MICHAEL JEFFREY ANDREWS

What drives innovation, and what drives individuals to become inventors? Though scholars have long strived to understand the process of innovative activity, in recent years improvements in text recognition technologies and data availability have reinvigorated the use of patent records to study the causes and consequences of innovation in the American economy over the long run. Michael Andrews’ dissertation constitutes a strong addition to this new wave of work.

Ideas can emerge and spread through various channels, including formal education and informal social interactions. Andrews’ dissertation exploits two quasi-natural experiments to suggest that both mechanisms played a significant role in the creation of knowledge during the nineteenth and twentieth century United States. He has also done a tremendous amount of data work.

To address the role of formal education, Andrews studies the establishment of new colleges in the United States from 1839 to 1954, a period that saw an explosion in the number of institutions of higher education. Often, several places were considered as a possible location for a given college. A careful exploration of the narrative historical record is used to determine losing sites that were strong contenders but ended up not being chosen as the location for a new college for arguably exogenous reason. This is impressive, meticulously researched work—the appendix contains about 140 pages of descriptions of the site selection process for over 200 colleges. These institutional histories are fascinating to read. Andrews uses them to guide the selection of losing sites that can serve in the empirical analysis as appropriate controls for winning sites. The identification strategy is reminiscent of Michael Greenstone, Richard Hornbeck, and Enrico Moretti’s (Reference Greenstone, Richard and Enrico2010) work on agglomeration spillovers in manufacturing, and expands Shawn Kantor and Alexander Whalley’s (Reference Kantor and Alexander2014) study of land grant colleges to a broader set of institutions.

A comparison of winning and losing sites reveals that the establishment of a college increases the number of patents in that county, and it also has positive spillover effects on patenting activity in neighboring countries. Andrews then wonders whether the effects of colleges on local innovation are direct or indirect. Are the students and professors affiliated with the educational institution creating the patentable new knowledge, or are county residents who are not themselves affiliated with the college those primarily responsible for the rise in innovation? Answering this question presents a clear data challenge. Andrews cleverly matches patent records to college yearbooks from 1900 to 1940 to determine whether innovators studied or taught at particular institutions.

It turns out that students and professors did not innovate that much, at least while they remained in the county where the college was located—it is possible, however, that individuals affiliated with the college moved and innovated elsewhere. Instead, the establishment of a new college appears to have had an indirect impact on innovation, leading county residents unaffiliated with the educational institution to patent more. To further convince us of this indirect channel, Andrews asks a simple, but clever question. Were those individuals that were restricted from attending the college likely to innovate more after it was established? He shows that, indeed, patenting rates by blacks and women increased differentially in winning counties. (These types of simple but illuminating comparisons, by the way, are what sets Andrews’ work apart.) I was left wanting to know more, however, about the ways in which the innovative process of individuals unaffiliated with the educational institution may have benefited from the nearby college.

The differences in patenting activity between winning and losing counties were somewhat persistent, and it is easy to see why. Once a college was established, the county exhibited much faster population growth than other close by areas. Andrews speculates that colleges may attract particularly high skilled or creative individuals to the area, and create knowledge spillovers. This seems plausible, but it requires further examination. In a different chapter, Andrews amasses a wealth of data on inventors’ demographics. I wish these data were put to use here, to learn more about those inventors who may have moved into the county, and about those students or professors who may have moved away and innovated elsewhere. More generally, the main results in the paper are not always as strong or consistent as I would have hoped for.

Determining the role of informal social connections on innovation requires a fair amount of creativity. How do we know whether people interact in an informal setting? We often observe whether individuals are co-workers or classmates, but firms and schools may themselves directly affect ideas, even if employees or students do not interact with each other. It is also difficult to think of a shock to social networks that changes little else. To overcome these empirical challenges, Andrews studies the introduction of state-level alcohol prohibition in the United States in the first two decades of the twentieth century.

Counties that were wet prior to the enactment of statewide prohibition were forced to shut down saloons, where individuals got together to drink, socialize, and, presumably, share ideas. The imposition of statewide prohibition resulted in a differential decline in patenting rates in wet counties relative to dry counties. A creative piece of validating evidence is to compare patenting activity by gender. Since women were typically not welcome to frequent saloons, their ability to innovate should have been less affected by the laws. Indeed, Andrews shows that the difference in patenting rates between men and women was reduced after the imposition of prohibition. This paper suggests that informal social interactions may constitute an important channel for the diffusion of ideas, at least in the short run. Andrews finds that patenting in formerly wet countries recovered its initial level in about five years of the imposition of statewide prohibition, suggesting that individuals may have found new venues to exchange ideas over time.

I would also like to call attention to another chapter, co-written with Nicholas Ziebarth, which makes a large data contribution to a topic that has long interested economic historians—who were the innovators of the past? This chapter expands on the work by Naomi Lamoreaux and Kenneth Sokoloff (Reference Lamoreaux and Kenneth2005) on inventors’ backgrounds by taking advantage of the current abundance of digitalized records. Specifically, people who were granted a patent in Census years from 1870 to 1940 are matched to the corresponding decennial U.S. Population Census, providing demographic information for almost 50,000 inventors. Inventors were quite different from the general population— they were more likely to be white, male, and, perhaps, more mobile geographically. The facts turn out not to be very surprising and attempts to relate local economic factors to the demographics of patentees are inconclusive, but the data are really fascinating. I expect that, along with a similar dataset constructed by Ufuk Akcigit, John Grigsby, and Tom Nicholas (Reference Akcigit, John and Tom2017), these data will be much used in coming years to expand our knowledge of the American creative process over the long run.

GILLIAN MICHELE BRUNET

The global recession of 2008 and the resulting fiscal stimulus packages in many countries have reignited academic interest in government spending multipliers. Despite a growing theoretical and empirical literature, there is little consensus on the impact of government spending on macroeconomic aggregates—a recent paper, for example, upliftingly characterized this debate as the “fiscal multiplier morass” (Leeper, Traum, and Walker, Reference Leeper, Nora and Todd2017). Gillian Brunet’s dissertation makes significant contributions to this contested literature by focusing on the largest fiscal shock in modern American history—WWII. Besides providing novel estimates of the fiscal multiplier during the war period, her work also seeks to understand how the economic and institutional contexts affect this important statistic.

