Contributions to the Berkeley Economic History Laboratory (BEHL) Working Papers series are from visitors and other affiliates of the BEHL. These papers are preliminary works, and their circulation is intended to stimulate discussion and comment. Please contact the author with comments or before referencing or quoting a paper. To inquire about contributing a working paper to the series contact Professor Barry Eichengreen.
The Liquidity Trap, the Great Depression, and Unconventional Policy: Reading Keynes at the Zero Lower Bound | BEHL WP 2014-05 | Richard Sutch, October 2014. Abstract The developed economies of Japan, the United States, and the Eurozone are currently experiencing very low short-term rates, so low that they are considered to be at the “zero lower bound” of possibility. This effectively paralyzes conventional monetary policy. As a consequence, monetary authorities have turned to unconventional and controversial policies such as “Quantitative Easing,” “Maturity Extension,” and “Low for Long Forward Guidance.” John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned in the current discussions because the subsequent simplifications and the bowdlerization of his model obliterated this detail. It was only later that his characterization of a lower bound to interest rates would be dubbed a “Liquidity Trap.” This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer.
The Rule of Karlowitz: Fiscal Change and Institutional Persistence | BEHL WP 2014-04 | Elira Karaja, February 2014. Abstract Could the empires that ruled Eastern Europe for centuries and the formal institutions that they implemented have left an imprint on current formal and informal institutions of modern states? This paper sheds light on the legacy of the Ottoman Empire’s administrative system in contemporary states in the region. I investigate a causal mechanism that led to divergent paths of state building and rule of law, interpreted as attitudes toward corruption. The boundary between the Ottoman Empire and the Austro-Hungarian Empire was set in the Treaty of Karlowitz in 1699, contemporaneous with a fiscal shock and a crucial change in the Ottoman fiscal system. This is identified as the historical treatment effect. The analytical narrative focus on effects of tax system change, which encouraged uncontrolled predatory behavior, spread of abuse and rent extraction in the Ottoman Empire. Using Geographic Information System methods and regression discontinuity analysis with household survey data, I investigate the persistence of different attitudes about bribery on both sides of of the former border. Findings evidence higher willingness to bribe on the Ottoman hereditary lands. These findings are robust to controls. Last, the persistent effect of weak institutions on growth is estimated using household consumption and light intensity data as proxies for development.
War and Progressive Income Taxation in the 20th Century | BEHL WP 2014-03 | Juliana Londono Velez, September 2014. Abstract I argue that progressive income taxation in the twentieth century is a product of the exigency of war and not of democracy. I obtain long-run series of the top marginal personal income tax rate for a large sample of OECD countries, and use data on wars of mass mobilization and democracy from the Correlates of War data set and Scheve & Stasavage (2012) to test this hypothesis. My results suggest that wars of mass mobilization (i.e. wars in which more than 2% of the population served in the military) cause substantial increases in tax progressivity. These effects are persistent and do not vanish upon the conclusion of war.
Breaking the Unbreakable Union:Nationalism, Trade Disintegration and the Soviet Economic Collapse | BEHL WP 2014-02 | Marvin Suesse, May 2014. Abstract The breakup of the Soviet Union provides evidence for the detrimental effects of secessionist conflict on domestic integration and economic growth. This paper shows that the increased likelihood of secessions by the Union’s member republics in the late 1980s strongly reduced internal Union trade. Economic disintegration thus proceeded along internal borders and preceded the Soviet Union’s official dissolution. This helps to explain the severity of the output fall in the late Soviet period. Methodologically, these results stem from an empirical gravity framework, which is derived from first principles by a game-theoretic modeling of Soviet internal trade. Exogenous variation in nationalist agendas, namely the desire to preserve national languages, is used to preclude endogeneity running from trade patterns to secession.
