The Agenda

Southern Economics

Matt Yglesias has written a tongue-in-cheek post about Southern economics:

Something I often puzzle over is why we’re supposed to believe that conservative ideas will produce prosperity when the portions of the country most governed by conservative ideas tend to be least-prosperous. 

It’s worth noting that the South has been converging since the Second World War. This has been going on for a long time, as Barro and Sala-i-Martin observed in 1992. Convergence theory tells us that in an open economy, poor regions or countries will tend to catch up simply because the returns to capital are likely to be higher. Then there is conditional convergence, from a handy definition offered by the New School:

The conditional convergence hypothesis states that if countries possess the same technological possibilities and population growth rates but differ in savings propensities and initial capital-labor ratio, then there should still be convergence to the same growth rate, but just not necessarily at the same capital-labor ratio.

And:

Of course, even the conditional convergence hypothesis should not necessarily hold when comparing the industrialized world with the underdeveloped world because the population growth rates between countries in these two groups are different (Denmark vs. Mozambique again). But the conditional convergence hypothesis ought to help explain why countries with similar population growth rates (e.g. India and Nigeria) can converge to the same growth rates, albeit with different steady-state capital-labor ratios, and thus different income/consumption per capita.

This is a highly simplified, stylized model. One reason we see convergence in the U.S. is that capital and labor flow freely across the states. So the mere fact that southern states have high growth rates doesn’t in itself prove Matt wrong here. The causal density is so great that we’re never going to get an answer that will satisfy everyone. 

But a study by Barry W. Poulson and Jules Gordon Kaplan on “State Income Taxes and Economic Growth” [PDF] in Cato Journal suggested that low taxes in the Southern United States has been a significant contributor to growth:

The analysis reveals that higher marginal tax rates had a negativeimpact on economic growth in the states. The analysis also shows thatgreater regressivity had a positive impact on economic growth. Statesthat held the rate of growth in revenue below the rate of growth inincome achieved higher rates of economic growth.

And:

Our analysis also supports the modern version of the “frontier thesis”:states in the West were at an advantage in attracting populationand investment, thus achieving higher rates of economic growth. States in the Rust Belt were at a disadvantage due to the heavy concentrationof agricultural and traditional manufacturing industries.The Southeastern states do not appear to have been at an advantage; higher growth rates in those states can be explained by their tax policies and convergence.

This article underscores the importance of controlling for convergence and regional influences on economic growth. After controlling for those factors, we find that tax policies were significant determinants of differential growth rates in the states.

My guess is that not everyone will embrace this conclusion. Yet it does suggest that a conservative policy — maintaining a low tax burden — has contributed to prosperity. Matt then pivots from this observation to Drew Gilpin Faust’s research on the Confederate postal service, first cited in a post by Ta-Nehisi Coates:

Confederate statesmen believed that any subsidization of the mail would represent an unwarranted support for the nation’s commercial interests. Thus postal rates reflected actual costs, a policy that sent the price of stamps skyrocketing after secession…Despite its high cost, mail delivery was far from reliable and southerners reported instances where service was interrupted for months at a time.

The implication is that the Confederates were laissez-faire extremists. But as the brilliant Cornell political economist Richard Franklin Bensel argued in his landmark book Yankee Leviathan: The Origins of Central State Authority in America, 1859-1877, the Confederacy was, despite its rhetorical stance in favor of decentralization, far more centralized than the Union:

This book describes the impact of the American Civil War on the development of central state authority in the late nineteenth century. The author contends that intense competition for control of the national political economy between the free North and slave South produced secession, which in turn spawned the formation of two new states, a market-oriented northern Union and a southern Confederacy in which government controls on the economy were much more important. During the Civil War, the American state both expanded and became the agent of northern economic development. After the war ended, however, tension within the Republican coalition led to the abandonment of Reconstruction and to the return of former Confederates to political power throughout the South. As a result, American state expansion ground to a halt during the late nineteenth and early twentieth centuries. [Emphasis added.]

As former Confederates returned to power, they embraced a political economy that married extreme coercion in matters relating to race and industrial policies designed to attract low-wage manufacturing. There was a shift in the economic strategies of Southern states after the Second World War and after the civil rights movement towards what we would recognize as conservative economic policies, albeit it with a heavier emphasis on industrial policy than I’d prefer.

More recently, there has been a turn towards better human capital policies in states like Alabama, home to the innovative ACCESS program, and Louisiana, a leader in school reform efforts. Florida, meanwhile, might be forced to impose higher taxes to pay for sharp increases in public spending, as Nicole Gelinas has explained. It seems likely that the states of the Old Confederacy will see their economic outcomes diverge as states like Texas adhere to what we can loosely describe as conservative economic policies while states like Florida move in a different direction. 

P.S. As Arpit Gupta reminds me, I neglected the impact of political competition. He directs me to a paper by Timothy Besley, Torsten Persson, and Daniel Sturm on “Political Competition and Economic Performance:Theory and Evidence from the United States” [PDF].

The post-war economic transformation of the American South — with living standards converging to those in the rest of the US — is typically viewed as reflecting either economic forces alone, as in the macroeconomic growthliterature (see, e.g., Barro and Sala-i-Martin, 2004, Ch.11), or a change in“culture”, as in the literature on political and economic history (see e.g.,Wright, 1999). Our argument does not rule out these explanations forSouthern convergence, but adds the force of political competition.4 Figure2 plots the log of income per-capita in each of the Southern states relative to the entire US against political competition in the state relative to the entire US, again using averages for each decade from 1930 to 2000. The regression line has a slope of unity, suggesting that each percentage pointof (relative) political competition is associated with a percentage point of (relative) income. Our paper will argue that this relation is not a merecoincidence, but the result of a causal mechanism.

The authors suggest that the benefits that flow from political competition are significant:

Political competition has a statistically significant and quantitativelyimportant positive effect on state income and growth. According to our IVestimates, the stiffer political competition induced by the Voting Rights Actraised long-run income in the average affected state by about 25%. Moreover, we find empirical evidence for the mechanisms highlighted by the theoreticalmodel. Thus, higher political competition leads to policies of lower overallstate taxes and more business-friendly labor regulation, and to a larger shareof manufacturing in state production. We also find that the quality ofpoliticians — as measured by state Governor fixed effects — are increasing inthe degree of political competition.

I imagine that many left-of-center observers would take exception to the notion that the quality of southern politicians has been steadily increasing. 

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