To estimate the fiscal multiplier, Brunet focuses on military spending, a standard practice to address the endogenous response of other forms of government spending to the economic cycle. A naïve guess would suggest a large multiplier for the war period— defense spending was never as large as a fraction of GDP, and economic growth also peaked at that time. But the work by Robert Higgs (Reference Higgs1992) and, more recently, Price Fishback and Joseph Cullen (Reference Fishback and Joseph2013), who find small effects of war production spending on retail activity at the county level, suggest that this may not be the case. Using new data and a state-of-the-art methodology, Brunet indeed estimates a relatively small multiplier for the war years.

This chapter of Brunet’s dissertation is a bit of a tour de force. It uses a novel dataset of government war supply contracts with private firms to construct a state-level panel data on war spending from 1940 to 1945—over 190,000 contracts worth about almost twice American GDP in 1940. Her approach is to estimate the relative effect of spending shocks across states—what is called the open economy relative multiplier—and then relate this multiplier to the aggregate multiplier as in Emi Nakamura and Jón Steinsson (Reference Nakamura and Jón2014). She then uses case studies and narrative evidence to guide the evaluation of the mechanisms that may explain the relatively small relative multiplier. And as in the rest of the dissertation, much thought goes to determining the most appropriate unit of analysis for the research question at hand.

The effects of war production spending on wartime employment and income appear to have been quite modest—only about one quarter the size of similar estimates for the post-war period (Nakamura and Steinsson, Reference Nakamura and Jón2014). Why would the multiplier be so low given the large scale of war production? The war period was also extremely unusual. The demand for war-related products required large-scale conversion of industrial capacity. Non-war industrial production contracted even as total production soared. Personal saving rates also skyrocketed, perhaps due to a combination of patriotic efforts to help finance the war, the rationing of durable goods, and the high levels of public debt. While savings rates increased throughout the United States, they did so by more in states that received more war spending. Brunet’s work therefore suggests that there may be diminishing returns to the fiscal multiplier process: once the scale of a government spending shock grows to a sufficiently large size relative to the aggregate economy, it displaces other economic activity, attenuating its impact on aggregate employment and incomes.

If I had to come up with criticisms to this otherwise fine work, I would urge the author to further exploit the richness of the data. For example, the detailed war contract data is primarily used to get at the timing of spending, but any differential effects across manufacturing products get lost in the aggregation.

If rationing, the conversion of production, and high savings reduced consumption during the war differentially in areas that received more defense spending, then it is possible that household spending increased when these constraints were lifted after the war ended. A second chapter in Brunet’s dissertation therefore switches the focus to the post-war years. Aggregating defense spending to commuting zones to more accurately capture local labor markets, she finds that locations receiving more war spending increased the purchases of durable goods by more following the war, but that there were no differential effects on retail sales, a proxy for consumption in non-durable goods.

The post-war increase in consumption suggests that a fiscal multiplier that takes into account dynamic effects may improve our assessment of the effects of government spending during the war on the economy. This may be a worthwhile exercise to consider. I also wonder about the effects that the end of the war had on firms. Those firms receiving contracts had to reconvert after the war ended, and this process may have affected firm investment, at least in the short run. Access to credit for small firms and households may also have improved when the crowding out effects created by high levels of government debt diminished. Overall, however, Brunet makes a convincing case that wartime spending may have contributed to American prosperity in the postwar period.

In a different paper, Brunet joins a long tradition in economic history—that of providing new measurement of economically significant variables. Specifically, she proposes a novel measure of government spending, budget authority, which takes spending into account when it is authorized, before funds are dispersed. This approach differs from existing measures—such as those based on National Product Income Accounts data or on a narrative approach, as in Valerie Ramey (Reference Ramey2011)—by how it captures the timing of spending or expectations about future spending. She shows that the aggregate fiscal multiplier is quite sensitive to the choice of measure. I found this exercise somewhat less persuasive. Budget authority implicitly assumes that households and firms would wait until any uncertainty about future government spending is resolved, which does not seem an accurate description of the expectation formation for most economic agents.

COLIN RUSSELL WEISS

Economic uncertainty plays a central role in macroeconomic models. Traditionally, researchers have used various aggregate economic indicators, such as the volatility of stock market returns, to quantify economic uncertainty. But these indicators may in turn be influenced by a variety of factors that also affect economic activity. In recent years, researchers have instead followed a narrative approach. Introduced by Christina Romer and David Romer (Reference Romer and David1989, Reference Romer and David2004), this approach utilizes the historical record (for example, narrative accounts of the process that led to various government decisions) to identify shocks to policy. More recently, the increasing availability of data and machine-learning methods have led researchers to measure fluctuations in policy uncertainty based on the frequency of uncertainty-related terms in newspaper articles (Baker, Bloom, and Davis, Reference Baker, Nicholas and Steven2016). This strategy is particularly useful for economic historians, as newspapers are often available over a long time span and for a large set of countries.

Empirical attempts to determine whether and how economic policy uncertainty has real economic consequences have been less successful, in no small part because these attempts have tried to encompass many kinds of economic policies over a long period across many countries (see for example, Baker, Bloom, and Terry, Reference Baker, Nicholas and Stephen2018). Weiss makes a significant contribution to this growing literature by following a more focused approach (see Baker, Frydman, and Hilt, Reference Baker, Carola and Eric2018, for a similar approach). He studies one particular source of policy uncertainty, devaluation risk, during a specific and historically relevant period: the “Free Silver” movement in the late nineteenth century United States. This approach allows him to make more convincing claims on identification. Fluctuations in exchange rate risk often occur at times of economic turmoil, muddling the attribution of any economic effects to this specific source of risk. “Silver agitation” heightened fears that the United States would abandon the gold standard and substantially depreciate the dollar, but this never happened. The silver question was, without a doubt, one of the major sources of policy uncertainty at that time, and it clearly dominated the political debate. Politics, more than economic factors, were the more likely cause of devaluation risk.

