Long-Run Growth and the Great Divergence

The Origins of Sovereign Debt and Default: War and Taxes in Habsburg Spain

Political Determinants of Asset Prices and Asset Price Volatility

Other working papers

Long-Run Growth

[with Jonathan Hersh]

to be presented at the Economic History Association Meetings, 10.-11. September 2009

Abstract: Did living standards stagnate before the Industrial Revolution? Traditional real-wage indices typically show broadly constant living standards before 1800. In this paper, we show that living standards rose substantially, but surreptitiously because of the growing availability of new goods. Colonial luxuries such as tea, coffee, and sugar transformed European diets after the discovery of America and the rounding of the Cape of Good Hope. These goods became household items in many countries by the end of the 18th century. We use the Greenwood-Kopecky (2009) method to calculate welfare gains based on data about price changes and the rate of adoption of new colonial goods. Our results suggest that by 1850, the average Englishman would have been willing to forego 15% or more of his income in order to maintain access to sugar and tea alone. These findings are robust to a wide range of alternative assumptions, data series, and valuation methods.

[with Nico Voigtlaender]

presented at the AEA Meetings, San Francisco, January 5, 2009.

published: American Economic Review, Papers and Proceedings, May 2009.

[this is an overview paper summarizing "How the West..." and "The Three Horsemen..."]

Abstract: We summarize how living standards can change significantly in a world that is governed by strong Malthusian forces. We show that shifting fertility and mortality schedules are capable of producing major discontinuities in per capita income. In this paper, we present an overview of the modelling approaches that rationalize two major changes in the European demographic regime after 1350 -- the emergence of a European marriage pattern, and the rise of a distinctive mortality regime. Both owe their existence to the shock of the Plague. Massive population losses generated temporarily higher wages. We argue that these laid the foundations for permanently higher incomes by leading to reduced fertility and higher mortality.

presentation

[with Nico Voigtlaender]

Abstract: Early modern Europe was unusually rich by 1700, compared to the rest of the world. We argue that the 'European Marriage Pattern' (EMP) contributed to this phenomenon. By raising the marriage age of women, and ensuring that a substantial proportion remained celibate, the EMP reduced fertility by up to 40%, and raised average wages by a quarter. We present a model that explains how fertility limitation evolved. We emphasize changes in the production structure of the agricultural sector following the 14th century Black Death. Rising wages after 1349 translated into greater demand for 'luxury products', such as wool and meat. Their production was subject to economies of scale, making it profitable for large farms to hire outside labor. It was also land-using and labor-saving. Women's wages increased, and a period of working as a servant became a common feature of the life cycle of European women. Marriage was thus delayed, and fertility reduced. The Black Death set into motion a virtuous cycle of higher wages and fertility decline that contributed to unusually high per capita incomes.

presentation

[with Nico Voigtlaender]

Abstract: We construct a simple Malthusian model with two sectors, and use it to explain how Western Europe overtook China in terms of incomes and urbanization rates in the early modern period. That living standards could exceed subsistence levels in a Malthusian setting at all should be surprising. Rising fertility and falling mortality ought to have reversed any gains. In our setup, population fell following the Black Death; wages surged. Because of Engel’s Law, demand for urban products increased. European cities were particularly unhealthy; urbanization pushed up death rates. This effect was reinforced by more frequent wars, fed by city wealth, and disease spread by trade. Thus, higher wages themselves reduced population pressure. Our calibrated model without technological change can account for income increases far above subsistence levels and the observed rise in European urbanization.

presentation

[with Jörg Baten and Dorothee Crayen]

Abstract: This paper examines if low levels of nutrition impaired cognitive development in industrializing England, and if welfare transfers mitigated the adverse effects of high food prices. Age-heaping is used as an indicator of numeracy, as derived from census data. For the cohorts from 1780-1850, we analyse the effect of high grain prices during the Napoleonic Wars. We show that numeracy declined markedly for those born during the war years when wheat was particularly dear. Where the Old Poor Law provided for generous relief payments, the adverse impact of high prices for foodstuffs was mitigated. Finally, we show some tentative evidence that Englishmen born in parishes with low income support selected into jobs with lower cognitive requirements.

presentation

[with Joel Mokyr]

in: Stephen Broadberry, Kevin O'Rourke, Cambridge Economic History of Europe, Cambridge: CUP 2009.

Abstract: We confront the existing theoretical literature about the transition from "Malthus to Solow" with the salient facts from economic history. Contrary to earlier papers, we conclude that many unified growth models fit historical reality quite well. Misunderstandings have reigned supreme largely because of a mistaken unit of analysis -- most papers in the unified growth tradition have looked to industrializing Britain as the canonical case. Instead, we suggest that Europe's development in the aggregate after 1500 (and not the UK's after 1750) should provide most of the evidence with which to test our theories. We also point to a rich agenda for future research that can do much to deepen our understanding of long-run growth, with special emphasis on institutions, technology, demography, and the role of human capital and culture.

