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Unequal Gains
American Growth and Inequality Since 1700
By Peter H. Lindert, Jeffrey G. Williamson PRINCETON UNIVERSITY PRESS
Copyright © 2016 Princeton University Press
All rights reserved.
ISBN: 978-1-4008-8034-8
CHAPTER 1
Persistent Debate, a New Approach, More Data, Rich Findings
How and when did Americans become so prosperous and so unequal? Generations of Americans have debated competing visions of what was happening to national income and how it was divided. Yet they lacked the solid evidence needed to choose between the competing visions. We still know little about the growth and (especially) the inequality of American incomes before the twentieth century. We also need to understand what has caused the dramatic movements in inequality over the last century, and its future prospects.
When did America grow fast enough to make it a world leader in average living standards? There is little disagreement about how American incomes have grown since the early twentieth century and even as far back as 1870, thanks to the pioneering work of Simon Kuznets and many others. But income estimates are weak for the years before 1870 — weaker than in some western European countries.
To be sure, others before us have struggled admirably to reduce uncertainties about the pre-1870 history of national income. Yet the debate continues about income levels and growth before and during the Civil War. And even those estimates that most people agree on probably give the wrong impression about how American incomes compared with those of other countries. Our history textbooks imply that the road to prosperity was paved by the institutional wisdom of the country's founding fathers and those who refined that wisdom over the two centuries that followed. While those institutions were well chosen and largely well borrowed, this book will show that America had reached world leadership in living standards long before the country's founding fathers constructed their new republic. We will also find that the road to prosperity was far bumpier than the standard, benign tale of American economic progress implies.
How unequally was income distributed between the rich, middle, and poor, and why? The steep rise in inequality since the 1970s is now unmistakable. New measures of inequality avoid the faulty official numbers that hid most of the true movements in the incomes of the richest. Since the 1960s, the official US Census Bureau estimates have badly understated top incomes and (unintentionally) hidden much of the rise in the share going to the richest 1 percent. Fortunately, an international research team led by Anthony Atkinson, Thomas Piketty, and Emmanuel Saez solved that twentieth-century problem. Starting from income tax returns, this team has charted the dramatic twentieth-century fall and rise of top incomes in countries around the world. Their evidence, however, is only available for the twentieth century. Since the US income tax was only introduced in 1913, there is still no history of American top income inequality for the centuries before, though economic historians have certainly offered many plausible guesses.
Why does all this new twentieth-century American evidence matter, and why do we think it's necessary to use new methods to mine the thinner evidence documenting the three centuries before? The answer is that two fundamental questions important for policy debate have been left unanswered by American history. First, does modern economic growth inevitably drive up inequality? And second, does inequality favor or disfavor growth? This book speaks to those two questions by exploring American incomes since the 1600s.
A DIFFERENT APPROACH WITH NEW DATA
New Evidence, Helped Greatly by Four Scholars
Information about the distant past keeps growing, thanks to advances in archival recovery technology. The leading estimates of nineteenth-century American gross domestic product (GDP) date from pioneering research in a great quantification wave from the 1960s through the late 1980s. Nineteenth-century evidence on inequality and growth did not advance so quickly, but the same quantification wave did give us new impressions about colonial American inequality. Those impressions were still limited by incomplete evidence on the distribution of wealth, property income, labor earnings, and thus total income.
Since then, several new sources have become available that this book exploits — new evidence supplemented by some old sources that have been underutilized in the past. The new evidence did not appear by some official release of long-locked archives. Rather, it came from the previous efforts of several others. We are delighted to acknowledge their labors before describing our own method of extracting a new income history from the mass of information they have patiently extracted. Our American incomes history has benefited especially from the contributions of four scholars. The landmark study of American wealth around 1774 by Alice Hanson Jones had already appeared by 1980 and launches our new income history in chapter 2. Jackson Turner Main scoured the colonial archives and delivered much of what we know about rates of pay on the eve of the revolution. As far as we know, we are the first to mine systematically the numbers in his Social Structure of Revolutionary America. Gloria Lund Main, first with her late husband and then on her own, wrote widely on colonial American wealth inequality. Central to our chapter 3, she has just made available — in machine-readable form — their rich sample of New England probates from 1631 to 1776. Finally, Steven Ruggles, director of the University of Minnesota Population Center, leads the continuing development of the Integrated Public Use Microdata Series (IPUMS), which has revolutionized the use of past censuses. One of its many accomplishments is the set of 1 percent samples of the US population censuses from 1850 onward. Our new history of American incomes reported in chapters 5 and 6 would have taken vastly longer to research without the 1850, 1860, and 1870 IPUMS samples of individual wealth, occupation, location, and other attributes.