Weiss focuses on the effects of uncertainty on financial markets and industrial production from 1878 to 1900. He constructs a daily series of silver coinage policy news shocks based on information from the historical financial press, and links it to daily bond yields. Corporations often issued corporate bonds payable in “gold coin” rather than dollars, making their debt burdens highly sensitive to devaluation risk. One would therefore expect currency risk to differentially affect firms by their credit risk. To sort corporate debt into safe and speculative securities, Weiss constructs his own measure of credit risk, utilizing the criteria that Moody’s introduced decades later to rate securities, and applying it to hand-collected firm financial information. The amount of new data collected for this project is just astounding.

News of reduced silver coinage risk indeed lowered the safe-speculative bond spread. Further analysis suggests that the impact on bond risk premia was largely attributable to the increase in the firms’ likelihood to default in the case of devaluation. An impulse-response analysis also finds that changes in exchange rate expectations had sizable and persistent effects on aggregate industrial production. Weiss’ work therefore provides a convincing link between policy uncertainty and real economic activity.

Though I find each of these pieces of evidence persuasive on their own, there is a bit of disconnect between them. Bond spreads and credit risk can only be calculated for railroads, which were the primary issuers of corporate debt at that time. Instead, industrial production also reflected the impact on other industries (see Davis, Reference Davis2004). Relative to railroads, industrial firms had much lower leverage levels, suggesting that default risk may have played a lesser role for them. Perhaps demand for their goods was reduced at times of higher uncertainty. It would be helpful to investigate the channels by which devaluation risk affected industrial production more broadly.

The threat of a bimetallic system largely died out with the election of President McKinley, who was a staunch supporter of the gold standard, in 1896. This event gives Weiss a unique opportunity to study how the resolution of policy uncertainty affects firm outcomes. He finds that those railroads more sensitive to currency risk experienced greater growth in their net income in the year following the election relative to less affected railroads. Interestingly, investment did not respond differentially. Instead, railroads utilized the additional income to pay dividends, perhaps as a result of the hardships they had suffered during the Panic of 1893. In the aftermath of this severe crisis, when a quarter of the country’s railroads went into distress, the market for corporate bonds, which were the main source of railroad finance, continued to be sluggish. But the resolution of uncertainty strengthened the conditions of the banking system, which in turn may have improved general economic activity. Weiss argues that policy uncertainty had an indirect effect on railroads, by influencing the demand for their services.

It is unfortunate for the analysis, though perhaps not coincidental, that the Panic of 1893 took place just a few years prior to McKinley’s accession to the Presidency. The railroad industry continued to be severely disrupted in 1896. These firms also suffered major transformations—their corporate governance, for example, radically changed as bankers took on board seats in exchange for helping with corporate restructuring. It is quite possible that the resolution of economic policy uncertainty would have very different impact on firm outcomes during a more robust period for the industry.

The last chapter of the dissertation uses the period of silver coinage agitation to study how newspapers use bias in economic reporting. In response to increased policy uncertainty, newspapers printed more articles using biased phrases regarding the monetary standard. This increase in media slant occurred primarily during election campaigns but was not equally salient during legislative discussions regarding monetary policy. A novel takeaway of the paper is therefore that the electoral process plays an important role in the media’s reporting on economic policy. The chapter also offers preliminary evidence to suggest that biased reporting actually influences the partisanship of politicians. Given the increased polarization in modern politics and media coverage, this is a topic ripe for further exploration.

Carola Frydman, Northwestern University

Mark Koyama, George Mason University

REFERENCES

Akcigit, Ufuk, John, Grigsby, and Tom, Nicholas. “The Birth of American Ingenuity: Innovation and Inventors of the Golden Age.” Unpublished manuscript. Chicago: University of Chicago, 2017.

Baker, Richard B., Carola, Frydman, and Eric, Hilt. “Political Discretion and Antitrust Policy: Evidence from the Assassination of President McKinley.” NBER Working Paper No. 25237, Cambridge, MA, November 2018.

Baker, Scott R., Nicholas, Bloom, and Steven, J. Davis. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics 131, no. 4 (2016): 1593–636.

Baker, Scott R., Nicholas, Bloom, and Stephen, J. Terry. “Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments.” Unpublished manuscript. Evanston, IL: Northwestern University, 2018.

Davis, Joseph H. “An Annual Index of U.S. Industrial Production, 1790–1915.” Quarterly Journal of Economics 119, no. 4 (2004): 1177–215.

Fishback, Price, and Joseph, A. Cullen. “Second World War Spending and Local Economic Activity in U.S. Counties, 1939–58.” Economic History Review 66, no. 4 (2013): 975–92.

Greenstone, Michael, Richard, Hornbeck, and Enrico, Moretti. “Identifying Agglomeration Spillovers: Evidence from Winners and Loser of Large Plant Openings.” Journal of Political Economy 118, no. 3 (2010): 536–98.

Higgs, Robert. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” Journal of Economic History 52, no. 1 (1992): 41–60.

Kantor, Shawn, and Alexander, Whalley. “Knowledge Spillovers from Research Universities: Evidence from Endowment Value Shocks.” Review of Economics and Statistics 96, no. 1 (2014): 171–88.

Lamoreaux, Naomi R., and Kenneth, L. Sokoloff. “The Decline of the Independent Inventor: A Schumpeterian Story.” NBER Working Paper No. 11654, Cambridge, MA, October 2005.

Leeper, Eric M., Nora, Traum, and Todd, B. Walker. “Clearing Up the Fiscal Multiplier Morass.” American Economic Review 107, no. 8 (2017): 2409–54.

Nakamura, Emi, and Jón, Steinsson. “Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions.” American Economic Review 104, no. 3 (2014): 753–92.