Antisemitism Affects Households’ Investments | BEHL WP2014-01 | Francesco D’Acunto, Marcel Prokopczuk, and Michael Weber, December 2013. Abstract We propose historical anti-Jewish sentiment as a proxy for distrust in financial markets. Households in German counties where Jews were persecuted the most as far back as in the Middle Ages are less likely to invest in stocks today. A one-standard-deviation increase in historical anti-Jewish violence leads to a 7.5% to 12% drop in the average stock market participation. For identification, we exploit the forced migrations of Ashkenazi Jews out of the Rhine Valley after the 11th century. The distance of a county from the Rhine Valley instruments for the existence of a Jewish community during the Black Death (1349) and hence the early emergence of anti-Jewish sentiment. Results are similar when we use the votes for the Nazi party as a proxy for anti-Jewish sentiment. The magnitude of the effect does not change from 1984 until 2011 nor across cohorts. Anti-Jewish sentiment does not capture generalized trust: its effect on stockholdings is similar across counties and households with dfferent levels of education.
Capital Is Back: Wealth-Income Ratios in Rich Countries 1700-2010 | BEHL WP2013-10 | Thomas Piketty and Gabriel Zucman, 26 July 2013 | Abstract How do aggregate wealth-to income ratios evolve in the long run and why? We address this question using 1970-2010 national balance sheets recently compiled in the top eight developed economies. For the U.S., U.K., Germany, and France, we are able to extend our analysis as far back as 1700. We find in every country a gradual rise of wealth-income ratios in recent decades, from about 200-300% in 1970 to 400-600% in 2010. In effect, today’s ratios appear to be returning to the high values observed in Europe in the eighteenth and nineteenth centuries(600-700%). This can be explained by a long run asset price recovery (itself driven by changes in capital policies since the world wars) and by the slowdown of productivity and population growth, in line with the ß = s/g Harrod-Domar-Solow formula. That is, for a given net saving rate s = 10%, the long run wealth-income ratio ß is about 300% if g = 3%, and 600% if g = 1.5%. Our results have important implications for capital taxation and regulation and shed new light on the changing nature of wealth, the shape of the production function, and the rise of capital shares.
Railroad Expansion and Entrepreneurship: Evidence from Meiji Japan | BEHL WP2013-09 | John Tang, September 2013 | Abstract Railroads in Meiji Japan are credited with
facilitating factor mobility as well as access to human and financial capital, but the direct impact on firms is unclear. Using prefecture‐level industry data and a difference-in- differences model that exploits the temporal and spatial variation of railroad expansion, I
assess the relationship between railways and firm activity across Japan. Results indicate that while rail access corresponds to lower firm numbers, total and average firm capitalization increase after controlling for market size and geography. These latter findings apply particularly to the manufacturing and service sectors, respectively, and coupled with decreased firms activity in areas with longer coastlines and larger populations, are consistent with industrial agglomeration and slower industrial growth in newly integrated markets.
The Eurozone Crisis: Phoenix Miracle or Lost Decade? | BEHL WP2013-08 | Barry Eichengreen, Naeun Jung, Stephen Moch and Ashoka Mody, May 2013
The Mother of All Sudden Stops: Capital Flows and Reversals in Europe, 1919-1932 | BEHL WP2013-07 | Olivier Accominotti and Barry Eichengreen, July 2013 | Abstract We present new data documenting European capital issues in major financial centers from 1919 to 1932. Push factors (conditions in international capital markets) perform better than pull factors (conditions in the borrowing countries) in explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centers at the end of the 1920s figured importantly in the decline in foreign lending. We draw parallels with Europe today.
Fiscal Policy and Economic Recovery: The Case of the 1936 Veterans’ Bonus | BEHL WP2013-06 | Joshua K. Hausman, June 2013 | Abstract Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. This paper shows that fiscal policy, though inadvertent, was tried in 1936, and a variety of evidence suggests that it worked. A deficit-financed veterans’ bonus provided 3.2 million World War I veterans with cash and bond payments totaling 2 percent of GDP; the typical veteran received a payment equal to annual per capita personal income. This paper uses time-series and cross-sectional data to identify the effects of the bonus. I exploit four sources of quantitative evidence: a detailed household consumption survey, cross-state and cross-city regressions, aggregate time-series, and a previously unused American Legion survey of veterans. The evidence paints a consistent picture in which veterans quickly spent the majority of their bonus. Spending was concentrated on cars and housing in particular. Narrative accounts support these quantitative results. A simple calculation suggests that the bonus added 2.5 to 3 percentage points to 1936 GDP growth.
