Income inequality has pestered economists for decades. The gap between rich and poor is no easy thing to measure, demanding a statistical caution which previous research has omitted. For this reason, Vincent Geloso, Professor at George Mason University, asks that even the most emotive narratives about inequality get reconsidered. In his forthcoming book, The First Egalitarian Enrichment, Geloso reworks the empirics of the Gilded Age, a time at the end of America’s 19th Century (1870-1910) when untethered capitalism, popular opinion states, grew oligarchic wealth out of amassing poverty.
This narrative, Geloso shows, deteriorates when four crucial adjustments are made to how we measure incomes. The first is to accommodate the sharp fall in “cost of living inequality” during the same period, where major innovations across transport and food processing relieved ordinary Americans of onerous price burdens, thus elevating their real living standards. The second is to fix ‘the missing poor’ issue which plagues historical measurements of both poverty and inequality. High mortality rates low down the income ladder meant that annual census data would miss people out; counting them back in enlargens the income pie, and shrinks the top share held by the rich. The third is to adjust for so-called ‘composition bias’. Mass immigration added many low-wage workers to the US economy, depressing average, measured incomes but by no means actually reducing living standards. The fourth is to add an underrated source of income for poorer Americans at the time – effectively, the retained earnings allowed by tax evasion that was rife before the 1930s.
When all of these changes are made to the data which informs popular narratives, Geloso demonstrates something fascinating. Far from rising, US inequality actually remained pretty stable between 1870 and 1910, while the bottom 90% of Americans (who all lived in abject poverty by today’s standards), saw their incomes more than double. ‘American exceptionalism’ was therefore not some jingoistic trope, as Western Europe and the New World were beset with rising inequality alongside smaller gains in living standards:
Geloso’s discovery should mobilise an academic goldrush. The US enjoyed superior development, naturally begging the question ‘why?’. Many economists would jump out of their chair before the question was even asked, quick to propose strong institutions (restraints on both private and government power to insulate the market economy from arbitrary coercion), widely regarded as the basic (and only) path to growth.
The United States, however, doesn’t fit this prediction. While measuring institutional quality isn’t easy either, we have no shortage of data. Every year, Leandro Prados de la Escoura assembles The Historical Index of Economic Liberty which captures the strength of private property rights, freedom from government regulation, openness to international trade, and monetary policy responsibility for a number of countries throughout the 19th Century. Indeed, America’s score (0-10) rose sharply over the forty years, indicative of pro-market reforms, but it consistently ranked near the bottom of all the countries Geloso displays on the chart above. In 1870, America had the lowest economic freedom score of all nine, while in 1910, its rating marginally exceeded Italy’s. The US economy was exceptionally prosperous, but not exceptionally free, rendering popular faith in liberalism, it seems, inapplicable to the Gilded Age.
The story, however, is far from finished. This is because major economic freedom indices, like HIEL, only partially captures one crucial dimension of liberalism – namely immigration policy. The United States didn’t stand out for its internal hospitability to the market mechanism, but its openness to foreigners told something different. Between 1870 and 1910, the country’s population doubled, as millions poured in from across Europe, Canada and Asia. Until restrictive immigration laws passed in 1924, America relished in an open borders experiment that would make the most outspoken market fundamentalists blush today.
Can we reasonably attribute America’s 19th-Century transformation to mass immigration? Given the research findings, this would make sense. Global border liberalisation, don’t forget, would as much as double the world’s GDP under current projections. A similar optimism can, to a great degree, retrospectively explain America’s growth. Sandra Sequeira, Nathan Nunn and Nancy Qian found that regional immigration exposure from 1850 to 1920 predicts socioeconomic variations even today.
Locations which received more immigrants have higher incomes, less poverty, less unemployment, higher urbanisation and educational attainment. By all accounts, therefore, immigration seemingly facilitated the main drivers of America’s growth which Geloso lists.
The first was innovation. Revolutions in transport and food processing technology bolstered living standards with drastically cheaper goods and services, to which foreigners made vast contributions. Ufuk Akcigit documents that they supplied nearly a fifth of US inventions between 1880 and 1940. Though not an overwhelming fraction, Akcigit emphasises that some of the most transformative inventions were by immigrants, including the current electrical system, the telephone and even the electrical elevator (basically enabling skyscrapers and modern urbanisation). This isn’t to say that under autarky, Americans would never have achieved technological modernisation independently, but it does mean the pace was faster because of immigration. Mechanically, immigration meant more people, and therefore more inventions, but immigrants themselves were predisposed to innovate – reaching the United States was to abandon home and embark on transatlantic voyages. The ones who came were ones ready to seize opportunity.
The second was industrial productivity gains that brought rising wages. Though impossible to separate from innovation, these improvements were (and still are) amplified by both high- and low-skilled immigrants. High skilled immigrants serve a disproportionately managerial purpose within the labour market, enabling competitive upgrades to firm structure. One paper found that between 1990 and 2010, 30% of America’s total-factor productivity growth came from these immigrants alone. Low-skilled immigrants, meanwhile, facilitate labour market specialisation. With more workers, a business can allocate them increasingly niche and specific tasks, instead of spreading them across many. This translates to higher productivity, and hence wages, including for native workers. Immigrants to the United States, who formed a wide skill distribution, thus propelled income growth for the American-born alike. Studies which examine the effects of sudden border closures prove this retrospectively. Nancy Qian (and colleagues) finds that the Chinese Exclusion Act of 1882 – intending to ‘free up’ jobs for skilled native-born Americans – reduced wages and slowed economic growth in the Western states until at least 1940. Ran Abramitzsky, meanwhile, shows that the Immigration Act of 1924, which ended America’s adventure with open borders, didn’t raise wages as promised.
This isn’t to say that institutions or immigration are the only two possible candidates to explain America’s growth, a country blessed with resource wealth and abundant land that stimulated both industrial might and urban agglomeration. But importantly, the full realisation of these advantages was catalysed by immigration. Katharine Eriksson and Zachary Ward note that in 1910, 71% of immigrants lived in cities, compared to 41% of native-born Americans, while a decade later, an estimated half of all industrial workers were immigrants. Although eventual immigration restrictions left a vacuum partially filled by native workers, it’s undeniable that the rapidity of industrial and urban growth would’ve been limited without border liberalism.
America continues to be a powerhouse of both innovation and entrepreneurship, in which immigrants remain central. The doors were almost shut in 1924, but now, the government seems to be aiming for a slam; immigration liberalism’s role in the country’s development should prompt interrogation of present trends.
