Protectionism and US Economic History

The case for selected protectionism and also “infant industry protectionism” is a strong one.

First, all the theoretical arguments in favour of complete free trade fail, and need not detain us.

Nor is the case for “infant industry protectionism” an endorsement of endless protectionism or tariffs on all goods, but the view that where domestic industries can be developed and generate positive externalities throughout an entire economy, through increasing returns to scale, synergies and cluster effects (Reinert 2007), they can be strongly aided in their early stages of development by selected tariffs on foreign imports.

The crucial point is that the creation of industries that gave increasing returns to scale (often in manufacturing), rather than dead-end “diminishing returns to scale,” is what marks successful economic development. Once the new manufacturing sectors become internationally competitive, it is possible to reduce or eliminate tariffs. Note also that this policy is perfectly compatible with the fact the other types of tariffs or poorly targeted tariffs can be harmful to economic development.

It is, above all, the structure of tariffs not average tariff rates that is the key to successful infant industry protectionism (Tena-Junguito 2009).

The US is a case in point. Protectionism as a modern economic theory was essentially born in the US in the thought of Alexander Hamilton and his Report on Manufactures (1791), although he drew on earlier mercantilist ideas (Bairoch 1993: 33).

Bairoch (1993: 34) sees US economic history as divided into these phases:

(1) 1816–1846
A very strong protectionist phase

(2) 1846–1861
A slightly reduced, but still moderately protectionist phase.

(3) 1861–1945
An era of strong protectionism.

The American Civil War saw the victory of the doctrine of protectionism after a somewhat more liberal era in the 1850s (Bairoch 1993: 35).

Although the average level of tariffs is not necessarily a guide to how effective and well targeted tariffs were in each country, nevertheless we can see the level of protectionism in the United States as compared with other Western nations in 1875 in the following data:

Average Level of Duties on Manufactured goods 1875
(1) United States | 40–50%

(2) Portugal | 20–25%

(3) Spain | 15–20%

(4) Russia | 15–20%

(5) Austro-Hungary | 15–20%

(6) Denmark | 15–20%

(7) France | 12–15%

(8) Belgium | 9–10%

(9) Italy | 8–10%

(10) Germany | 4–6%

(11) Switzerland | 4–6%

(12) Sweden | 3–4%

(13) Netherlands | 3–5%

(14) UK | 0%. (Bairoch 1993: 24, Table 2.2).

The US tariff regime aided manufacturing industries, and Bils (1984) shows how the US cotton textile industry would have been largely wiped out in the early 19th century if it had not been for protectionism.

BIBLIOGRAPHY
Bils, Mark. 1984. “Tariff Protection and Production in the Early U.S. Cotton Textile Industry,” Journal of Economic History 44: 1033–1045.

Bairoch, P. 1993. Economics and World History: Myths and Paradoxes. University of Chicago Press, Chicago.

Reinert, E. S. 2007. How Rich Countries got Rich, and Why Poor Countries Stay Poor. Carroll and Graf, New York.

Tena-Junguito, Antonio. 2009. “Bairoch Revisited: Tariff Structure and Growth in the Late 19th Century,” Economic History Working Papers, 121/09. Department of Economic History, London School of Economics and Political Science
http://eprints.lse.ac.uk/27869/

Sources and Data for US Economic History under the Gold Standard

Hanes (2013) provides a highly useful survey of the data and sources for US economic history, especially the 19th century and gold standard era until 1914, which I review below.

First, some miscellaneous facts. The US became part of the international gold standard in 1879, though it had no central bank until 1913. The US went off the gold exchange standard in 1933, and from the late 1930s/1940s shifted to a fundamentally different monetary and fiscal system.

One of these changes was that the government started to collect detailed economic data, whereas we lack such high quality data for the period before the 1940s.

Estimates for many pre-1914 economic variables are hardly definitive.

Hanes notes that we should sometimes be careful about making strict comparisons between estimates of some economic variables before the 1930s with the post-1945 data, because the two sets of data are often uneven and difficult to compare properly.

Take inflation rates. Historical price indices before the 1930s include a higher degree of “less-processed goods” or flexprice goods rather than manufactured goods (which tend to be fixprice), so that the volatility of pre-1945 inflation rates is higher than post-1945 rates, and that pre-war volatility may be a result more of the data used (Hanes 1999).

In general, pre-1914 business cycles appear to share the following traits with post-1945 cycles:

(1) Consumption and investment were procyclical

(2) net exports were not procyclical, and

(3) agricultural real output is volatile and acyclical (Hanes 2013: 118).

Pre-1914 recessions, however, were often marked by financial crises, bank runs or mass withdrawals of deposits and contraction of credit supply, whereas these problems have been rarer after 1945 (Hanes 2013: 119).

An interesting fact about real GDP is that fluctuations of agricultural output often have no relation to movements in the business cycle, since the weather, plant diseases, insect pests and other exogenous factors mainly influence farming output (Hanes 2013: 117).