Ramey, Valerie A. “Identifying Government Spending Shocks: It’s All in the Timing.” Quarterly Journal of Economics 126, no. 1 (2011): 1–50.

Romer, Christina D., and David, H. Romer. “Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz.” NBER Macroeconomics Annual 4 (1989): 121–70.

Romer, Christina D., and David, H. Romer. “A New Measure of Monetary Shocks: Derivation and Implications.” American Economic Review 94, no. 4 (2004): 1055–84.

REFERENCES

Emerson, Jason. Lincoln the Inventor. Carbondale, IL: Southern Illinois University Press, 2009.

Greenstone, Michael, Richard, Hornbeck, and Enrico, Moretti. “Identifying Agglomeration Spillovers: Evidence from Winners and Losers of Large Plant Openings.” Journal of Political Economy 118, no. 3 (2010): 536–98.

Hanlon, W. Walker. “Necessity Is the Mother of Invention: Input Supplies and Directed Technical Change.” Econometrica 83, no. 1 (2015): 67–100.

Juhasz, Reka. “Temporary Protection and Technology Adoption: Evidence from the Napoleonic Blockade.” American Economic Review 108, no. 11 (2018): 3339–76.

Khan, B. Zorina, and Kenneth, L. Sokoloff. “‘Schemes of Practical Utility’: Entrepreneurship and Innovation Among ‘Great Inventors’ in the United States, 1790–1865.” Journal of Economic History 53, no. 2 (1993): 289–307.

Lamoreaux, Naomi R., Kenneth, L. Sokoloff, and Dhanoos, Sutthiphisal. “Patent Alchemy: The Market for Technology in U.S. History.” Business History Review 87, no. 1 (2013): 3–38.

Marco, Alan C., Michael, Carley, Steven, Jackson, et al. “The USPTO Historical Patent Data Files: Two Centuries of Invention.” USPTO Economic Working Paper No. 2015–1, Alexandria, VA, June 2015.

Moser, Petra. “How Do Patent Laws Influence Innovation? Evidence from Nineteenth-Century World’s Fairs.” American Economic Review 95, no. 4 (2005): 1214–36.

Nicholas, Tom. “Cheaper Patents.” Research Policy 40, no. 2 (2011): 325–39.

Petralia, Sergio, Pierre-Alexandre, Balland, and David, L. Rigby. “Unveiling the Geography of Historical Patents in the United States from 1836 to 1975.” Nature: Scientific Data 3, no. 160074 (2016): 1–14.

Sokoloff, Kenneth L., and Zorina Khan, B.. “The Democratization of Invention During Early Industrialization: Evidence from the United States, 1790–1846.” Journal of Economic History 50, no. 2 (1990): 363–78.

STIMULUS ON THE HOME FRONT: THE STATE-LEVEL EFFECTS OF WWII SPENDING

WWII is viewed as the quintessential example of fiscal stimulus and exerts an outsized influence on fiscal multiplier estimates, but the economic history literature does not support this interpretation. Price Fishback and Joseph A. Cullen (Reference Fishback and Joseph2013) find that total war production spending had no influence on growth in county-level retail sales between 1939 and 1948. Robert Higgs (Reference Higgs1992) does not directly address the economic effects of wartime spending but challenges the notion of wartime prosperity based on how much of the wartime growth in both output and employment was directly attributable to war production and consequently did not contribute to civilian economic wellbeing. In Chapter 1 I provide new evidence on the effects of government spending in WWII and confirm that the multiplier was indeed quite small during this period. I then show that features of the wartime economy explain the small wartime multiplier.

I use newly-digitized contract dataFootnote ¹ to construct a state-level panel on U.S. military spending in WWII, allowing me to produce the first panel-data estimates of the relative fiscal multiplier for this period. Using an estimation technique similar to that used by Emi Nakamura and Jón Steinsson (Reference Nakamura and Jón2014) with modern military spending data, I estimate a relative fiscal multiplier of 0.25, implying an aggregate multiplier of roughly 0.3. This finding stands in stark contrast to Nakamura and Steinsson’s relative multiplier estimate of 1.4 for 1966 to 2006.

Employment effects were also small in WWII, consistent with the finding of a small wartime fiscal multiplier. The implied cost of each additional job year was the equivalent of $165,000 to $255,000 of military spending in 2015 dollars. In contrast, employment estimates for the 2009 American Recovery and Reinvestment Act (ARRA) imply a range of costs per job year of $22,000 to $170,000 per job year.Footnote ²

Unique features of the wartime economy significantly reduced the stimulative effect of wartime spending. Conversion from civilian manufacturing to war production reduced the initial shock to economic activity because war production directly displaced civilian manufacturing. Entire industries switched from civilian manufacturing to war production, most famously the automobile industry. I find that roughly $1 out of every $3 spent on war production directly displaced civilian manufacturing, so the net shock to economic activity was much smaller than the amount spent.

Another feature of the wartime economy also contributed to the unusually low fiscal multiplier: private savings skyrocketed during the war. Because of conversion, consumer durables were not available for households to buy. In this sense conversion is closely related to rationing. Data limitations make it impossible to measure wartime household consumption directly at the state level. However, I approach the question indirectly by constructing state-level measures of household saving. I digitized state-level data on Series E war bond purchases from the Monthly Treasury Bulletins Footnote ³ and constructed net bank deposit flows using the Reports of the Comptroller of the Currency.Footnote ⁴ Together, war bond purchases and bank deposit flows account for about 60 percent of the income response to war spending. This implies an upper bound on the consumption response to war spending, helping explain why the wartime fiscal multiplier was so much smaller than the fiscal multiplier for later periods.

Together, conversion and the high wartime saving rate explain about half the difference between Nakamura and Steinsson’s relative multiplier estimate of 1.4 for the postwar period and my estimate of 0.25 for WWII. My findings imply that the wartime boom of the early 1940s reflects the massive scale of the war effort, not that war production was a particularly effective form of stimulus.

WHEN DOES GOVERNMENT SPENDING MATTER?

