Congressional Voting on the Underwood Tariff of 1913

Congressional Voting on the Underwood
Tariff of 1913: An Econometric Analysis
Jonathan S. Epstein
Senior Thesis
Departments of Economics and History
Brandeis University
Primary Advisor: Professor Linda Bui
Secondary Advisor: Professor Judith Dean
Secondary Advisor: Professor Peter Petri
History Advisor: Professor Michael Willrich
Second History Reader: Professor David Engerman
May 8, 2014
2
“It may be a narrow view for me to take, but I am for the people of my district first and
the rest of the world afterwards.”
-- Kentucky Republican Representative Caleb Powers, September 8, 19131
Abstract
The Underwood Tariff of 1913, an initiative of newly elected Democratic
President Woodrow Wilson, sought to lower cumulative tariff rates from 20.0% to 8.8%.
This fiercely contested bill passed by a margin of 320-195. The question posed by this
paper is, Why did congressmen vote for or against the Underwood Tariff? While party
affiliation plays a large role, with Democrats favoring passage and Republicans opposing,
it is believed that the economic characteristics of a congressman’s state are the primary
catalysts in determining voting. This paper tests for three economic models: the
Heckscher-Ohlin trade model, an adaptation of the Ricardo-Viner trade model, and a
model that proxies for the effect of income taxes. The Heckscher-Ohlin model, which
accounts for relative factor endowments, is proven to be the only statistically significant
model. Using the Heckscher-Ohlin variable, a Capital to Land ratio for each state, this
paper proves that congressmen from states that have agrarian economies support freer
trade and congressmen from states that have manufacturing economies support
protectionism.
1
Congressional Record. Vol. 50 Part 5. 63rd Congress, 1st Session. September 8, 1913, p. 4545.
Woodrow Wilson, “An Address on Tariff Reform to a Joint Session of Congress, April 8, 1913.” In
Arthur S. Link, editor, The Papers of Woodrow Wilson, Vol. 27: 1913. Princeton: Princeton University
2
3
Table of Contents
Introduction………………………………………………………………………………..4
The Tariff, 1887—1909…………….……………………………………………………..6
The Tariff, 1912—1913……………………………………………………………….…16
Economic Model: Influences.……………………………………………………………26
Economic Model of This Paper………………………………………………………….29
Econometric Model: Influences………………………………………………………….32
Econometric Model of This Paper……………………………………………………….34
Data Summary Statistics………………………………………………………………....37
Regional Breakdown of Data………………………………………………………….…38
Multicollinearity…………………………………………………………………………40
State by State Breakdown of Data……………………………………………………….42
Regression Results……………………………………………………….………………46
Conclusion……………………………………………………………………………….49
Bibliography……………………………………………………………………………..52
Data Sources……………………………………………………………………………..55
Appendix…………………………………………………………………………………56
4
I. Introduction
“I have called the Congress together in extraordinary session because a duty was
laid upon the party now in power….The sooner that is done… the sooner our men of
business will be free to thrive by the law of nature (the nature of free business) instead of
by the law of legislation and artificial arrangement.”
A month after his inauguration, on April 8, 1913, President Woodrow Wilson, as
of yet unencumbered by gunshots across the Atlantic, made the first presidential speech
to a joint session of Congress since John Adams did so in 1800. The subject of this
unorthodox speech was the tariff question. “We long ago passed beyond the modest
notion of ‘protecting’ the industries of the country and moved boldly forward to the idea
that they were entitled to the direct patronage of the Government,” Wilson stated. “We
have sought in our tariff schedules to give each group of manufacturers or producers what
they themselves thought they needed in order to maintain a practically exclusive market
as against the rest of the world.” Directly linking the tariff question to the growth of
trusts, he continued, “We have built up a set of privileges and exemptions from
competition behind which it was easy by any, even the crudest, forms of combination to
organize monopoly.” Ever the academic, Wilson linked monopoly to deadweight loss:
“Nothing is obliged to stand the tests of efficiency and economy, in our world of big
business, but everything thrives by concerted arrangement.” To remedy this, “the object
of the tariff duties henceforth laid must be effective competition, the whetting of
American wits by contest with the wits of the rest of the world.”2
2
Woodrow Wilson, “An Address on Tariff Reform to a Joint Session of Congress, April 8, 1913.” In
Arthur S. Link, editor, The Papers of Woodrow Wilson, Vol. 27: 1913. Princeton: Princeton University
Press, 1978), 269-72. It is noteworthy that Wilson advocated a gradual approach to tariff reform, not one
of “reckless haste” or “revolution.”
