Now Online: Intergenerational income mobility and economic freedom

My paper with Justin Callais on how economic freedom improves intergenerational income mobility (changes along the income ladder relative to parents) is now available online at the Southern Economic Journal. The abstract is below:

Numerous studies have found that income inequality reduces the chances of upward relative mobility (i.e., climbing up the income ladder). However, most of this work ignores the role played by institutional quality (namely, economic freedom) in determining mobility and increasing the individual’s set of choices. We fill this gap by empirically testing the direct and indirect (through economic growth) impacts of economic freedom on intergenerational income mobility. We find that economic freedom has both direct and indirect effects on intergenerational income mobility, while income inequality is a strong predictor of downward income mobility. When we incorporate findings about the purely mechanical relationship between inequality and intergeneration income mobility, we find that the legal system and property rights component of economic freedom matters more than inequality. These results suggest that good institutions can increase intergenerational income mobility.


New Working paper – The Myth of Wartime Prosperity: Canadian Evidence

I have a new working paper with my friend and mentee Casey Pender of Carleton University. In this short paper, we revisit the performance of the Canadian economy during the two World Wars. Casey and I stand on the shoulders of Robert Higgs here to perform our work. We owe him a lot. The abstract is below and the paper is here on SSRN:

This paper provides a series of nominal non-war output for Canada during WWI and WWII and a novel estimated price deflator to account for wartime price controls. We argue that our nominal series, deflated by our price estimates, provides a superior indicator of welfare and general economic well-being during wartime than more traditional measures of real output. When looking at our series, we find that it is 11% lower than traditional measures in 1918 and closer to 30% lower in 1945. We also corroborate our finding with domestic private investment in Canada, which we show follows similar trends of decline during wartime relative to trend. We argue that this provides evidence against the idea of wartime prosperity and, more specifically, against the notion of WWII ending the Great Depression in Canada.

Does the Conquest Explain Quebec’s Historical Poverty? The Economic Consequences of 1760

This new working paper is probably the one that will get me most in trouble. However, as I am gradually assembling the pieces of a book on the economic history of French-Canadians (tentatively titled The Seeds of Distinctiveness: Economic Growth and Institutions in French Canada to 1913), I felt there was no way around it. How could one assess the historical origins of Quebec’s relative poverty (and how it speaks to wider questions in economic history) without discussing the extent to which the British Conquest of 1760 matters. Historians have been going back and forth on this for decades (at least since François-Xavier Garneau) and no one is convinced. However, I noticed that all arguments boil down to a simple mechanism: the extent of French-Canadian engagements with markets.

More nationalist historians argued that there was a retreat from the market into a form of subsistence agrarianism. Others argue that there was no retreat to be had. Others argued that the British unleashed some form of market revolution (not in those terms). As such, the validity of the mechanism advanced by all sides can be tied to whether markets grew more integrated (which would mean greater responsiveness to market signals) over time and space. I test exactly that and find that there was market integration — very strong signs of market integration in fact after signs of disintegration under French rule.

My findings provide a strong development in the literature as it leaves only two questions to consider. Indeed, we now know which mechanism was correct (i.e., that which claimed that British rule was associated with greater market development) and which are incorrect (that there was either zero effects of the conquest or negative effects). All we need to know is how beneficial was the Conquest and whether the market integration trends observed were due specifically to British rule. The link to the paper is here and the abstract is below:

The British Conquest of Quebec in 1760 was a key moment in Canadian history as it marked the beginning of a tense coexistence between French and English Canadians. Many argue that the Conquest had strong economic consequences in the form of the relative poverty of the French settlers. The mechanisms proposed are manifold, but they all rely on a key feature: a retreat from the market by French farmers. Using 171 years of wheat price data for Quebec City and Montreal, I test whether there are any signs of this retreat from the market and instead find the opposite: over time, markets grew more integrated across regions. In fact, there are more signs of disintegration during the era of French rule. Additionally, over time, regional prices became better predicted by current prices elsewhere than by the lagged prices in the same region. By the 1830s, markets in Quebec were as well integrated as those in economies such as the United States, France, Britain and Germany. The evidence in this paper is consistent with recent empirical findings about Quebec’s economic history, and so I argue that the case for the Conquest’s initiation of the relative poverty of Quebec (also dubbed “economic inferiority” in the historiography) is non-existent. This does not exclude long-run consequences of the Conquest, but the correct answer must lie elsewhere than in conventional explanations.

New Working Paper: Was there a Crisis?

I have a new working paper available. This time it is co-authored with Matthew Curtis (great guy currently doing his postdoc at Université libre de Bruxelles — you should hire him if you are looking for a good economist). In the paper, we employ data on wages, mortality and literacy to create a human development index (HDI) for Quebec from 1688 to 1911 with an intent to focus on the 1760 to 1850 period. The focus is because there is a claim of an agricultural crisis (due to falling wheat output) in Quebec between 1800 and 1850. This, apparently, translated into falling living standards. This decline in living standards is behind many key political developments in Canadian history (notably the 1837-38 rebellions, the Act of Union, Confederation, the massive emigration of French-Canadians etc.).