Chapter 2 focuses on how the measurement of government spending influences the estimated fiscal multiplier. There are two major puzzles in the fiscal multiplier literature. First, empirical estimates of the cross-sectional (or relative) multiplier on government spending are large relative to estimates of the aggregate multiplier on government spending. This is particularly puzzling given that recent work suggests that in most empirically relevant cases—including under the conditions prevailing in WWII—the cross-sectional multiplier should be a rough lower bound for estimates of the aggregate multiplier (Chodorow-Reich forthcoming). Second, estimates of the aggregate multiplier on tax changes are large relative to estimates of the aggregate multiplier on government spending. Again, economic theory suggests that, if anything, the opposite should be the case.

My insight is that these three empirical literatures measure the timing of government spending (and tax cuts) in three different ways since their data are constructed from different sources. Following a long tradition in economic history, I focus on how the measurement of fiscal shocks influences estimates of the multiplier. Government spending involves a long process, not a single development. For this reason, getting the timing right is a non-trivial question.

It is standard in the literature to use the National Income Product Accounts (NIPA) to measure government spending. NIPA measures government spending as the flow of government funds out of the Treasury for spending purposes. For some purposes—such as national income accounting—this measure is ideal. However, if the goal is measuring the influence of government spending on economic activity, I argue that NIPA measures government spending too late in the process. A significant fraction of payments is often delayed until final goods are delivered to the government. Specifically, firms are often paid after they have received a contract, hired workers, and purchased materials. These actions initially show up in NIPA as inventory investment on the part of the firms with government contracts. When the firm delivers the finished goods, the NIPA records negative inventory investment and positive government spending.

I introduce an alternative measure of government spending, called budget authority, which uses authorizations to measure the government’s commitment to spend. Budget authority is established annually as part of the congressional budget process, and is readily available from 1976 onward. I use historical budget publications to construct defense budget authority for 1938 to 1975, extending the available data backwards by several crucial decades. Over time $1 of defense budget authority will eventually translate into $1 of defense spending as measured by NIPA. The main difference between the two measures is their timing.

Measuring government spending with budget authority generally produces larger estimates of the aggregate fiscal multiplier than when NIPA is used. Budget authority also produces far more precise estimates: the standard errors for the multiplier based on budget authority are approximately half those based on the NIPA. The differences between the two measures are largest at shorter time horizons and diminish over longer time horizons—as one would expect since the two measures converge over time. Consumption responds more strongly to defense budget authority than to defense NIPA—suggesting why budget authority produces larger estimates of the aggregate multiplier. Investment also responds far more strongly to budget authority than to NIPA over a one-year time horizon. Together, consumption and investment responses explain why budget authority produces larger estimates of the fiscal multiplier than the more traditional NIPA measure.

AFTER THE WAR: THE EFFECTS OF WARTIME SAVING ON POST-WAR HOUSEHOLD CONSUMPTION AND INVESTMENT

The U.S. economy boomed after WWII, but we know relatively little about the relationship between the war and the postwar boom. Economic historians have previously explored the effects of WWII on the economic development of specific regions, finding evidence that wartime production helped shift economic activity (particularly manufacturing) permanently towards the Pacific coast (Rhode Reference Rhode2003; Wright Reference Wright2018), but that war spending did not systematically drive southern economic development in the post-war years (Jaworski Reference Jaworski2017). Fishback and Cullen (Reference Fishback and Joseph2013) find that counties receiving higher war spending did not exhibit appreciable increases in retail sales (which they interpret as a proxy for income) or in manufacturing wages in 1948 relative to 1939, but that those counties did receive significant population inflows.

In Chapter 3 I examine the influence of WWII on U.S. household consumption and saving in the immediate post-war years—after rationing was relaxed—through the channel of wartime saving. I find evidence that in areas (whether counties or commuting zones) receiving more war spending, households spent more on durables in the immediate post-war years: there is a strong positive association between war spending and the increase from 1940 to 1950 in the fraction of households with modern, private bathrooms. In less rural areas (defined as less rural than the sample median)—places where the relationship between war spending and wartime saving was stronger to begin with—there is also a strong association between war spending and the increase from 1940 to 1950 in the fraction of households owning electric refrigerators. Finally, I find that wartime saving is strongly associated with large increases in the number of housing units in an area: a 10 percent increase in wartime saving (war bonds and bank deposits held in 1944) is associated with a 2.6 percent increase in the number of housing units in 1950. While more work remains to be done, this is suggestive evidence that wartime asset accumulation helped fuel the post-war boom.

My dissertation uses economic history to explore the mechanisms of fiscal policy. The resurgence of interest in fiscal policy in the wake of the Great Recession has served to highlight how much we have yet to understand about how fiscal policy affects macroeconomic activity and under what conditions the size of the fiscal multiplier systematically varies. Economic history offers important insights into these empirical questions.

REFERENCES

Chodorow-Reich, Gabriel. “Geographic Cross-Sectional Fiscal Spending Multipliers: What Have We Learned?” American Economic Journal: Economic Policy, forthcoming.

Chodorow-Reich, Gabriel, Laura, Feiveson, Zachary, Liscow, et al. “Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act.” American Economic Journal: Economic Policy 4, no. 3 (2012): 118–45.

Feyrer, James, and Bruce, Sacerdote. “Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act.” NBER Working Paper No. 16759, Cambridge, MA, February 2011.

Fishback, Price, and Joseph, A. Cullen. “Second World War Spending and Local Economic Activity in U.S. Counties, 1939–58.” Economic History Review 66, no. 4 (2013): 975–92.

Higgs, Robert. “Wartime Prosperity? A Reassessment of the U.S. Economy in the 1940s.” Journal of Economic History 52, no. 1 (1992): 41–60.

Jaworski, Taylor. “World War II and the Industrialization of the American South.” Journal of Economic History 77, no. 4 (2017): 1048–82.

Nakamura, Emi, and Jón, Steinsson. “Fiscal Stimulus in a Monetary Union: Evidence from U.S. Regions.” American Economic Review 104, no. 3 (2014): 753–92.