5
Overnight, the Underwood Tariff lowered the tariff rates on numerous products
from the rates introduced by the 1909 Payne-Aldrich Tariff, catalyzing immense change
in the American economy, from incentives facing American firms and consumers to the
revenues collected by the government. In addition to lowering tariff rates, the Underwood
Bill also implemented the income tax, which had been made legal by the adoption of the
Sixteenth Amendment in February 1913. Tables I and II quantify some of these changes.
Table I3
Comparing Revenues From Payne-Aldrich (1909) and Underwood (1913)
Effect
Payne-Aldrich
Underwood
Average % of tariff rates,
37%
27%
compared to value of all imports
Value of Annual Imports Added
$147,000,000
to Free List by Underwood
Estimated Revenue from Imports
$303,000,000
$249,000,000
Estimated Revenue from
$37,000,000
$122,000,000
Corporate and Income Taxes
Table II4
Reduction in Tariff Rates on Specific Goods from Payne-Aldrich to Underwood
Good
% Reduction
Foodstuffs and Farm Products
Nearly 1/2
Raw Wool
Free List
Woolen Clothing
Nearly 2/3
Cotton Clothing
1/3
Sugar
Free List (in 1916)
Earthenware and Glassware
1/3
Meats, Fish, Dairy Products, Flour, Potatoes, Free List
Coal, Iron Ore, Lumber, and many classes of
Farm and Office Machinery
These tables illustrate how Underwood drastically cut rates and increased the
income tax to make up for the lost revenue. Following Wilson’s reasoning, the
Underwood bill reduced costs for many goods and deadweight losses from both the
economic inefficiency of producing goods in countries with a comparative disadvantage
3
4
“Wilson Signs New Tariff Law.” The New York Times. October 4, 1913. Page A1.
Ibid.
6
and from the inefficiency of price increases caused by trusts that are enabled by high
tariff walls. Coupled with these benefits were changes highlighted by opponents of
Underwood: the loss of profits and jobs in domestic industries that could no longer
compete against foreign producers under the lower rates. This was the main, though far
from the only, argument against reducing tariffs.
President Wilson was explicit and unequivocal in his reasons for supporting the
Underwood Tariff. Congress, which passed Underwood by a vote of 320-195, was not as
publicly clear in explaining the actions of its members. The question posed by this paper
is, Why did congressmen vote for or against the Underwood Tariff? To answer this
question, this paper looks at the brief history of the tariff predating Underwood and
examines the events leading to Underwood and the issues connected to the tariff in 1913,
before deciding upon an economic and econometric model with which to analyze voting
on Underwood.
II-A. The Tariff, 1887—1909
The first sparking of the tariff debate after the Civil War occurred during Grover
Cleveland’s presidencies in the 1880s, along with the associated issues of silver
(inflation) and monopolies (the antitrust law debates). Before the 1880s, the fault lines on
economic issues occurred more strongly along regional, not party, lines: while some
western Democrats campaigned on a call for ‘softer money,’ many Democrats were in
favor of hard-money. The Republicans similarly lacked a consensus on inflation, thus “it
never became a decisive issue between the parties.”5 The same could be said for the tariff
5
Leon Friedman, “The Democratic Party, 1860—1884,” in Arthur M. Schlesinger, History of U.S. Political
Parties, Vol. II, 1860—1910: The Gilded Age of Politics, (New York: Chelsea House, 1973), 887, 903-4.
7
debate before 1887. The election of 1888 was the first presidential election of the era
exhibiting an explicit divide on the tariff question. After using the entirety of his annual
message of 1887 to push for tariff reform, Cleveland helped pass the Mills Tariff in July
1888, which lowered customs by an average of seven percent and increased the number
of goods on the free list. In response, the Republicans nominated Benjamin Harrison, “an
ultra-protectionist, on an ultra-protectionist platform.”6 Republicans subsequently sought
to raise tariff rates during President Harrison’s term, and in 1890 did so with the
McKinley Tariff. Yet the tariff remained such a divisive issue that the McKinley Tariff
only passed as a result of compromise involving a tradeoff on the currency issue: “a
bargain was made in which western silverites voted for protection and eastern
protectionists gave a ‘sop’ to the western silverites” by requiring the Treasury to increase
its purchase of silver.7
For the ensuing generation, tariff rates were volatile. New tariff legislation every
handful of years caused the rates to repeatedly seesaw higher and lower, as the graph
below illustrates. Wilson-Gorman (1894), passed during Cleveland’s second term,
lowered rates again. Dingley (1897), passed during the first year of William McKinley’s
presidency, raised rates.8 Payne-Aldrich (1909), passed at the beginning of President
William Taft’s one term, lowered overall rates, but concurrently raised rates on some
goods.
