in 1500 that were relatively rich then are relatively poor now. In the paper, they use urban density as a proxy for economic development at that point in time.

I was not particularly convinced by this because of the issue of ruralization in colonial economies. I am still not convinced in fact. As many scholars interested in American colonial history point out, the country de-urbanized (ruralized) during the colonial era as cities grew at a slower pace than the general population. As such, the share of the US population in rural areas increased. But Jeffrey Williamson and Peter Lindert documented that in 1774, the United States were the richest place in the world (beating England on top of being more egalitarian). 

This is normal. Economies on the frontier had land to labor ratios that were the exact opposite of those in Europe. The opportunity cost of congregating in one area was high given the abundance of land that could be brought under cultivation. This is why the Americas (North America at least) was the Best Poor Man’s Country. As such, areas with low population density are not necessarily poor (even if urbanization is a pretty strong predictor of wealth).

This is where Canada comes in. Today, the country easily fits in the “relatively rich” group. According to the figures 1 and 2 in the work of Acemoglu, Johnson and Robinson, it would have been in the “relatively poor” group well behind countries in Latin America. However, I recently finished compiling the Canadian GDP figures between 1688 and 1790 which I can now compare with those of Arroyo Abad and Van Zanden for Peru and Mexico. With my Canadian data (see the figure below), we can see that Canada was as poor as Latin America around 1680 (the start date of my data).

GelosoGDP.png

So, Canada was a relatively poor country back which was equally poor (or moderately richer) than Latin American countries. Why does that matter to the reversal of fortune story? Well, with the urbanization data, one shows that the non-urbanized of 1500 are the rich of the today. With the GDP data for the 1680s, we see that the more urbanized countries were also poorer than the less urbanized countries.

Now, my argument is limited by the fact that I am using 1680s GDP rather than 1500 GDP. But, one should simply extend the urbanization series to circa 1700 and the issue is resolved.  In any case, this should fuel the skepticism towards the strength of the reversal of fortune argument.