Rhode, Paul W. “After the War Boom: Reconversion on the U.S. Pacific Coast, 1943–1949.” NBER Working Paper No. 9854, Cambridge, MA, July 2003.

Shoag, Daniel. “Using State Pension Shocks to Estimate Fiscal Multipliers since the Great Recession.” American Economic Review 103, no. 3 (2013): 121–24.

Wilson, Daniel J. “Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act.” American Economic Journal: Economic Policy 4, no. 3 (2012): 251–82.

Wright, Gavin. “World War II, the Cold War, and the Knowledge Economies of the Pacific Coast.” Unpublished working paper, 2018.

SILVER COINAGE NEWS, CORPORATE BOND YIELDS, AND INDUSTRIAL PRODUCTION

Beginning with contemporary opponents of the Free Silver movement, and later by Milton Friedman and Anna Schwartz (Reference Friedman and Anna1963), many have speculated that the uncertainty created by Free Silver agitation imposed significant real costs on the U.S. economy. In my first chapter, I use the high-frequency (daily) response of corporate bond yields to news about silver coinage policy as an instrument to credibly identify the effects of exchange rate uncertainty on monthly industrial production in order to test the aforementioned hypothesis.

I begin by constructing a series of daily silver policy news shocks between 1878 and 1900 using narrative methods. I look for sharp increases in monthly counts of newspaper articles related to silver and then read further to find exact dates when news that altered expectations of future silver coinage arrived. This results in a set of 21 silver policy events.

Next, I hand-collect daily corporate bond prices around these 21 events, as well as for a six-month period in 1891 without silver news. I then match these bonds with hand-collected annual balance sheet and earnings data for the issuing companies. This allows me to assign a measure of credit risk to each bond. Importantly, this aids in identifying the effects of silver news on yields: roughly 70 percent of corporate bonds were payable in gold coin rather than dollars, and bonds with higher credit risk had higher gold debt burdens. Thus, these speculative corporate bonds were more exposed to news about the future dollar-gold exchange rate than safer corporate bonds.

I find in an event study that corporate bond spreads increase by 35 basis points when there is news that raises silver coinage risk. Additionally, the effect of silver policy news increases to 50 basis points after the Panic of 1893, as the ability of the United States to maintain the gold standard was weaker after the panic. These average effects are large when compared to spread changes from other uncertainty shocks of the time as well as to when the United States actually abandoned the gold standard during the Great Depression. Further, individual yield changes on event days are indeed correlated with the bond’s gold debt burden, reflecting the importance of currency mismatch as a transmission mechanism.

I take these daily spread changes from silver policy news and use them as shocks to exchange rate expectations for impulse response functions of monthly measures of real activity in the second half of this chapter. I first document that silver news did change exchange rate expectations by estimating an impulse response function for the dollar-gold interest rate differential. This interest rate spread increases immediately in a month where silver risk increases and remains elevated for several months. Turning to the response for real activity, I estimate a statistically and economically significant decline in industrial production as a result of increased silver coinage risk. The 12-month trough of industrial production due to an average increase in credit spreads from heightened silver risk is one-third of the decline in annual industrial production during the Panic of 1893.

I again find evidence that gold debts played an important role in transmitting nominal uncertainty to real activity. Immediately after several decreases in silver coinage risk, the narrative record indicates railroads increased their borrowing for investments as well as their maintenance spending. In addition, as argued by Scott Fulford and Felipe Schwartzman (Reference Fulford and Felipe2019), gold standard uncertainty affects the returns to holding dollar-denominated bank deposits. I present suggestive evidence that the currency-deposit ratio moved in the predicted direction around major silver policy events.

THE 1896 ELECTION AND RAILROAD OUTCOMES

Standard theories of the effects of economic uncertainty predict that, when uncertainty is resolved, a boom in investment occurs. I test this prediction using the aftermath of the 1896 presidential election in my second chapter. The defeat of William Jennings Bryan in this election is widely seen as the effective end to the Free Silver movement. Given that this is a single event, I focus on cross-sectional variation in response to the election. Specifically, I examine whether firms with larger bond yield changes on dates with election news saw bigger changes in earnings and investment after the election.

I hand-collect annual operations and balance sheet data for 81 railroads between 1890 and 1900 for this study. Railroads were the primary issuers of traded bonds at the time and also had the most uniform reporting of their operations and balance sheet data. I study the effect of the 1896 election on railroads’ net income, maintenance spending, and investment, as well the composition of their liabilities (debt versus equity). The yield changes from election news are based on the events related to the 1896 election classified in my first chapter.

Greater yield changes from election news predict greater growth in net income and maintenance spending after the election, but investment spending is not related to the sensitivity of bond yields to election news. While changes in borrowing costs (proxied by bond yields) should be most directly related to investment spending among firm outcomes, I argue that this does not happen with 1896 election news because those firms with the greatest yield changes happened to have the weakest financial conditions prior to the election. Importantly, a significant predictor of investment spending after the election is the firm’s ability to service its existing debts before 1896. I also present narrative evidence of financial constraints for several firms with large increases in earnings after the election that did not significantly increase investment.

The relationship between yield changes and income growth is less direct, but I provide evidence favoring a specific channel. I emphasize that the 1896 election, by reducing uncertainty surrounding the gold standard, increased bank deposits, which in turn increased the amount of credit, supporting a broader economic expansion. Building off the evidence on banking activity in Fulford and Schwartzman (2018), I argue that railroads in areas with greater increases in bank leverage saw greater increases in their earnings. Overall, the results on earnings and investment demonstrate how financial factors can amplify and dampen the real effects of policy uncertainty.

NEWSPAPER BIAS AND SILVER COINAGE UNCERTAINTY

What motivates bias in reporting on economic policy issues? In my third dissertation chapter, I study the correlates of the quantity of newspaper coverage going to the gold standard and silver coinage as well as how these newspapers commented on gold and silver coinage between 1878 and 1897. I do so with a panel of eight newspapers that spanned the United States geographically and ideologically. I record monthly counts of articles containing one of several biased phrases related to the gold standard or silver coinage for this panel.