Perhaps Friedman’s most enduring reasoning for the swinging of the political pendulum in 1884 is the idea
of an “inevitable,” “Hegelian destiny” in which the dominance of one party catalyzes counter-factions,
making the idea of a permanent majority impossible (904-5).
6
Paolo E. Coletta, “The Democratic Party, 1884—1910” in Schlesinger, vol. II, 992.
7
Coletta, 993.
8
F. W. Taussig, “The Tariff Act of 1897.” The Quarterly Journal of Economics, Vol. 12, No. 1 (Oct.,
1897), 42-69.
8
Graph I
Graph created from Lake’s data.
The oscillation of tariff rates needs to be placed in the context of the original
purpose of tariffs: to raise revenues for the government. As the graph below shows, tariffs
accounted for roughly half of government revenue throughout this period. Before the
Civil War, tariffs brought it nearly all federal revenue. Reducing tariff rates required
either cutting expenditure or raising revenue elsewhere. (Assuming that US import
demand was below, not above, it’s point of unit elasticity; i.e. that if tariff rates were
reduced, Americans would not consume enough additional imports in order to increase
total tariff revenue.) It is noteworthy that even as global trade increased due to
technological and other advances during the period, tariff revenues as a percentage of
GDP declined from 1880 to 1913.
9
Graph II: Federal Revenue Sources to 1940
Source: U.S. Treasury Department; amended by author.
The ostensible catalyst of the post-1887 divide on tariff policy appears to be a
Republican-Democratic dichotomy. Republicans passed higher tariffs and Democrats
subsequently passed lower tariffs. Economic differences between the regions provide a
more compelling answer. Walter LaFeber posits one explanation for an increased appetite
for free trade in some regions and sectors: a second industrial revolution, resulting in
lower costs of production and a consequent expansion of export capacity. Improved
technology, leading to more efficient cotton mills, increased production and led to a drop
in the price per pound of cotton from eighteen cents in 1871 to seven cents in 1900. The
competitiveness of the South allowed it to export not only across the Atlantic, but to East
Asia as well. From 1887 to 1897 exports of textiles to China increased by 120 percent.
10
Southerners even worried that their dependence upon foreign business had become a
liability. Naturally, cotton and textile producers exercised their political muscle to protect
exports. Producers lobbied with vigor against the 1882 Chinese Exclusion Act, fearing
that China would retaliate by restricting U.S. imports. Export industries similarly exerted
political influence in lobbying for the creation of an isthmian canal, a generation before
the Panama Canal was opened in 1914. Yet while the popular imagination pictures
exports as being industrial products or manufactured goods, in 1900 two-thirds of exports
were agricultural.9
Just as cotton exporters opposed the Chinese Exclusion Act because they feared
the Chinese would impose retaliatory tariffs, many agrarians opposed higher tariffs
because they feared European and other countries would impose reciprocal tariffs.
Democrats, who were the dominant party in the South, consequently perceived the tariff
as favoring manufacturers over farmers. This perception led Governor Wilson to declare
at the beginning of 1912, “All the life blood of the country is being drained from the
farms into the factories.”10 It is notable that Wilson framed this inequality in terms of
sectors, not regions.
The Underwood Tariff could not have passed by such a wide margin (320-195) if
it was only backed by agrarians. Manufacturers were not uniformly pro-tariff; similarly
farmers were not homogenously anti-tariff. The cotton producers of the South were more
open to competition than Midwestern farmers who feared competition from Canadian
9
Walter LaFeber, The New Cambridge History of American Foreign Relations: Volume II, The American
Search for Opportunity, 1865—1913 (Cambridge University Press, 2013), 23-25.
10
Woodrow Wilson, “An Address on the Tariff to the National Democratic Club of New York, Jan. 3,
1912.” In Arthur S. Link, editor, The Papers of Woodrow Wilson, Vol. 23: 1911—1912 (Princeton:
Princeton University Press, 1977), 642.
11
livestock, wool, feeds and other agricultural products. Many wheat growers feared
competition from farmers in Canada, Russia and Latin America. Likewise, manufacturers
who depended upon imported raw materials, such as pig-iron, favored lower tariffs. The
story of Andrew Carnegie is a representative example of how industrialists came to
support freer trade. Part of Carnegie’s motivation to enter the steel industry was the tariff
of 1870, which protected American steel from foreign competition. At the time, steel
producers donated heavily to political candidates. By 1895, Carnegie realized that the
U.S. steel industry, no longer an infant industry, was efficient enough to compete without
protection. Carnegie flipped his view, advocating that U.S. tariffs be lowered so that
other countries would reciprocate and U.S. firms and consumers could obtain raw
materials at lower cost. Oil and petroleum products, produced in large part by John D.
