When we think of prohibition in the U.S., many of us will think about the negative impacts that the black market trade in alcohol has. We think about Al Capone and tommy guns. However, national prohibition (which came into force on 17 January 1920, one year after the 36th state ratified the 18th Amendment to the Constitution) was actually the endpoint of decades of local prohibitions, which were implemented at the county (or sometime the sub-county) level. By 1920, the U.S. was a patchwork of wet counties (where alcohol sales were allowed) and dry counties (where it was not).
Although we mostly think about the negative effects, could local prohibitions have positive effects as well? A recent working paper (forthcoming in the Journal of Economic History) by Greg Howard (University of Illinois) and Arianna Ornaghi (University of Warwick) addresses that question. Specifically, they use Population Census and Agricultural Census data to look at differences in land values (proxied by farm values and population change) and a number of other variables, between counties that were early adopters of prohibition (between 1900 and 1909), and those that were later adopters (1910-1919). The outcomes they look at are measured over the period 1890 to 1910, so the 'late adopters' are counties that hadn't (yet) implemented dry laws, but were similar to the counties that had, in the sense that they were the next counties that would go dry (and would all do so before national prohibition was introduced).
Howard and Ornaghi find that:
...local Prohibition had significant economic effects on rural counties. First, Prohibition increased population and land prices, consistent with it being a policy that people find desirable. Second, we show that counties that enacted Prohibition saw increases in labor productivity and capital investment after they became dry, consistent with agglomeration that comes through a land price channel. We also see an increase in banks in the areas, suggestive of more lending... Third, we show counter-intuitive sorting patterns: counties with local Prohibition attracted relatively more immigrants and African-Americans. Given that these groups were generally less in favor of Prohibition, these sorting patterns seem unlikely to have been driven by preferences for the policy, but could have been the product of growing labor market opportunities.
A model of Tiebout competition suggests that local areas that adopt attractive policies will, by definition, attract population. That will increase land values. Howard and Ornaghi's evidence suggests that Prohibition was a 'positive amenity' that attracted population. The increase in land prices gave land owners more collateral, which they could use to borrow and invest in their farms (remember that this time period was when mechanisation of farms was increasing). The increase in bank lending they identify is consistent with this.
So, local prohibition had positive amenity effects. However, we need to be cautious about extrapolating too much from the U.S. experience a century or more ago. Although alcohol has large and negative effects now (see my post from earlier this week), those effects were likely much larger in the early 20th Century than they would today. So, local prohibition likely had a much larger positive effect than a similar policy would have today, and to some extent we can see that with the benign effect of local alcohol policies in New Zealand, as I discussed earlier this week. Of course, that isn't the point that Howard and Ornaghi are making with their paper - they are more focused on the effects of local amenities and on Tiebout competition, and Prohibition simply provides the context for their study.
[HT: Marginal Revolution, last year]
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