How Canada Tracked the US during the Great Depression

Over the last few years, while I continued my research on other fronts, I started spending small amounts of time on a daily basis to read about the Great Depression and more precisely, how Canada lived through the depression.

Since the old adage is that Canada gets pneumonia when the US gets the flu, I thought that it was a worthy endeavor (although Pedro Amaral and James McGee have been working on that front) to try to see what insights we can derive from looking at Canada’s experience during the Great Depression (especially since it had a very different banking system).

In the process, I managed to collect in a datasheet, the Industrial Production Index of Canada (consisting largely of heavy industry with some light industries and utilities, making it a relatively well-rounded index). This is what it looks like.

industrialproduction

Other than seeing Canada’s experienced mirrored in the US experience (except for the 1935-1937 window), I am not sure what to make of it. However, I thought it worthwhile to share that information publicly.

Household size and growth since 1870 (albeit in Canada)

Two days ago, I posted something on how much we were estimating growth since the 1950s. While organizing another research paper that I am trying to finish, I realized that I could make a follow-up to this based on previous research of mine.

A few months ago, I published (alongside Vadim Kufenko and Klaus Prettner) a short note in Economics Bulletin where we showed that the large differences in household size in Canada that existed up to 1975 led many to overestimate the level of differences between provinces. Moreover, we pointed out that because household size were converging at the same time as incomes, we argued that the rate of convergence from 1945 onwards was slightly overestimated. That paper convinced us to do the same between all the OECD countries (we are assembling the data right now).  But this was an argument about variance, what if we simply plot the “per capita” income of Canada with the “per adult equivalent” income of Canada since 1870.

By using the Maddison dataset combined with the data from my article, it took me a few seconds to get the graph below. What is important to notice in this graph is that, incomes per adult equivalent (measured in 1990 Geary-Kheamis dollars) have increased 40% less than incomes per person. Since adult equivalents are a better measure of living standards (because you capture the economies of scale associated with household size), we can easily say that we have been underestimating the level of improvement in Canada (it is still substantial however).

growthfactors

On Tax Resistance, Censuses and the Cliometrician’s Craft

In the process of finalizing another research article (under revise and resubmit for Agricultural History), I found a small case of tax resistance in Canada East (modern day Quebec) in 1851  that is interesting.

The district of Grenville, northwest of Montreal, was an ethnically mixed district (25% French, the rest were English-Canadians) operating under the British freehold tenure system (as opposed to most of the rest of the province that operated under French seigneurial tenure). During the 1851 census, the enumerator complained that the population of roughly 2,000 inhabitants refused to report statistical information.

Basically, the enumerator pointed out that the majority supposed the information they were giving was “the precursor of a general tax for schools which they are strongly opposed to”.

tax-resistance-in-the-censuses

I find this to be interesting because it is a nice little case of how hard to master the craft of an economic historian. As a cliometrician, my task is to find the best data possible to answer historical questions with strong economic theory (while enriching theory with historical evidence). The data for that area would be biased downwards as peasants would understate their incomes to avoid being heavily taxed. Any statistical test to assert the applicability of a theory to historical questions of Canada (or Quebec) would be altered by this reaction on the part of peasants.

True, for some broad questions (like measuring GDP), this would not be too dramatic an issue. However, for more specific questions like “what was the role of tenure systems in explaining Quebec’s relative poverty”, the issue would be more problematic.

How much do the little things matter, right?

On 19th Century Tariffs & Growth

A few days ago, Pseudoerasmus published a blog piece on Bairoch’s argument that in the 19th century, the countries that had high tariffs also had fast growth.  It is a good piece that summarizes the litterature very well. However, there are some points that Pseudoerasmus eschews that are crucial to assessing the proper role of tariffs on growth. Most of these issues are related to data quality, but one may be the result of poor specification bias. For most of my comments, I will concentrate on Canada. This is because I know Canada best and that it features prominently in the literature for the 19th century as a case where protection did lead to growth. I am unconvinced for many reasons which will be seen below.

Data Quality

Here I will refrain my comments to the Canadian data which I know best. Of all the countries with available income data for the late 19th century, Canada is one of those with the richest data (alongside the UK, US and Australia). This is largely thanks to the work of M.C. Urquhart who recreated the Canadian GNP series fom 1870 to 1926 in collaborative effort with scholars like Marvin McInnis, Frank Lewis, Marion Steele and others.