We essentially obliterate (yes, that is actually what we do) the idea that there was a prolonged collapse in living standards in Quebec during the first half of the 19th century. We dont even find signs of stagnation. We only find positive economic growth and improvements in living standards. There was, simply put, no crisis (see the graph of our resulting HDI). All the historiography built on the idea of this crisis is simply building on moving sands.

The abstract is below and the paper is available here on SSRN:

The colony of Lower Canada, now the modern-day province of Quebec in Canada, is presented as having experienced a prolonged agricultural crisis (marked by the shift away from wheat-farming) during the first decades of the nineteenth century. During this crisis, living standards supposedly fell, but this is subject to a debate which persists to this day because of the absence of convincing data. In this paper, we use new data (real wages, literacy, and infant mortality) to provide quantitative evidence of living standards in the form of a Human Development Index (HDI) to study whether there was a crisis between 1760 and 1850 (and we extend the index to 1688 and 1911 in appendix). Across multiple specifications of the HDI to account for non-linearity, we find no signs of a crisis. We find only signs of improvements during the period — driven largely by falling infant mortality rate and rising literacy rates. This new evidence should finally put to rest the claim that there was a crisis.

Roundabout solutions to calm down the abortion debate

In the wake of the recent Supreme Court decision on returning the regulation of abortions to the state level, it is hard to find anyone who does not have an opinion on the matter of abortions. Most of the positions stated are about virtue-signaling or tribal-signaling. Little of it has any productive value nor do they have a chance at persuading people. As such, let me propose a different take on the matter that few have considered: that the debate’s magnitude can only be reduced by indirect solutions.

The issue at hand is that having a child is costly. It clearly alters the life-course of women who become pregnant (regardless of age). This is in addition to the monetary cost of raising children – which is not trivial. As any economist would tell you, increasing the cost of something means you will get less of it. Or, you might see people allocate energy and money to avoiding that cost – which means that demand for abortions would rise with rising costs of childrearing. Reduce the cost of childrearing and you will reduce the demand for abortion. Fewer abortions demanded should please pro-life advocates by reducing the number of abortions while pro-choice people should be satisfied by reducing the number of instances where the choice to abort hasto be made.

Nothing radical here for anyone with a modicum of economics knowledge. However, what is generally underappreciated is how much government policies have increased the cost of childrearing. Consider two examples: childcare and housing.

Childcare is an obvious cost associated with childrearing. Families in the United States can be expected to pay somewhere between $5,110 and $21,610 for full-time service depending on the state of residence. As childcare is a cost associated with the return to work for mothers, it is no surprise that the labor economics literature finds that mothers are quite sensitive to childcare costs in their decisions of when to return to work (and how many hours to work).

However, as Devon Gorry and Diana Thomas found in an article published in Applied Economics, childcare providers are heavily regulated at the state-level regulations with measures such as minimum child-staff ratios, licensing requirements, continuous training obligations, group size restrictions, building requirements, degree requirements etc. While these measures appear to have little relevance to service quality, they clearly raise the price of the services. Gorry and Thomas found that forcing smaller group size by one child increases rates quoted by 9% to 20% whereas degree requirements for educators increased them by 22% to 46%.  Deregulation of childcare would help reduce prices. As childcare accounts for more than 50% of the weekly expenditures on a pre-school age child, such reductions would dramatically reduce the total cost of having kids. In turn, this will make the prospect of having a child less financially less daunting for parents and make them more willing to eschew the decision to abort.

Housing regulations have a similar effect. Why? One of the most important costs associated with children is the area they need in a housing unit. After all, they need bedrooms, room for toys, a play area etc. Also, parents like some privacy and no one wants to go back to the 19th century style of living where kids live in the same bedroom as them. In economist-speak, we would say that housing is a complement to children just like batteries are a complement to electronic equipment and steaks are a complement to whiskey. If you raise the price of a complement, you reduce the quantity demanded of the other good even if its price is unchanged. As my colleague Bryan Caplan notes, “the few empirical papers on this topic fit the theory” – higher housing prices reduce the demand for having children (as seen through lower fertility rates). This means that higher housing prices might incentivize some potential parents to opt for an abortion because of the financial inability to deal with the need for greater space. Housing regulations, by reducing the supply of housing and making it more inelastic, drive-up housing prices.

How much do they drive up prices? A lot! One study for the United States suggest that even mild reductions in land-use restrictions in San Francisco – a particularly egregious municipality in terms of overregulation – could reduce rents by 4% to 8% annually. Another famous study, also using San Francisco, found that land-use regulations adopted in the 1980s increased housing prices by 20% to 40%. Another study, concerned this time with Manhattan, found similar proportions when studying the effects of land-use restrictions on construction costs.  Land-use deregulation would reduce housing prices and thus increase the demand for having children. Logically, it should also decrease the number of cases where parents will consider the choice of aborting.

Moreover, these examples compound each other. Indeed, housing costs are roughly 15% of the operating costs of childcare centres. If land-use deregulation reduced rents by 25%, daycare costs would fall by roughly 4% — an effect that compounds those of deregulating the supply of daycare services.

Abortion legislation is unlikely to resolve this contentious issue to anyone’s satisfaction. While they will not resolve the issue, indirect solutions that reduce the cost of family formation will reduce the contentiousness of the issue. In other words, these solutions might dial down the tone and reduce the stakes in play. This, while not perfect, may help cooler heads to prevail.