presentation

Abstract: Why did England industrialize first? And why was Europe ahead of the rest of the world? Unified growth theory in the tradition of Galor and Weil (2000, American Economic Review, 89, 806–828) and Galor and Moav (2002, Quartely Journal of Economics, 177(4), 1133–1191) captures the key features of the transition from stagnation to growth over time. Yet we know remarkably little about why industrialization occurred much earlier in some parts of the world than in others. To answer this question, we present a probabilistic two-sector model where the initial escape from Malthusian constraints depends on the demographic regime, capital deepening and the use of more differentiated capital equipment. Weather-induced shocks to agricultural productivity cause changes in prices and quantities, and affect wages. In a standard model with capital externalities, these fluctuations interact with the demographic regime and affect the speed of growth.Our model is calibrated to match the main characteristics of the English economy in 1700 and the observed transition until 1850. We capture one of the key features of the British Industrial Revolution emphasized by economic historians—slow growth of output and productivity. Fertility limitation is responsible for higher per capita incomes, and these in turn increase industrialization probabilities. The paper also explores the availability of nutrition for poorer segments of society. We examine the influence of redistributive institutions such as the Old Poor Law, and find they were not decisive in fostering industrialization. Simulations using parameter values for other countries show that Britain’s early escape was only partly due to chance. France could have moved out of agriculture and into manufacturing faster than Britain, but the probability was less than 25%. Contrary to recent claims in the literature, 18th century China had only a minimal chance to escape from Malthusian constraints.

presentation

[with Mauricio Drelichman]

Abstract: The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. Four times during his reign the king failed to honor his debts and had to renegotiate borrowing contracts. In this paper, we reassess the fiscal position of Habsburg Spain. New archival evidence allows us to derive comprehensive estimates of debt and revenue. These show that primary surpluses were sufficient to make the king’s debt sustainable in most scenarios. Spain’s debt burden was manageable up to the 1580s, and its fiscal position only deteriorated for good after the defeat of the “Invincible Armada.” We also estimate fiscal policy reaction functions, and show that Spain under the Habsburgs was at least as “responsible” as the US in the 20th century or as Britain in the 18th century. Our results suggest that the outcome of uncertain events such as wars may influence on a history of default more than strict adherence to fiscal rules.

presentation

[with Mauricio Drelichman]

Abstract: The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. Four times during his reign the king failed to honor his debts and had to renegotiate borrowing contracts. In this paper, we reassess the fiscal position of Habsburg Spain. New archival evidence allows us to derive comprehensive estimates of debt and revenue. These show that primary surpluses were sufficient to make the king’s debt sustainable in most scenarios. Spain’s debt burden was manageable up to the 1580s, and its fiscal position only deteriorated for good after the defeat of the “Invincible Armada.” We also estimate fiscal policy reaction functions, and show that Spain under the Habsburgs was at least as “responsible” as the US in the 20th century or as Britain in the 18th century. Our results suggest that the outcome of uncertain events such as wars may influence on a history of default more than strict adherence to fiscal rules.

[with Mauricio Drelichman]

published in Helpman, Elhanan (ed). Institutions and Economic Performance. Cambridge: Harvard University Press, 2008.

Abstract: We examine the stagnation and decline of Castile in the Early Modern period in the light of the recent literature highlighting the interaction between natural resource abundance and institutional quality. Our conclusion is that Castile suffered from becoming too rich too fast. American treasure overwhelmed the country’s institutional setup, resulting in a fully fledged “resource curse” that affected the economy, domestic and foreign policy, and the structure of client networks. We also explore the question of whether the resource windfall further weakened Spanish institutions, thus further hampering economic growth in the long run.

Political Determinants of Asset Prices and Asset Price Volatility

appendices

presentation

[with Thomas Ferguson]

Quarterly Journal of Economics, May 2008.

Abstract: This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of seven firms, and a large proportion of the biggest companies, had substantive links with the NSDAP. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5 to 8 percent between January and March 1933. These results are not driven by sectoral composition, and are robust to alternative  estimators and definitions of affiliation.

presentation

Free Flows, Limited Diversification: Explaining the Fall and Rise of Stock Market Correlations, 1890-2001

[with Dennis Quinn]

NBER-ISOM Macro Annual 2010.

Abstract: Using a new dataset on capital account openness, we investigate why equity return correlations changed over the last century. Using equity returns from 16 countries for the period 1890-2001, we show that correlations increase as financial markets are liberalized.  In addition, countries with similar regulatory regimes show higher correlations. These findings are robust to controlling for both the Forbes-Rigobon bias and global averages in equity return correlations.  We show that greater synchronization of fundamentals is not the main cause of increasing correlations.  These results imply that the home bias puzzle may be smaller than traditionally claimed.

presentation

Stock Price Volatility and Political Uncertainty: Evidence from the Interwar Period

Abstract: Can political instability explain the “volatility puzzle”? Stock price swung widely during the interwar period. I examine the Merton/Schwert hypothesis that concern about the survival of the capitalist system was crucial. Using a panel data set on riots, demonstrations and other indicators of instability in 32 countries during the interwar period, I show that political and social unrest caused drastic falls in stock prices. Using early involvement with the Communist International as an instrument shows that the link is causal -- high volatility during the Great Depression can partly be explained by political factors.