The Political Economy of Educational Content and Development: | BEHL WP2013-05 | Davide Cantoni and Noam Yuchtman, 21 March 2013 | Abstract Beyond years of schooling, educational content can play an important role in the process of economic development. Individuals’ choices of educational content are often shaped by the political economy of government policies that determine the incentives to acquire various skills. We first present a model in which differences in human capital investments emerge as an equilibrium outcome of private decisions and government policy choices. We then illustrate these dynamics in two historical circumstances. In medieval Europe, states and the Church found individuals trained in Roman law valuable, and eventually supported productive investments in this new form of human capital. In late 19th-century China, elites were threatened by the introduction of Western science and engineering and continued to select civil servants—who enjoyed substantial rents—based on their knowledge of the Confucian classics; as a result, investments in productive, modern human capital were not made.
Goods, Services, and the Pace of Economic Recovery | BEHL WP2013-04 | Martha L. Olney and Aaron Pacitti, March 2013 | Abstract Service-based economies experience slower and longer economic recoveries than goods-based economies. The rise of services over the last half-century lengthens U.S. recoveries by nearly 50 percent. Using state-level data for the United States for post-1960 recessions, controlling for a state’s trend employment growth, and the depth and length of the state’s downturn, we find that the more services an economy produces relative to goods, the slower the pace of employment growth and thus the longer it takes that economy to recover from recession. We offer an anticipations- and exports-based hypothesis for this relationship and consider policy options to mitigate the negative external macroeconomic effects of a larger service sector.
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The Grammatical Origins of Gender Roles | BEHL WP2013-03 | Victor Gay, Estefania Santacreu-Vasut and Amir Shoham, 22 April 2013 | Abstract We investigate the relation between gender marking in grammar and female participation in the labor market, the credit market, land ownership, and politics. Cross-country and individual-level analyses reveal that women speaking languages that more pervasively mark gender distinctions are less likely to participate in economic and political life and more likely to encounter barriers in their access to land and credit. These findings are robust to a large set of controls and robustness checks. We also found that the impact of a language’s gender structure remains after controlling for culture, for historical agricultural use of the plough.
Financing a Planned Economy: Institutions and Credit Allocation in the French Golden Age of Growth (1954-1974) | BEHL WP2013-02 | Eric Monnet, September 2012 | Abstract The role of banking and finance in the Golden Age of European growth (1950-1973) is very little known and widely underestimated. This paper studies the French system of economic planning and investment-based strategy that enhanced medium and long-term financing (called “investment credit” at that time). First, I describe the new institutions that were built after WWII to organize credit allocation. I especially highlight the role of the central bank through the National Credit Council. I then use a newly constructed database that matches the amount of credit (that had to be registered at the Banque of France) in 49 sectors to corporate tax sectoral statistics. It shows a significant positive relationship between investment credit and the marginal product of capital. The allocation of medium/long-term credit managed to favor the allocation of productive capital across sectors and thus to ensure the catch-up process. Using GMM estimations in order to avoid the endogeneity bias, I find that the effect of “investment credit” on growth is significant and positive, contrary to short-term credit which did not play any role for investment. Understanding the institutional framework that shaped the mechanisms and success of credit policy in the French mixed economy during the 50s and 60s also helps to understand its failures during the mid-70s.
State Capacity and Long-Run Performance | BEHL WP2013-01 | Mark Dincecco & Gabriel Katz, October 2012 | Abstract We present new evidence about the long-term links between state capacity and economic performance. Our database is novel and spans 11 countries and 4 centuries in Europe, the birthplace of modern economic growth. Using standard panel data methods, we find that the performance impacts of states with modern extractive and productive capabilities are significant, large, and robust to a wide variety of specifications, controls, and modeling techniques.