Rockefeller’s Standard Oil, are additional examples of non-agrarian U.S. exports during
the period. 11
Many more forces affected opinions on the tariff. Perhaps the most powerful
impetus for higher tariffs caused by LaFeber’s second industrial revolution was the
proliferation of national corporations and the subsequent growth of monopolies and
oligopolies. Firms in an imperfectly-competitive environment will naturally seek to
further reduce competition as much as possible. Both Carnegie and Rockefeller lobbied
Congress for specific clauses adding further protections for their industries, albeit their
opinions fluctuated at different times during the life-cycle of their firms. The 1894 and
1897 tariffs bear retaliatory clauses specifically against nations who had barriers against
American oil. The Sherman Antitrust Act of 1890, meant to curb anticompetitive
11
H. Wayne Morgan, “The Republican Party, 1876—1893,” in Schlesinger, vol. II, 1416-7; LaFeber, 26-36.
12
behavior, had a meager de facto effect in its first decade.12 With only a few domestic
producers in an industry, the opportunity to collude was a low-hanging fruit: “If a few
vendors of a particular product conspired to fix its price even one cent below the foreign
import price, they could continue to monopolize the domestic market and share the
wealth among themselves.”13 The carton below from The New York World portrays the
expectation of favoritism by large industries.
Image I: The Panhandlers: Cotton, Wool, Sugar, Steel (1913)
Source: Arthur S. Link, Wilson: The New Freedom (Princeton: Princeton University Press, 1956), 184.
One ostensibly unlikely catalyst for voting for free trade was the dependence of
some American firms on Europe for capital during this period.
12
13
LaFeber, 21, 27, 38.
A. Scott Berg, Wilson (New York: G. P. Putnam’s Sons, 2013), 295.
13
Table III: National Creditors and Debtors, July 1, 1914 (in billions of $)
Capital Exporters
Capital Importers
Country
Amount
Country
Amount
United Kingdom
18.0
United States
7.1
France
9.0
Russia
3.8
Germany
7.3
Canada
3.7
United States
3.5
Argentina
3.0
Netherlands
2.0
Austria-Hungary
2.5
Belgium
1.5
Spain
2.5
Switzerland
1.5
Brazil
2.2
Mexico
2.0
India and Ceylon
2.0
South Africa
1.7
Australia
1.7
China
1.6
Other
2.2
Other
11.2
Total
45.0
Total
45.0
Source: Mira Wilkins, The History of Foreign Investment in the United States to 1914 (Cambridge, MA:
Harvard University Press, 1989), 145.
The table above shows that the U.S. in 1914 was a net importer of capital, to the tune of
$3.6 billion. American growth was tied to its ability to import capital: “By the turn of the
century, the [U.S.] had become the world’s foremost industrial giant…. U.S. economic
growth had been assisted over the many decades by the sizeable contributions of foreign
investors….equal to almost 20 percent of U.S. gross national product. No country in the
14
world had attracted greater foreign investment.”14 This partially explains the mixed
feelings in the East toward freer trade. Without these investments, many industries would
never have been able to get off the ground. Americans could only bite the hand that fed
them, by slapping high tariffs on their products, for so long without risking capital
flight.15 Jay Sexton has shown in the context of US government debt purchases, the
owners of capital in London often exerted immense influence over Parliamentary
decision-making. Often, large owners of capital were members of Parliament.16
This theory has considerable supporting evidence. Since the first transatlantic
telegraph cable in 1858, Europe had kept a close watch on internal American affairs. On
the same day that The New York Times reported on Wilson’s signing of the tariff bill, it
reported on “British praise for Wilson.” A London newspaper, The Daily Chronicle
editorialized that “No more remarkable man has reigned at the White House since
Abraham Lincoln.” After praising Wilson’s intellectual and character genius, The
Chronicle chided Theodore Roosevelt: “[Wilson’s] calm strength and definiteness of aim
contrast strikingly with the boisterous energy and assertive egotism of Roosevelt.”17
When choosing among a plethora of national markets to invest in, but with a dearth of
perfect information with which to compare investment opportunities on the fundamentals,
London investors surely judged the character of the nation. Wilson’s reduction of tariffs
and his character traits, including his leadership of the Anglophilic institution of
Princeton, endured American firms and national debt to London investors.
14
Mira Wilkins, The History of Foreign Investment in the United States, 1914—1945 (Cambridge, MA:
Harvard University Press, 2004), 4-5.
15
Lance E. Davis and Robert J. Cull, International Capital Markets and American Economic Growth:
1820—1914 (Cambridge University Press, 1994), 50-61.
16
Jay Sexton, Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 18371873 (Oxford University Press, 2005), 1-10.
17
“British Praise for Wilson.” The New York Times. October 4, 1913.
