Nathan Nunn, Stanford University and NBER;
William Easterly, New York and NBER,
Daniel Berger and Shanker Satyanath, New York University
Commercial Imperialism? Political Influence and Trade during the Cold War
Berger, Easterly, Nunn,and Satyanath ask whether there is evidence of U.S. power being used to influence countries' decisions regarding trade and trade policy. They measure U.S. influence using a newly constructed annual panel of CIA interventions aimed at installing and supporting new leaders during the Cold War. The researchers presume that the United States had greater control over leaders who were installed by the CIA. They show that U.S. interventions were followed immediately by an increased flow of U.S. goods into the intervened country. However, there was no increase in the shipment of goods from intervened countries to the United States. They also find that the increase in imports is observed only in autocratic regimes, where leaders are less accountable to their citizens, and where we expect U.S. influence to have been the most effective. Testing for alternative explanations, the authors find that the increase in U.S. imports did not arise from a decrease in bilateral trade costs with the intervened country. Rather, the increase in imports is in industries in which the United States has a comparative disadvantage. The researchers also test whether the increase in U.S. imports following U.S .interventions was the result of a change in political ideology, or of an increase in U.S. aid or U.S. Export-Import Bank loans. They find that these alternative explanations do not account for the surge in U.S. imports. Examining specific mechanisms, they do show that government purchases of U.S. products play a central role.
Moritz Schularick, Free University of Berlin,and
Alan M. Taylor, UC, Davis and NBER
Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870 to 2008
The crisis of 2008-9 has focused attention on money and credit fluctuations, financial crises, and policy responses. Here, Schularick and Taylor study the behavior of money, credit, and macroeconomic indicators over the long run, based on a newly constructed historical dataset for 14 developed countries over the years 1870 2008, and using the data to study rare events associated with financial crisis episodes. They present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as demonstrated by a decoupling of money and credit aggregates. They also find a decline in safe assets on banks' balance sheets. The researchers show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, they demonstrate that credit growth is a powerful predictor of financial crises, suggesting that such crises are "credit booms gone wrong" and that policymakers ignore credit at their peril. It is only with the long-run comparative data assembled for this paper that these patterns can be seen clearly.
Eugene White, Rutgers University and NBER
Lessons from the Great American Real Estate Boom and Bust of the 1920s
White notes that although long obscured by the Great Depression, the nationwide "bubble" that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates, and a "Greenspan put," helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened, not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the "Too Big To Fail" doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.
Kenneth Snowden, UNC, Greensboro
The Anatomy of a Residential Mortgage Crisis: A Look Back to the 1930s
Looking back to the 1930s provides the opportunity to examine one severe mortgage crisis as we live through another. Snowden examines the development of the residential mortgage market during the 1920s, the institutional disruptions that occurred in the 1930s, and the policy response of federal and state governments. The crisis reshaped the structure and development of the residential mortgage market and led to a postwar system in which portfolio lenders dominated both local and inter-regional markets. Some pre-1930 innovations-mortgage insurance and high-leverage, affordable loans-were written into federal programs and became part of the new system. But early experiments and proposals for securitization did not survive the 1930s, and the implementation of this innovation was delayed for forty years.
Werner Troesken, University of Pittsburgh and NBER
The Elasticity of Demand with Respect to Product Failures; or Why the Market for Quack Medicines Flourished for More Than 150 years
Between 1810 and 1939, real per capita spending on patent medicines grew by a factor of 114; real per capita GDP by a factor of 5. The long-term growth and survival of this industry is puzzling when juxtaposed with standard historical accounts, which typically portray patent medicines as quack medicines. Troesken argues that patent medicines were distinguished from other products by an unusually low elasticity of demand with respect to product failure. While consumers in other markets stopped searching for a viable product after a few failed attempts, consumers of patent medicines kept trying different products, irrespective of the number of failed medicines they observed. The market expanded as the stock of people buying potential cures accumulated over time. Because no one was ever cured, and consumers possessed a highly inelastic demand with respect to product failures, demand was unrelenting. In short, patent medicines flourished not despite their dubious medicinal qualities, but because of them. There is also evidence that genuine medical advances, such as the rise of the germ theory of disease and new therapeutic interventions, helped expand the market for quack medicines.
Zeynep K. Hansen, Boise State University and NBER,
Gary D. Libecap, UC, Santa Barbara and NBER, and
Scott E. Lowe, Boise State University
Climate Variability and Water Infrastructure: Historical Experience in the Western United States
Greater historical perspective is needed to enlighten current debate about future human responses to higher temperatures and increased precipitation variation. Hansen, Libecap, and Lowe analyze the impact of climatic conditions and variability on agricultural production in five semi-arid western states. They assemble county-level data on: dams and other major water infrastructure; agricultural crop mixes and yields; precipitation and temperature; soil quality, and topography. Using this extensive dataset, they analyze the impact of water infrastructure investments on crop mix and yields in affected counties relative to similarly-endowed counties that lack such infrastructure. They find that water infrastructure smoothes agricultural crop production and increases the likelihood of a successful harvest, especially during times of severe drought or excessive precipitation.