However, even that data has flaws. For example, me and Michael Hinton have recomputed the GDP deflator to account for the fact that its consumption prices component did not include clothing. Since clothing prices behaved differently than the other prices from 1870 to 1885, this changes the level and trend of Canadian incomes per capita (this paper will be completed this winter, Michael is putting the finishing touch and its his baby).  However, like Morris Altman, our corrections indicate a faster rate of growth for Canada from 1870 to 1913, but in a different manner. For example, there is more growth than believed in the 1870-1879 period (before the introduction of the National Policy which increased protection) and more growth in the 1890-1913 period (the period of the wheat boom and of easing of trade restrictions).

Moreover, the work of Marrilyn Gerriets, Alex Chernoff, Kris Inwood and Jim Irwin (here, here, here, here) that we have a poor image of output in the Atlantic region – the region that would have been adversely affected by protectionism. Basically, the belief is a proper accounting of incomes in the Atlantic provinces would show lower levels and trends that would – at the national aggregated level – alter the pattern of growth.

I also believe that, for Quebec, there are metrological issues in the reporting of agricultural output. The French-Canadians tended to report volume units in manners poorly understood by enumerators but that these units were larger than the Non-French units. However, as time passed, census enumerators caught on and got the measures and corrections right. However, that means that agricultural output from French-Canadians was higher than reported in the earlier census but that it was more accurate in the later censuses. This error will lead to estimating more growth than what actually took place. (I have a paper on this issue that was given a revise and resubmit from Agricultural History). 

Take all of these measurements issue and you have enough doubt in the data underlying the methods that one should feel the need to be careful. In fact, if the sum of these (overall) minor flaws is sufficient to warrant caution, what does it say about Italian, Spanish, Portugese, French, Belgian, Irish or German GDP ( I am not saying they are bad, I am saying that I find Canada’s series to be better in relative terms).

How to measure protection?

The second issue is how to measure protection. Clemens and Williamson offered a measure of import duties revenue over imports volume. That is a shortcut that can be used when it is hard to measure effective protection. But, it may be a dangerous shortcut depending on the structure of protection.

Imagine that I set an import duty so high as to eliminate all entry of the good taxed (like Canada’s 300% import tax on butter today). At that level, there is zero revenue from butter import and zero imports of butter. Thus, the ratio of protection is … zero. But in reality, its a very restrictive regime that is not being measured.

More recent estimates for Canada produced by Ian Keay and Eugene Beaulieu (in separate papers, but Keay’s paper was a conference paper) attempted to measure more accurate indicators of protection and the burden imposed on Canadians. Beaulieu and his co-author found that using a better measure, Canada’s trade policy was 11% more restrictive than believed. Moreover, they found that the welfare loss kept increasing from 1870 to 1890 – reaching a figure equal to roughly 1.5% of GDP (a non-negligible social cost).

It ought to be noted though that alongside Lewis and Harris, Keay has found that the infant industry argument seems to apply to Canada (I am not convinced, notably for the reasons above regarding GDP measurements). However, that was in the case of Canada only and it could have been a simple outlier. Would the argument hold if better trade restriction measures were gathered for all other countries, thus making Canada into a weird exception?

James Buchanan to the rescue

My last argument is about political economy. Was the institutional arrangement of protection a way to curtail government growth? Protection is both a method for helping national industries and for raising revenues. However, the government cannot overprotect at the risk of loosing revenues. It must protect just enough to allow goods to continue entering to earn revenues from imports.  This tension is crucial especially since most 19th century countries did not have uniform general tariffs (like a flat 5% import duty) which would have very wide bases. The duties tended to concern a few goods very heavily relative to other goods. This means very narrow tax bases.

Standard public finance theory mandates wide tax bases with a focus on inelastic sources. However, someone with a public choice perspective (like James Buchanan) will argue that this offers the possibility for the government to grow. Basically, a public choice theorist will argue that the standard public finance viewpoint is that the sheep is tame. Self-interested politicians will exploit this tameness to be elected and this might imply growing government. However, with a narrow and elastic tax base, politicians are heavily constrained. In such a case, governments cannot grow as much.