15
Philosophical ideas and cultural norms can also be seen as having an influence in
pushing Americans toward freer trade. One explanation of the South’s support for freer
trade is that after the federally imposed loss of states’ sovereignty caused by the
thirteenth amendment and Reconstruction, the South reflexively supported small
government. Laissez-faire was a natural outgrowth of this ideology. Another idea
potentially pushing Americans in the direction of freer trade and an expanded global role
was the concept of Social Darwinism. In this telling, America was destined to succeed in
a world ruled by the law of survival of the fittest, both politically and economically. Even
Frederick Jackson Turner, the father of the Frontier Thesis, subscribed to this idea. This
explanation fits well with the imperialistic role championed by Republican Presidents
William McKinley and Theodore Roosevelt (1897—1909), even though they were
protectionists. Comparing themselves to the social unrest in Europe, American
industrialists preferred “evolution rather than revolution.” This theory lines up with
Wilson’s statement that it was necessary to “abolish everything that bears even the
semblance of privilege or of any kind of artificial advantage, and put our business men
and producers under the stimulation of a constant necessity to be efficient, economical,
and enterprising, masters of competitive supremacy, better workers and merchants than
any in the world.”18
Another interpretation of tariff policy is through an international relations prism.
David Lake argues that America’s tariff policy mirrors its engagement with the rest of the
world and that the systemic-level theory of hegemonic stability explains America’s move
toward free trade around WWI. In Lake’s telling, after the Civil War, America largely
turned its back to the rest of the world, limiting its foreign engagement and enacting
18
LaFeber, 38, 40-41; Berg, 292-94.
16
protectionist tariff policies. Near the end of the century, America quickly became more
active on the international scene, but only within its hemisphere and enacted lower tariff
rates. A year before WWI, America introduced its most liberal tariff bill in Underwood.19
II-B. The Tariff, 1912—1913
Wilson was a rare politician: the impetus for his legislation came not from the
desire to support his supporters or constituents, but from a unique sense of progressive
idealism. This idealism manifested itself in a number of accomplishments, including the
creation of the Federal Reserve System (1913), appointment of Louis D. Brandeis to the
Supreme Court (1916), passage of the nineteenth amendment enfranchising women
(1920). In 1913, Wilson was full of energy and rich in congressional allies. He was an
epoch away from his defeat over the Treaty of Versailles and Democratic Oklahoma
Senator Thomas Gore’s observation that “Wilson had no friends, only slaves and
enemies.”20
Wilson was an honest and ethical politician. In 1912, he ordered his campaign
finance chairman, Henry Morgenthau, to “accept no money from anybody who expected
a favor in return or from any corporation, even indirectly.” Wilson favored small-donors:
90,000 individuals donated an average of $12.34 each. In contrast of the Republican
National Committee’s $2 million budget in 1904 (during Roosevelt’s first election
contest), three-fourths were donated on behalf of corporations. Approximately $375,000
alone emanated from J.P. Morgan, John D. Rockefeller, E. H. Harriman and Henry Clay
19
David A. Lake, “International Economic Structures and American Foreign Economic Policy, 18871934.” World Politics. Vol. 35:4 (July 1983), 517-543.
20
Berg, 5.
17
Frick.21 Campaign finance played a role in other Progressive era races as well.22 Wilson
however, was not representative of Congress. At the end of this section, a surmising of
comments made during the Congressional debate on Underwood exemplifies this.
However, numerous political scientists have pointed out the simultaneous
causality bias inherent in these types of donations. Donors are only likely to contribute to
politicians whose legislative views line up with their own in the first place. It is less
likely that donors manage to change the views of politicians. While candidates who
received greater special interest donations were likelier to win, the magnitude of this
effect is unclear.
Complicating the matter further, 1912 was a year of blurred party lines and
allegiances. While the Progressive Party did not have a strong congressional foothold, it
had a sizeable effect on the 1912 presidential campaign. The Progressive platform
charted a middle ground on tariff policy, blaming tariffs for raising the cost of living, an
issue that ranked near the top of the platform, while concurrently citing the need for
protection of American firms. The plank equivocally stated, “We believe in a protective
tariff which shall equalize conditions of competition between the United States and
foreign countries, both for the farmer and the manufacturer, and which shall maintain for
labor an adequate standard of living.” The plank called for a downward revision from the
current rates under Payne-Aldrich. Yet it warned against Democratic intentions: “The
Democratic party is committed to the destruction of the protective system through a tariff
for revenue only—a policy which would inevitably produce widespread industrial and
21
Berg, 239, 243.
Paul Baker, Curbing Campaign Cash: Henry Ford, Truman Newberry, and the Politics of Progressive
Reform (University Press of Kansas, 2012), 1-12, 41- 64. Campaign finance laws existed de jure, but in
practice were regularly flouted.