I. Unemployment Data
From 1890, some US states began recording unemployment data in manufacturing and the Interstate Commerce Commission (ICC) on railroad employment (Hanes 2013: 119), but many gaps remain.

For pre-1914 unemployment data, a number of estimates have been made, as follows:

(1) Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.

(2) Romer, C. D. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.

(3) Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.

(4) Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

It is generally thought that Lebergott’s estimates are too high, but there are counterarguments (James and Thomas 2007).

Weir (1992) provides a useful “private nonfarm unemployment rate” that can be used to show how unemployment was considerably more volatile before 1914 than after 1945.

II. Real GDP
For pre-1914 real GDP, the following estimates have been made:

(1) the Kuznets-Kendrick-Gallman series:

Kuznets, Simon S. 1946. National Product since 1869. National Bureau of Economic Research, New York.

Kendrick, John W. 1961. Productivity Trends in the United States. Princeton University Press, Princeton, N.J.

Gallman, R. E. 1966. “Gross National Product in the United States 1834–1909,” in D.S. Brady (ed.), Output, Employment, and Productivity in the United States after 1800. Columbia University Press, New York.

(2) Romer’s estimates:

Romer, C. D. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37.

(3) Balke and Gordon’s estimates:

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

But none of these estimates can be considered definitive, although Balke and Gordon’s (1989) figures seem to be widely used.

Hanes (2013: 121) argues that there is no general agreement about which of the series is the best one.

However, there are valuable alternative measures of business cycles: production indices.

III. Production Indices
A number of indices of industrial production are available for the pre-1914 era, as follows:

(1) Fabricant, Solomon. 1940. The Output of Manufacturing Industries, 1899–1937. National Bureau of Economic Research, New York
http://papers.nber.org/books/fabr40-1

(2) Frickey, Edwin. 1947. Production in the United States, 1860–1914 (Harvard economic studies v. 82). Harvard University Press, Cambridge.

(3) Miron, Jeffrey A. and Christina D. Romer. 1990. “A New Monthly Index of Industrial Production, 1884–1940,” The Journal of Economic History 50.2: 321–337.

(4) Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790–1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Davis (2004) provides what is generally considered to be the best index, with many more products and services used to calculate it (Hanes 2013: 121).

Since business cycles are generally fluctuations in non-agricultural output, a manufacturing index like Davis (2004) provides a good method for comparing the volatility of pre-1914 recessions with post-1945 ones by simply comparing it with a post-1945 industrial index (Hanes 2013: 121). Such a comparison finds that percentage changes in annual fluctuations in pre-1914 industrial production were larger than after 1945 (Hanes 2013: 121).

IV. Prices and Wages
Warren and Pearson (1932) provide an index of wholesale prices from 1720 to 1932, but this index cannot provide a good comparison with post-1945 wholesale price changes because it is biased towards prices of raw materials and less-finished goods in a way that does not reflect the composition of wholesale output in this period (Hanes 2013: 122).

Hanes (1998) provides a better wholesale price index for all periods.

Hoover (1960) and Rees (1961) provide consumer price indices for most of the later 19th century even though many goods are not covered, and Long’s (1960) index for 1880–1890 relies on limited data.

Genuinely reliable GDP price indices and deflators are not available for the pre-1914 era (Hanes 2013: 122).

Extensive wage data for manufacturing, railroads and mining exist from the late 19th century. Douglas (1930), Long (1960), Hanes (1992) provide wage indices, mainly for these sectors.

While nominal wage cuts appear common in the pre-1914 era (Hanes and James 2003), real wage trends may well have been similar to the post-1945 era (Hanes 1996).

Post-1945 data shows strong downward nominal wage rigidity in many types of wages (Hanes 2013: 118), and absolute cuts in nominal wages rates are very rare, even during recessions (Lebow et al. 2003).

V. Financial Crises
Banking panics and financial crises are studied by Wilson et al. (1990), Calomiris and Gorton (1991), and Wicker (2000), and such crises occurred in 1884, 1890, 1893, and 1907, which amplified and worsened downturns in the business cycle already under way (Hanes 2013: 125).

VI. Causes of Recessions
Davis et al. (2009) argue that a number of recessions in the pre-1914 era (such as those in 1884, 1893, 1896 and 1910) were set off by changes in the US cotton harvest.

Cotton was a major US export. When bad harvests reduced output, the US exported less, reducing the flow of gold into the US and hence causing interest rates to rise, which impacted negatively on the economy.

Hanes and Rhode (2012) also argue that a decline in European demand for American assets (either by interest rate hikes in Europe or fire sales of American assets by Europeans) was probably also a factor causing business cycles in the pre-1914 era.

BIBLIOGRAPHY
Backus, David K. and Patrick J. Kehoe. 1992. “International Evidence on the Historical Properties of Business Cycles.” The American Economic Review 82.4: 864–888.

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Calomiris, C. W. and G. Gorton. 1991. “The Origins of Banking Panics: Models, Facts, and Bank Regulation,” in R. Glenn Hubbard (ed.), Financial Markets and Financial Crises. University of Chicago Press, Chicago. 107–173.