The protection of the 19th century – identified by many as a source of growth – may thus simply be the symptom of an institutionnal arrangement that was meant to keep governments small. This may have stimulated growth by keeping other sectors of the economy more or less free of government meddling. So, maybe protection was the offspring of the least flawed institutional arrangement that could be adopted given the political economy of the time.

This last argument is the one that I find the most convincing in rebuttal to the Bairoch argument. It means that we are suffering from a poor specification bias: we have identified a symptom of something else as the cause of growth.

Canadian Megatrends: Top 1% income share and median age

Statistics Canada just came up with a study on the top income share of the top 1% in Canada. As I have explained elsewhere, my view of inequality is that: a) it has increased; b) not as much as we think; c) a lot of the increase is from desirable factors (personal utility maximization differing from income maximization or international immigration) or neutral factors (demography, marriage); d) that the inequality that is worrisome stems either from birth or government manipulations of the market and; e) that those stemming from government manipulations, direct (like subsidizing firms) or indirect (like the war on drugs which means that a large number of individuals are jailed and then released with a “prison earnings penalty” which stymies their income levels and growth), are the easiest to fight.

The recent Statistics Canada study allows me to make my point again with regards to element C of my answer. As I looked at their series, all I could think was “median age”. A lot of the variations seem to be related to the median age of the population. I went back to the census data I had collected for my book and plotted it against the data. This is what it looks like.

medianage

Why would there be a relation? Well, each year you measure the income distribution, the demographic structure of that population changes. As it grows older, you have more people at the top of their earnings curve relative to those at the bottom. Not only that, but earnings curve seem elongated in recent times – we live longer and so some people work older as witnessed by increased labor force participation rates above a certain age closer to retirement. And the heights of the earnings curve are now higher than ever before while we also enter later into the labor market.

Now, I am not sure how much aging would “explain away” rising inequality in Canada, but there is no point denying that it does explain some of it away. But, I would not be surprised that a large part is explained away. Why am I saying that? Because of this paper on Norway’s age structure. 

In Norway, the median age in 1950 was much higher than it was in Canada back then and today, it is roughly the same as Canada (although Canada has had a steeper increase in inequality). And according to the paper on Norway, adjusting for composition bias in inequality measures caused by aging, eliminates entirely the upward trend in that country. In fact, it may even reverse the trend whereby inequality adjusted for age has actually declined over time. This is a powerful observation. Given that Canada has had a steeper increase in median age, this suggests that the increase in inequality might be simply the cause of a statistical artifice.

Has Canada been Poorer than the US for so long?

A standard stylized fact in Canada is that we are poorer, on average, than the average American. This has been presented as a fact that is as steady as the northern star. But our evidence on Canadian incomes is pretty shoddy prior to 1870 (here I praise M.C. Urquhart for having designed a GNP series that covers from 1870 to 1926 and links up with the official national accounts even if I think there are some improvements that can be brought to measuring output from some key industries and get the deflator right). But what about anything before 1870? There are some estimates for Ontario from 1826 to 1851 by Lewis and Urquhart (great stuff), but Ontario was pretty much the high-income of Canada.

So, can we go further back? This is what my work is about (partially), and I just made available my results on Canadian living standards (proxied by Quebec where the vast majority of the population was) from 1688 to 1775 as captured by welfare ratios. So that’s pretty much the closest we can get to the “founding”. Below are my results derived from this paper. They show that the colonists in Canada were not very much richer than their counterparts in France with the basket meant to capture the meanest of subsistence and roughly equal to their counterparts in France with a basket that includes more manufactured goods like clothing and more alcohol. This explains why most migrants from France to Canada were “volunteered” (in the sense that they were pretty much reluctant migrants) for migration. But the key interesting result is that relative to New England – the poorest of the American colonies – it is poorer regardless of the basket used. Thus, there seems to be truth to the common logic about Canadians being always poorer than the Americans.

comparingcanadane

However, I am not fully convinced of my own results. This may surprise some. The reason is not that I do not trust my data (in fact, I think it is superior to most of what exists for the time given that I will be able to proceed to tons of other data). The reason is simple (and rarely discussed): natives.