22
18
commercial disaster.”23 This complication of the Democratic—Republican dichotomy,
and the level of support for a new third party, evidences the protean nature of party lines
in the period, particularly in comparison to the consistency of regional alliances. The
graphs below illustrate a strong degree of heterogeneity within regions, and the state-bystate tabulation of voting in the appendix reiterates the same point on a state-level. The
characteristic of party allegiances that did not conform to regional or state boundaries
was also present in congressional elections, as shown in Graph VII.
South
0
0
10
20
20
40
30
60
40
Graphs III-VI: Regional Voting for President, 1912
North
mean of Wilson
mean of Taft
mean of Wilson
mean of Taft
mean of Roosevelt
mean of Debs
West
0
0
10
10
20
20
30
30
40
40
Midwest
mean of Roosevelt
mean of Debs
mean of Wilson
mean of Taft
23
mean of Roosevelt
mean of Debs
mean of Wilson
mean of Taft
mean of Roosevelt
mean of Debs
The Progressive Party. “Progressive Platform of 1912,” in Arthur M. Schlesinger, History of U.S.
Political Parties, Vol. III, 1910—1945: From Square Deal to New Deal, (New York: Chelsea House,
1973), 2584-95.
19
Source: Statistical Abstract, 1913
0
.2
.4
.6
Graph VII: Congressional Party Affiliation in the Northeast, 1913
mean of Democrat
mean of Republican
Source: Bibliographical Directory of the United States Congress, 1774-Present
Note: There are three Northeast Progressive congressmen not shown here.
These graphs illustrate that there was no set-it-stone, preconceived notion of
uniform regional or state party allegiance in 1913. It is noteworthy that the South is
strongly pro-Wilson and pro-Democratic, but is still not completely homogenous. The
rest of the country is highly divided.
A more plausible explanation for differences in voting on Underwood is that
congressmen focus on net export differences in their state. The graph below charts net
export differences across regions in 1913. The graph below shows that the Gulf Coast
region had the highest trade surplus of any region. The Atlantic Coast though had a larger
export business.
20
Graph VIII. Net Export Differences Across Regions, 1913
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Note: Measured in millions of dollars
Contemporaneous economist Frank Taussig points out that no one advocated free
trade. Rather, the Republicans demanded that tariffs be high enough to “equalize[e] cost
of production,” while the Democrats wanted tariffs low enough to spark competition—a
“competitive tariff.” In his telling, the principle behind both sides’ stance is “is that of
enabling the domestic producer to compete on even terms with the foreign producer.” Yet
both sides did not elucidate on how they practicably and quantitatively defined these
terms. The difference is that Republicans desired “reasonable profit” for domestic
producers, while Democrats’ competitive tariff required little or no profit.24 Hence,
Underwood—written by and passed by Democrats—only lowered average tariff rates
from 40% to 25%, rather than wholly abolishing them. Taussig evidences the significance
24
F. W. Taussig, “The Tariff Act of 1913.” The Quarterly Journal of Economics. Vol. 28, No. 1 (Nov.
1913), 1-30. Taussig concludes that the two are more similar than different, because both ensure that
domestic firms have an advantage over foreign firms.
21
of the Underwood Tariff in stating that it will force many firms out of business. He
highlights the sugar industry, whose tariff was set to be wholly abolished by 1916, as an
example: “Tho the producers in Louisiana and in the beet sugar states have exaggerated
their dependence on protection…it would seem that in fact most of them are not able to
meet foreign competition on equal terms.” Taussig fine-tunes this point to conclude that
the more inefficient firms will close, while the more competitive firms will adjust and
survive.25 He also points out that the income tax is expected to make up for the lost
customs revenue. Taussig notes that sugar producers will wait until the reduction takes
full affect in 1916, praying that in the interim the Democrats lose control of the
Presidency, Senate and House, and that the act is repealed. Sugar producers will not make
any adjustments between 1913 and 1916, and be equally ill-prepared then for
competition. Ultimately, Taussig concludes that the main catalyst behind voting patterns
on Underwood was party affiliation, with Democrats lining up behind Wilson, and
Republicans nearly uniformly opposed.26 However, it seems that Taussig oversimplifies
to achieve the conclusion that party is the only important variable. Other economists have
created models attributing tariff voting to economic interests; it seems unlikely that
Underwood would be an exception to these models. Rather, it seems likelier that
congressmen lined up by party, but only so far as their party’s ideology lined up with
their own district’s perceived economic interests.
25
Taussig, 11, 16.