Building Social Tables on the Income Side
Armed with new evidence, this book applies a different approach to the historical estimation of what Americans have produced, earned, and consumed. National income and product accounting reminds us that we should end up with the same number for GDP by assembling its value from any of three sides — the production side, the expenditure side, or the income side. All previous American estimates for the years before 1929 have proceeded from either the production side or the expenditure side. Taking the production route, others have assembled real GDP by applying fixed base-period weights to time series of such physical output indicators as bushels of grain harvested, pigs slaughtered, yards of cloth woven, bricks used to build houses, and service workers employed. These weighted output trends are then applied to some benchmark year, where the evidence is thick enough — like an early census — to build what are hoped to be solid estimates for that year. Here the leading historical extension has been the pioneering work of Robert Gallman, who provided annual estimates back to 1834. Paul David used his "controlled conjectures" to push aggregate output back to 1800, and more recently, Thomas Weiss and his collaborators have used the same method to push the aggregates back into the colonial era. The second leading approach to GDP estimation before 1929 has taken the expenditure side, adding up estimates of household consumption, capital formation, government expenditures, and the difference between exports and imports. The production and expenditure approaches have helped support each other by using much the same data from federal censuses.
We work instead on the income side, constructing nominal (current price) GDP from free-labor earnings, property incomes, and (up to 1860) slaves' retained earnings (that is, slave maintenance or actual consumption). What are called "social tables" are built up to income aggregates from occupation and location (described at greater length in chapter 2) in the "political arithmetic" tradition spawned by such Englishmen as Sir William Petty and Gregory King in the seventeenth century. Development economists will recognize a similarity between our social tables and their social accounting matrices. We have built five social tables for the benchmark years 1774, 1800, 1850, 1860, and 1870 — years where the data are most plentiful. No such income estimates were available for any year before 1929 until now.
Our different approach leads to rewards not attainable by sticking to the production or expenditure side. One reward is the chance to confront and challenge the production-side estimates using very different data, sources, and methods. The production side and the income side should add up to the same GDP total, once one either multiplies the production side's real GDP estimate by a price index or divides the income side's nominal GDP by the same price index. As we will see, some instructive tensions arise between the two kinds of estimates, exposing the need to rethink the index-number alignment of real GDP and its price deflator.
An even bigger reward from using the income approach is that it exposes how income was distributed by socio-occupational class, race, and gender as well as by region and urban–rural location. Furthermore, our income approach allows us to travel deeper into the past than just 1790, 1834, or 1870. Our estimated social tables capture the distribution of national income going back to the colonial era. In addition, we can break that distribution down into component parts — skill premiums, urban–rural wage and income gaps, regional inequality, earnings inequality, property income shares, and property income distribution — thus better to understand the determinants of aggregate income inequality and its change over time.
Why Not Wealth or Capital?
We elect to chart a new history of American incomes rather than revisit the history of American wealth. Our choice of income, as opposed to wealth or capital, may seem surprising given that it comes in the wake of Piketty's best-selling book Capital in the Twenty-First Century and his article with Gabriel Zucman proclaiming that "capital is back." Piketty dwells at great length on wealth inequality and the ratio of wealth to GDP. We have explored the history of American wealth before, so why not return to it with new data to address the debate that Piketty has reignited? The answer is that wealth is an incomplete measure of one's lifetime resources. It only includes nonhuman assets, missing the investments people make to augment their earnings capacity — formal education, on-the-job training, health, and migration.