Natives are always omitted from the stories of living standards. But they existed nonetheless. In terms of national accounts, if the British and French settlers dispossessed and killed natives, their welfare losses are just not computed. But the welfare losses of a musket shot to the head are real. I have always been convinced that if we could correct estimates of living standards to account for the living standards of natives, the picture would change terribly. The reason is two-fold. The first reason is that the historiography is pretty clear that while they were obviously not nice, the French were nicer than the British towards the Natives (at least until 1763 when the British shifted strategy). In fact, trade between French and Natives was very frequent and so it might be that for the whole population (natives + settlers), the French-area peoples enjoyed more growth and higher average levels. In the British colony, if the settlers killed and dispossessed natives, this is basically the British turning native capital stocks into their own capital stock or into consumption (which would enter settlers GDP but not change total GDP). In essence, this is basically a variation on the arguments of Robert Higgs with regards to measuring the American GDP in World War Two and Albrecht Ritschl on the German interwar growth. I am pretty sure that adjusting for the lives of natives would show a greater level for Canada leading to rough equality between the two colonies. However, I am not sure if the argument would cut that way (my guts say yes) since in their conjectural growth estimates, Mancall and Weiss show that with the natives included, their zero rate of income per capita growth turns into a positive rate.

Nonetheless, I still think that knowing that the settlers were better off in the US as an improvement over the current state of knowledge. Until ways to impute the value of native output and production are found, my current estimates are only a step forward, not the whole nine yards.

On Capitalism and Slavery : Pêle-Mêle Comments

Last week, a debate was initiated via an article in the Chronicle of Higher Education that relates to the clash between historians and economists over the topic of slavery. The debate seems acrimonious given the article and at the reading of a special issue of the Journal of Economic History regarding the Half has never been told by Edward Baptist, its hard to conclude otherwise. Pseudoerasmus published comments on the issue in a series of posts and a Trumpian twitterstorm (although the quality is far from being Trumpian). I find myself largely in agreement with him in response to the historians, but there are some pêle-mêle points that I felt I needed to add.

On Historians Versus Economists

To be honest, when I took my first classes in economic history, it seemed clear that there were important points that were agreed upon in the literature on slavery. The first was that the accounting profitability of slavery was not the same as the economic profitability (think opportunity cost here) of slavery. Thus, it was possible that (concentrating on the US here) the peculiar institution could more or less thrive regardless of the social costs it imposed (i.e. slavery is a tax on leisure which also increases the expropriation rate from slaves, and non-slaveowners often had to shoulder the cost of enforcing the institution). This argument is not at all new; in fact it is basically a public choice argument that Gordon Tullock and Anne Krueger could have signed on to without skipping a heartbeat (see Sheilagh Ogilvie – one of my favorite economist who does history in equality with Jane Humphries). The second point of agreement is that no one agreed on how to measure the productivity of slavery in the United States and the distribution of its costs and gains. The second point has been a very deep methodological debate which related to the method of measuring productivity (CES vs Translog TFP – stuff that would make your head blow and which also lead to the self-invitation of the Cambridge Capital Controversy to the debate). The quality of the data has been at the centre-stage as well, and datasets on slave prices, attributes, tasks and many other variables are still being collected (see notably the breathtaking work of Rhode and Olmsted here and here).

Thus, I will admit to being unimpressed by the use of oral histories to contest that literature. In addition, the absence of theory in Baptist’s work yields an underwhelming argument. Oral histories are super-duper important. The work of Jane Humphries on child labor is a case in point of the need to use oral histories. She very carefully used the tales told by children who worked during the industrial revolution to document how labor markets for children worked. The story she told was nuanced, carefully argued and supported by other primary evidence. This is economic history at its best – a merger of cliometrician and historian. In fact, while this is an evaluation that is subjective, the best economists are also historians and vice-versa. The reason for that is the mix of theory with multiple forms of evidence. But they key is to have a theory to guide the analysis.