The Congressional Record shows some Congressmen advocating for unbridled free trade, and Arthur
Link’s biography of President Wilson attributes the same free-trade ideology to him. So, why then does
Underwood stop at a 15% reduction in the tariff? The answer is politics—Wilson and Underwood
pragmatically sought to achieve the achievable, rather than fight a Sisyphean battle. However, a fascinating
historiographical question is whether Wilson viewed Underwood as not an end in of itself, but as a first step
toward free trade. My answer, based on evidence from the Congressional debate and Wilson’s biography, is
the latter.
26
22
A sample of arguments made during the Congressional debate by senators from
both parties evidences the importance of local economic interests. Kansas Republican
Senator Joseph Bristow called for a tariff of 10% on cattle “to do as well by the cattle
producers of our country.” He added, “not satisfied with putting the products of the
farmer on the free list, the framers of this bill now propose to put the products of the
farmer’s wife on the free list. They not only invade the wheat fields and the herds, but
they rob the henhouse as well.”27 Idaho Republican Senator William Borah stated, “it was
the deliberate design, as I understand, of the framers of this bill to kill the wool
industry.”28 Idaho Republican Senator James Brady argued:
“We are not here to beg for a prohibitive tariff on lead. We do not even suggest this, but we are
asking that you do not destroy an industry that furnishes employment to thousands of men and pays
the highest known wage to mining men in the world and that does not permit foreigners to supplant
the American workingman in American mines. Idaho stands out preeminently as a State that is
inhabited by exceptionally industrious and law-abiding people. The statistics of the last census show
29
that 98.1 per cent of our entire population are white and that only 2 per cent are illiterate.”
New Hampshire Republican Senator Jacob Gallinger defended the need for protection for
the shipping industry by highlighting how foreign subsidies created an unbalanced
competition: “It may be said in passing that when Great Britain and other foreign nations
secured the commercial agreements to which I have alluded, they very cunningly
nullified to a large extent their obligations under the agreements by granting subsidies to
their vessels engaged in the foreign trade.”30 Kentucky Republican Representative Caleb
Powers argued for the needs of farmers: “It may be a narrow view for me to take, but I
am for the people of my district first and the rest of the world afterwards.”31
27
Congressional Record. Vol. 50 Part 5, Pages 4117-5138. 63rd Congress, 1st Session. Sept. 3-Sept. 18,
1913. p. 4550-52.
28
Congressional Record. 8 September 1913. Page 4436.
29
Congressional Record. 8 September 1913. Page 4444.
30
Congressional Record. 8 September 1913. Page 4449.
31
Congressional Record. 8 September 1913. Page 4545.
23
Democratic Senators demanded protection for their industries as fervently as the
Republicans. Georgia Democratic Senator Augustus Bacon demanded more protection
for diamonds: “There is one feature of the rate of duty on diamonds which I think has
always been improper- it was improper in the Payne-Aldrich law and I think it is
Improper in this bill-and that is the difference which is made in the rate of duty on uncut
and on cut diamonds.”32 Georgia Democratic Senator employed metaphors to argue for
protection for agricultural machinery:
“I have felt that we could not afford to go as far as I would like to see the law go lest serious
injury would affect those industries, in view of the position they have occupied in the past…. I
believe It will help industries to take them out of the hothouse. You can not take a plant out of
a hothouse instantly and put it where it is exposed to the weather. You must do it by
degrees.”33
Many economists have done empirical studies on the question of what motivates
congressmen to vote for or against tariff reduction bills. Economic historian Douglas A.
Irwin argues that during the tariff debate of 1888, a major reason Democrats supported
lower tariffs was their desire to lower taxes on farmers and consumers, while Republicans
supported higher tariffs because they sought to protect American manufacturers from
competition and maintain the current wage rates for laborers. A second catalyst behind
the parties’ respective positions, and the focus of Irwin’s article, is their views on whether
higher tariffs would increase or decrease tariff revenue. The government was running a
surplus in 1888 and both parties sought to reduce revenue. The Democrats sought to
reduce tariff rates to accomplish this, while Republicans believed the opposite, that
raising tariff rates would reduce revenue. To decide who was correct Irwin estimates the
price elasticity of US import demand and determines that a reduction in tariff rates would
32
33
Congressional Record. 8 September 1913. Page 4421.
Congressional Record. 8 September 1913. Page 4436.
24
reduce revenues.34 However, the US budget surplus disappeared around the early 1890s,
causing the tariff debate to refocus on the merits of which interest groups won and lost
from protection. When a reduction in tariffs threatened to cause deficits, the debate dealt
with whether and to what extent the income tax should be used to substitute for lost
revenues.