At this point, we need to emphasize that the inequality we should really care about is the distribution of lifetime resources, as shared within a household. It can be measured either as an inflow, by lifetime earnings plus inheritance, or an outflow, by lifetime consumption plus bequest. For most people, any calculation of their lifetime income reveals the quantitative dominance of labor earnings or consumption flows, not wealth. Earnings from accumulated skills, ability, and effort account for more than half of lifetime incomes, and wealth misses this. More important, the modern distribution debate has failed to note the fact that inequality of lifetime income must have been reduced dramatically by rising life expectancy, as we have pointed out some years ago. Since the nineteenth century, the spectacular decline in infant and child mortality — and that of young mothers in childbirth — has not only improved average life expectancy but also caused a spectacular convergence in those rates across income classes. This point is never introduced into inequality debates. While we do not fully approve of the narrower focus on current income, we follow the convention in this book so that our new evidence can be compared with that of others.
Granted, studying wealth does have some practical benefits. First, the study of wealth inequality is a useful prelude to the study of inheritance — an issue worth public debate. In addition, data on household wealth offer clues about income inequality in earlier centuries, when direct income measures are sparse. Yet because we have found a way to trace the long history of income levels and income inequality, we can afford to set aside a separate, and narrower, discussion of the distribution of wealth.
Three Things Left Out
This book omits three things that matter. It excludes Native Americans — a big part of the colonial population — since information on their living conditions is simply too limited. Second, our seventeenth- and eighteenth-century analysis only covers the thirteen mainland British colonies, ignoring the West Indies, Canada, and all other North American settlements. Third, and most important, we see no way to place any monetary value on the freedom that slaves were denied. Nor can their inhumane treatment be quantified. Only slave consumption is measured here — a much narrower concept than their well-being. The last of these qualifications deserves particular emphasis since so much of this book will deal with income inequality. While we will stress that the distribution of American incomes was strikingly "equal" or "egalitarian" before 1790 or 1800 and the start of modern economic growth, this evidence should be understood to mean "equal in income" or "income egalitarian." A society with slavery should not be viewed as egalitarian in any broader sense.
Though we use a different income-building approach than have others, our estimates should be viewed as part of a research tradition that David so aptly described as "new evidence and controlled conjectures." Our estimates use new evidence that was not available when others were writing on this topic, and we offer them only as controlled conjectures, since they are laden with explicit assumptions about information that is still lacking from the historical record. Far from claiming closure, we present the implications of currently available evidence, awaiting revision as more and better evidence accumulates.
NEW FINDINGS
Our new approach and new data yield a rich harvest of new findings. They are:
• American world leadership in income per person has waxed and waned for centuries.
Before the twentieth century, the period in which Americans most clearly led Britain and all of western Europe in purchasing power per capita was during colonial times — that is, when North Americans were still British. They were already ahead by the late seventeenth century. America lost that lead in the Revolutionary War and the Articles of Confederation years, gained it back by 1860, lost most of it again in the Civil War decade, gained it back once more by 1900, and briefly lost it again in the Great Depression of the 1930s. Angus Maddison's claim that American income per capita did not catch up to that of Britain until the start of the twentieth century seems to be off the mark by at least two centuries.
Over the whole span of over 360 years since the mid-seventeenth century, America's income advantage over Britain has not increased and may have decreased slightly. The only historical moment in which the United States soared far ahead of the rest of the world in average income came at the end of World War II. Since then, western Europe and Japan have been growing faster than the United States in terms of incomes per person.
• Demography mattered from the start.
American colonists probably had the highest fertility rates in the world, and their children probably had the highest survival rates in the world. Thus, the American colonies had much higher child dependency rates and family sizes than did Europe, and even higher than does the Third World today. What was true of the colonies was also true of the young republic. It follows that America's early lead in income per capita was exceeded by its early lead in income per household or per worker.
• The colonial era saw little growth per capita, because extensive growth in the poorer hinterland offset intensive growth on the richer coast.
Our evidence supports the slow- or no-growth side of the colonial growth debate. This is not a "pessimist" result, however, since it is consistent with more than a century of relative prosperity based on a growing colonial supply of primary products to Atlantic markets and the rapid expansion of an interior poorly integrated with those markets. It was a dualistic economy, with the richer coastal strip producing high-value exports and undergoing intensive growth, and with an interior producing a high level of subsistence (or what colonial historians have called "subsistence-plus") and undergoing extensive development. The interior won the colonial population race, bringing de-urbanization over the century up to independence.
(Continues...)
Excerpted from Unequal Gains by Peter H. Lindert, Jeffrey G. Williamson. Copyright © 2016 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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