Davis, Joseph H. 2004. “An Annual Index of U. S. Industrial Production, 1790–1915,” The Quarterly Journal of Economics 119.4: 1177–1215.

Davis, Joseph H. 2006. “An Improved Annual Chronology of U.S. Business Cycles since the 1790s,” Journal of Economic History 66.1: 103–121.

Davis, Joseph H., Hanes, Christopher and Paul W. Rhode. 2009. “Harvests and Business Cycles in Nineteenth-Century America,” The Quarterly Journal of Economics 124.4: 1675–1727.

Douglas, Paul Howard. 1930. Real Wages in the United States, 1890–1926. Houghton Mifflin Company, Boston and New York.

Fabricant, Solomon. 1940. The Output of Manufacturing Industries, 1899–1937. National Bureau of Economic Research, New York
http://papers.nber.org/books/fabr40-1

Frickey, Edwin. 1947. Production in the United States, 1860–1914 (Harvard economic studies v. 82). Harvard University Press, Cambridge.

Gallman, R. E. 1966. “Gross National Product in the United States 1834–1909,” in D.S. Brady (ed.), Output, Employment, and Productivity in the United States after 1800. Columbia University Press, New York.

Hanes, Christopher. 1992. “Comparable Indices of Wholesale Prices and Manufacturing Wage Rates in the United States, 1865–1914,” in Roger L. Ransom, Richard Sutch, and Susan B. Carter (eds.), Research in Economic History 14: 269–292.

Hanes, Christopher. 1996. “Changes in the Cyclical Behavior of Real Wage Rates, 1870–1990,” The Journal of Economic History 56.4: 837–861.

Hanes, C. 1998. “Consistent Wholesale Price Series for the United States, 1860–1990,” in Trevor J. O. Dick (ed.), Business Cycles since 1820: New International Perspectives from Historical Evidence. E. Elgar, Cheltenham, UK and Northampton, MA.

Hanes, Christopher. 1999. “Degrees of Processing and Changes in the Cyclical Behavior of Prices in the United States, 1869–1990,” Journal of Money, Credit and Banking 31.1: 35–53.

Hanes, Christopher. 2013. “Business Cycles,” in Robert Whaples and Randall E. Parker (eds.), Routledge Handbook of Modern Economic History. Routledge, Abingdon, Oxon and New York. 116–135.

Hanes, Christopher and John A. James. 2003. “Wage Adjustment under Low Inflation: Evidence from U.S. History,” The American Economic Review 93.4: 1414–1424.

Hanes, Christopher and Paul W. Rhode. 2012. “Harvests and Financial Crises in Gold-Standard America,” NBER Working Paper No. 18616, December
http://www.nber.org/papers/w18616

Hoover, Ethel D. 1960. “Retail Prices after 1850,” in Trends in the American Economy in the Nineteenth Century (Studies in Income and Wealth, vol. 24), Princeton University Press, Princeton, N.J.

James, J. A. and M. Thomas, 2007. “Romer Revisited: Long-Term Changes in the Cyclical Sensitivity of Unemployment,” Cliometrica 1.1: 19–44.

Kendrick, John W. 1961. Productivity Trends in the United States. Princeton University Press, Princeton, N.J.

Kuznets, Simon S. 1946. National Product since 1869. National Bureau of Economic Research, New York.

Lebergott, S. 1964. Manpower in Economic Growth: The American Record since 1800. McGraw-Hill, New York.

Lebow, David E., Saks, Raven E. and Beth A. Wilson. 2003. “Downward Nominal Wage Rigidity: Evidence from the Employment Cost Index,” Advances in Macroeconomics 3.1: 1–28.

Long, Clarence D. 1960. Wages and Earnings in the United States, 1860–1890. Princeton University Press, Princeton.

Miron, Jeffrey A. and Christina D. Romer. 1990. “A New Monthly Index of Industrial Production, 1884–1940,” The Journal of Economic History 50.2: 321–337.

Rees, Albert. 1961. Real Wages in Manufacturing, 1890–1914. Princeton University Press, Princeton.

Romer, C. D. 1986. “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy 94: 1–37.

Romer, C. D. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37.

Vernon, J. R. 1994. “Unemployment Rates in Post-Bellum America: 1869–1899,” Journal of Macroeconomics 16: 701–714.

Warren, G. F. and F. A. Pearson. 1932. Wholesale Prices for 213 years, 1720 to 1932. Cornell University, Ithaca, N.Y.

Weir, D. R. 1992. “A Century of U.S. Unemployment, 1890–1990: Revised Estimates and Evidence for Stabilization,” Research in Economic History 14: 301–346.

Wicker, Elmus. 2000. Banking Panics of the Gilded Age. Cambridge University Press, Cambridge.

Wilson, Jack W., Sylla, Richard E. and Charles P. Jones. 1990. “Financial Market Panics and Volatility in the Long Run, 1830–1988,” in Eugene N. White (ed.), Crises and Panics: The Lessons of History. Dow Jones/Irwin, Homewood.