Unexpectedly for some, the best exposition of this argument comes from Ludwig von Mises in his unknown book Theory and HistoryI was made aware of that book in a discussion with Chris Coyne of George Mason University and I proceeded to reading it. I was surprised how many similarities there were between the Mises who wrote that book and the Douglass Norths and the Robert Fogels of this world. The core argument of Theory and History is that axiomatic statements can be applied to historical events. The goal of historians and economic historians is to sort which theory applies. For example, the theory of signaling and the theory of asymmetric information are both axiomatically true. Without the need for evidence, we know that they must exist. The question of an economic historian becomes to ask “did it matter”? Both theories can compete to offset each other: if signaling is cheap, then asymmetric information can be solved; if it is not, asymmetric information is a problem. Or both may be irrelevant to a given historical development. To explain which two axiomatic statements apply to the event (and in what dosage), you need data (quantitative and qualitative). Thus, Theory and History actually proposes the use of econometrics and statistical methods because it does not try to predict as much as it tries to a) sort which axiomatic statements applied; b) the relative strengths of competing forces; c) the counterfactual scenario.

Without theory, all you have is Baptist’s descriptions which tell us very little and can, incidentally, be distorted by he who recounts the tales he read.

On the Culture of Peasants/Slaves/Slaveowners

When I started my PhD dissertation Canadian economic history, the most annoying thing I saw was the claim that the French-Canadians had “different mentalities” or “more conservative outlooks”. This was basically the way of calling them stupid. This has recently evolved to say that they “maximized goals other than wealth”. Regardless, this was basically: the French-Canadian was not culturally suited for economic development.

But culture is not a fixed variable, it is not an exogenous variable. Culture is basically the coherent framework built by individuals who share certain features to “cut out” the noise. Everyday, we are bombarded with tons of pieces of information and there is no way that the human brain can process them all. Thus, we have a framework – culture (ideology does the same thing) – which tells us what is relevant and what is irrelevant and what interpretation to give to relevant information.

People can cling to old beliefs for a long time, but only if there is no cost to them. I can persist in terrible farming practices if I am not made aware of the proper valuation of the opportunity I am foregoing. For example, British farmers who arrived in Quebec in the 19th century tended to use oxen as they did in England for tilling the soil. They had probably been taught to do that by their parents who learnt it from their grandparents because it was part of the farming culture of England. The behavior was culturally inherited. However, when they saw that the French-Canadians were using horses and that horses – in the Canadian hinterland – got the job done better, they shifted. The culture changed at the sight of how important was the foregone opportunity by continuing to use oxen. Where the British and the French co-existed, both were equally good farmers. Where they could not observe each other, they were all sub-optimal farmers. Seeing the other methods forced changes in culture.

The same applies to slaveowners and slaves! Slaveowners were a more or less tightly knit group that frequented similar circles and were constantly on the lookout to increase productivity. If some master had noticed that he could increase production by whipping more slaves, why would he not adopt this method? Why would he leave 100$ bill on the street? Why did the masters growing cotton in South Carolina not adopt the method of whipping adopted by growers in Louisiana? Without a theory of how culture changes (and what purposes it serves beyond the simplistic Marxist power structure argument), there is no answer to this question. With the work of Rhode and Olmstead, there is an answer: the type of cotton that had higher yields was not suited for growing everywhere! In this case, we are applying my comment from the section above on Historians versus Economists. There are competing theories of explaining increasing output: either some slave masters were unable to observe the other slave masters and adopt the torture methods they had (which would need to be the case for Baptist to be right) or there were biological limitations to growing the better crops in some areas (Rhode and Olmstead).

Two competing theories (they are not mutually exclusive though) that can be tested with data and they set a counterfactual. That is why you need theory to make good history.

One last thing: slave owners were not capitalists

This is probably the most childish thing to come out of works like those of Baptist: to assert that because slaves were capital assets, that the owners were capitalists. That is true if you want to adhere to the inconsistent (and self-contradicting) Marxist approach to capital. In fact, as Phil Magness pointed out to me, slave owners were not free market types. They were very much anti-capitalists. Slavery apologists like Fitzhugh and Carlyle were even more anti-capitalists than that. It’s not because you own capital that you are a capitalist unless you adhere to Marxist theory.

But, capital is just a production input. Its value depends on what it can produce. As Jeffrey Hummel pointed out, there is a deadweight loss from slavery: enforcement costs, the overproduction of cotton because slavery is basically a tax on leisure and the implicit taxation of the output produced by slaves. All three of these factors would have slowed down economic growth in the south. Thus, as capital assets, slaves were relatively inefficient.