I begin my analysis by exploring how economic conditions affected the amount of biased coverage across time and across newspapers with different ideological stances towards the gold standard. Motivated by informal findings in the modern setting regarding inflation reporting and the level of inflation, I study whether uncertainty surrounding the gold standard increased biased reporting on the issue. As proxied by the level of gold in the treasury and the change in the price index for farm goods, I show that, as silver coinage risk and gold standard uncertainty increased, so too did biased reporting by both pro-gold and pro-silver newspapers.

Next, I read many of the articles containing biased phrases towards silver and gold. I observe that many of these articles broadly relate to elections, so I check whether this is true in a quantitative sense. Indeed, I find that approximately one-third to one-half of the biased phrase articles in the newspapers with a clear editorial slant on the issue contain either the word “election” or the word “convention” as well. Further, these biased articles about elections drive overall variation in articles containing biased phrases about the gold standard. Across newspapers and biased phrases, the correlation between overall biased article counts and those about elections is close to one. At the same time, the correlation between biased phrase articles and articles containing the phrase “silver bill” (indicating legislative action on silver coinage) is close to zero for all newspapers. These results highlight the importance of the electoral process in driving media bias on economic reporting.

CONCLUSION

This dissertation estimates the economic costs of the Free Silver movement at both the aggregate and firm level, as well as shows the role of gold standard uncertainty in shaping economic reporting. Further, it documents the importance of gold-denominated debts in creating these costs of nominal uncertainty. Developing countries today have accumulated large amounts of foreign currency debt, and many also peg their exchange rates to other currencies. The example of the United States in the late nineteenth century shows the potential costs of pursuing these policy choices, costs that have proven difficult to measure in modern settings.

REFERENCES

Baker, Scott R., Nicholas, Bloom, and Steven, J. Davis. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics 131, no. 4 (2016): 1593–636.

Friedman, Milton, and Anna, J. Schwartz. A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press, 1963.

Fulford, Scott L., and Felipe, Schwartzman. “The Benefits of Commitment to a Currency Peg: Aggregate Lessons from the Regional Effects of the 1896 U.S. Presidential Election.” Review of Economics and Statistics, forthcoming, 2019.

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Mitchener, Kris J., and Marc, D. Weidenmier. “Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk.” Journal of Economic History 75, no. 2 (2015): 479–511.

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Schmukler, Sergio, and Luis, Serven. “Pricing Currency Risk Under Currency Boards.” Journal of Development Economics 69, no. 2 (2002): 367–91.

EDUARDO MONTERO

Eduardo Montero’s dissertation Essays on the Political Economy of Development consists of three essays. The first chapter is entitled Cooperative Property Rights and Development: Evidence from Land Reform in El Salvador. Land reform is one of the most important topics in the twentieth century economic history of many parts of the developing world including Japan, Taiwan, and South Korea.

The policy of land reform in El Salvador had some interesting features. In particular, there was a cumulative landholding threshold of 500 hectares above which land was expropriated and handed over to cooperatives. This enables Montero to conduct a regression discontinuity design (RDD) approach, comparing territories just below and just above the threshold. The former remained haciendas while the later became cooperatives.

Guided by a model, Montero notes that both haciendas and cooperatives face moral hazard problems. But these vary accord to crop type. Haciendas face moral hazard due to share cropping. Cooperatives may redistribute the earnings from cash crops undermining effort incentives.

The empirical evidence supports these predictions. As is often the case in good economic history research, the devil is in the details. Cooperatives shift away from cash crops where they are more likely to face perverse incentives, but they are more productive in staple crops.

In the second chapter The Legacy of Colonial Medical Campaigns in Central Africa, Sara Lowes and Montero study the long-run impact of French colonial campaigns against sleeping sickness from the 1920s to the 1950s. For this chapter, the authors construct a novel dataset of the location of sleeping sickness campaigns from French colonial archives.

They then examine the impact of these campaigns on trust in medicine in survey data today. They find that they are associated with refusal to take blood tests. Specifically, the average treatment—15 years of exposure to colonial medical campaigns raises refusals by 5.1 percentage points. Intriguingly, these effects are highly specific to healthcare projects. Areas with greater exposure to these campaigns have low rates of vaccinations among children and worse overall healthcare outcomes. But colonial medical campaigns are not associated with less successful projects in other domains.

To establish that these effects are causal, Lowes and Montero construct an instrument based on relative soil suitability for cassava, interacted with distance to the colonial capital. This instrument is motivated by the colonial administrators’ observation that sleeping sickness was associated with cassava production (partly because the processing of cassava involves water and hence attracts tsetse flies).

The third chapter (with Sara Lowes) considers the legacy of colonial rubber concessions in the Congo. This chapter is very much in the tradition of recent work on the long-run effects of extractive institutions (Dell Reference Dell2010; Nunn and Wantchekon Reference Nunn and Leonard2011). The authors study the legacy of rubber concessions, which were associated with the violent mistreatment of the native population by private companies.

Using an RDD approach, they find that rubber concessions are associated with lower quality local government but also with higher levels of trust. Sharing norms are stronger within former rubber concessions. This is consistent with work that suggests that certain types of negative shocks, such as civil wars, can promote trust and social capital (Voors, Nilleson, Verwimp, et al. 2012; Gilligan, Pasquale, and Samii Reference Gilligan, Benjamin and Cyrus2014) whereas other shocks, such as political persecutions undermine social capital (Xue and Koyama Reference Xue and Mark2017). Worse governance means that people rely less on the state and more on local communities. This is important; social scientists often like to assume that good outcomes go together. History, however, is often more complicated than this.

ERIK PRAWITZ

Erik Prawitz’s dissertation, On the Move: Essays on the Economic and Political Development of Sweden can be viewed as asking the question: What made Sweden, Sweden? That is to say, how did Sweden become one of the richest, most stable, egalitarian, and innovative states in the world? Contrary to the popular impression of many in the Anglo-Saxon world, Sweden is not socialist, but combines a highly innovative market economy with high levels of social insurance and redistribution. Prawitz’s dissertation employs novel data to study the empirics and the history of Swedish economic and political development from the late nineteenth century to the present.

The first essay in the dissertation entitled Exit, Voice, and Political Change co-authored with Mounir Karadja, finds that migration from Sweden was associated with labor organization and left-wing voting in the early twentieth centuries. In other words, it was those counties that had the most migration that led the way in moving Sweden towards social democracy.

The authors’ preferred explanation is that migration led to labor scarcity, which improved labor’s bargaining position and enabled workers to organize politically. Local government became more responsive and representative. Of course, a number of alternative hypotheses are possible. Perhaps more entrepreneurial and right-learning Swedes selected to migrate? Rather than dismissing these possibilities, Prawitz and Karadja do their best to show that these cannot account for the entirety of the effects they find.

This case study is extremely valuable, and I learned a lot about the political economy of Sweden in the early twentieth century. It also raises interesting questions about external validity. Labor scarcity is associated with the improvement of the conditions of labors in medieval England, where the Black Death brought an end to serfdom. But labor scarcity does not always improve the bargaining power of workers (by making labor more valuable it can led to the imposition of labor coercion). Future work on political economy should investigate the relationship between factor prices and political power further.

One characteristic of Prawitz’s dissertation is that it combines novel data with careful attention to questions of identification. The authors use an instrument that combines the distance to reach an emigration port and severe local frost shocks that sparked an initial wave of emigration. Due to chain migration, this is a predictor of subsequent migration and should be uncorrelated with other political, economic, or demographic developments.

The second substantive chapter, Mass Migration, Cheap Labor, and Innovation argues that migration was associated with more inventiveness in sending regions. Labor scarcity prompted mechanization and the invention of labor-saving machinery. To establish causality, the same instrument is employed as described above. This paper is well done and helps substantiate other historical examples of biased technological change (i.e., Allen Reference Allen2009).

The third chapter, On the Right Track: Railroads, Mobility and Innovation, studies the impact of the railroads on innovation. The authors find that areas traversed by the railroad became more innovative and that the railroad allowed innovators to collaborate over longer distances. The final chapter, Homeownership, Housing Wealth, and Socioeconomic Outcomes: Evidence from Sweden studies the impact of recent house building on wealth and other socioeconomic outcomes.

In summary, each chapter in this dissertation is tightly argued and each makes a separate contribution both to the economic history of Sweden and to our more general understanding of the relationship between migration, innovation, and political economy.

KILAN RIEDER

Kilian Rieder’s dissertation is entitled (Un)promising Beginnings—Bagehot in the Land of the Waltz: Financial Crises and Lending of Last Resort in the Austro-Hungarian Empire (1868–1914). In this dissertation, Rieder has undertaken an exhaustive and extremely impressive study of how the Austro-Hungarian Central Bank acted as a lender of last resort (LLR) in the late nineteenth century. He focuses much of his attention on its response to the crisis of 1873. An impressive characteristic of this dissertation is the sheer volume of new data presented before the reader. To conduct his analysis, Rieder collected information from the official statistical yearbooks for Austria and Hungary and a privately published financial yearbook, complemented with data published in Austrian newspapers, and other sources.

The best economic history is often informed by contemporary concerns. Hence it is no bad thing that Rieder’s eye is half on the present and on the extraordinary actions taken by central banks such as the Federal Reserve in the wake of the 2008 Financial Crisis. Until recently the analysis of central banks has focused on issues of inflation targeting, the Financial Crisis has returned attention to the role central banks play as lenders of last resort. Rieder demonstrates that much can be learned by studying the choices made by continental central banks in the latter half of the nineteenth century and early twentieth century, central banks that have been neglected relative to their peers in Britain or America.

Chapter 1 examines the causes of bank distress in the 1873 crash. This was the most severe financial crisis experienced by the Dual monarchy: 30 percent of banks closed and 40 percent of total equity in the banking sectors evaporated. Rieder’s analysis of this crisis is incredibly detailed, informed by both an excellent knowledge of the latest economics research and a deep understanding of the specific historical context. Estimating a survivor function at the bank level, he documents that the 1873 crisis was in the repo market rather than the real estate market thus resembling the crash of 2008 in many respects. Rieder provides a detail analysis of this crisis demonstrating that many of the loan defaults represent a classical example of bad bank-level fundamentals, reflecting that bank-level solvency component of financial distress in 1873. This analysis is complemented by a detailed examination of the microstructure of the repo market.

Chapters 2 and 3 examine the response of the Austria central bank. Specifically, Rieder considers the response of private market actors to form support committees to extend credit when the central bank failed to discharge its duties as a LLR. Moral hazard was a major issue for the Austro-Hungarian Central Bank. To deal with it, the bank successfully used credit limits to limit excessive risk-taking during normal times but relaxed these limits during crises. Chapter 2 analyzes the role played by the AHCs–support communities (AHCs), which received financing from the Austrian Central Bank. Rieder provides evidence that AHCs stabilized the overall banking system. Banks that were members were significantly less likely to fail. But for the average bank it was more important to see their business partners to become AHCs members than to participate directly.

Chapter 3 examines the role credit limits played as “contingent rules” in the late nineteenth century. Rieder notes that AHCs had access to private information; hence they could screen borrowers limiting the problem of moral hazard and pool liquidity. Rieder argues that the Austro-Hungarian Bank used a system of credit limits” as an instrument to address moral hazard concerns. These credit limits were enforced in normal types, but relaxed during periods of crisis. Importantly, the central bank’s willingness to increase the limit during a period of distress was conditional on a positive initial credit assessment. Banks that were exposed to an unexpected liquidity shock could be expected to be treated leniently.

In summary, these are three fine dissertations. Though very different, each makes an important scholarly contribution to their field of study. The three authors will undoubtedly be major contributors to the field in future years.

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