Other economists have developed generalized models to analyze congressional
voting on trade policy. Grossman and Helpman argue that contributions made by special
interests play a key role in determining voting. Just as important is the effect of a change
in trade policy on a congressman’s constituents, both in terms of the effect on production
(whether a home industry expands or contracts), and in terms of the price of the basket of
goods consumers purchase relative to income. Their model differs from other models in
its assumption that the views of congressmen can be swayed by contributions. Other
models take congressmen’s views on trade policy as fixed, and assume that special
interests donate to their preferred candidate in order to sway elections and obtain their
preferred outcome.35 George Stigler’s model assumes that incumbent congressmen
ascertain which interests in a trade debate are ‘strongest’ and base their decision on the
criteria of maximizing their political support, without explicit regard to future elections or
rival politician’s positions.36
A final metric in determining where a congressman lined up on trade policy was
his views on other issues. The first three planks of the 1912 Democratic Platform were
34
Douglas A. Irwin. “Higher Tariffs, Lower Revenues? Analyzing the Fiscal Aspects of
"The Great Tariff Debate of 1888." The Journal of Economic History, Vol. 58, No. 1 (Mar. 1998).
35
Gene M. Grossman and Elhanan Helpman, “Protection for Sale.” The American Economic Review. Vol.
84, No. 4 (Sep., 1994), 833-850.
36
George J. Stigler, “The Theory of Economic Regulation.” The Bell Journal of Economics and
Management Science, Vol. 2, No. 1 (Spring, 1971), 3-21.
25
economic: Trusts, the Tariff and Currency. The Planks explicitly linked the first two
issues. Under Trusts, it stated that trusts “have undoubtedly been bred and nurtured and
made secure by the tariff, and a proper revision of the tariff, in the interest of free
business and industry of every kind, will do a great deal towards weakening and
ultimately destroying their power.” To supplement the reduction of tariffs, the plank
pledged “to pass such laws both civil and criminal, as will effectually punish and prevent
them.” The plank explicitly called out the “vast confederacies of banks, railways,
manufacturing corporations, mining corporations, packing companies, power and
development companies, and the like.” Noticeably there is no mention of agrarian
industries. On the Tariff, the Platform states, “We declare our earnest opposition to the
present protective tariff, and denounce the Payne-Aldrich Act as the most conspicuous
example ever afforded the country of the special favours and monopolistic advantages
which the Republican party has always shown itself willing to extend by legislation to
those to whom it looked for financial support….the only legitimate object of such
taxes…is to raise revenue for the support of the government. Tariff duties, as employed
by the Republican party, are not a means of equitable ‘protection’ but a method of
fostering special privilege. They have made it easy to establish monopoly in our domestic
markets.” The Platform further called for the creation of the Federal Reserve System
(without explicitly saying so), the direct election of senators, direct primaries, more open
(but not completely open) immigration laws, and labor protections (such as regulating
length of workweeks and factory safety).37
37
Unnamed, “Planks for a Democratic Platform: c. June 16, 1912.” In Link, Arthur S., ed. The Papers of
Woodrow Wilson, Vol. 24: 1912 (Princeton: Princeton University Press, 1977), 477-81.
26
III-A. Economic Model: Influences
As demonstrated in the preceding section, there are a multitude of historical
reasons that explain why U.S. congressmen voted for or against freer trade in 1913. This
section develops an economic model that reflects components of these explanations. In
the following sections, the data and econometric model of this paper will be described,
and its hypotheses subsequently tested.
The economic model of this paper is structurally based on and theoretically
influenced by that of Baldwin and Magee (2000),38 who set up a model to analyze
congressional voting on three 1990s trade bills: NAFTA, GATT and Most-FavoredNation (MFN) status for China. The Baldwin-Magee model is straightforward: each
congressman seeks to optimize his odds of reelection, and uses his voting power
accordingly. This is accomplished in two ways: by optimizing the economic welfare of
his constituents, and by optimizing the economic welfare of contributors to his
campaign.39 These two goals are sometimes complementary, but also can clash. Focusing
first on the goal of maximizing constituent welfare, Baldwin-Magee employs two trade
models, the Heckscher-Ohlin (H-O) trade model and an adaptation of the Ricardo-Viner
(R-V, or specific factors) trade model that provide differing predictions on which
constituents will benefit or lose from free trade, and which concomitantly use different
variables to make these predictions.
In the H-O model, factors of production (such as labor, capital and land) that are
relatively scarce lose from free trade, while relatively abundant factors benefit. When free
38
Robert E. Baldwin and Christopher S. Magee, “Is Trade Policy for Sale? Congressional Voting on
Recent Trade Bills.” Public Choice. Vol. 105, No. 1/2 (2000), 79-101.
39
This is in line with the Helpman support model of political contributions. This contrasts with the
opposing model which views politicians as having predetermined their votes, and contributors choose
which politician to support.
27
trade occurs, goods and services produced by the more abundant factor will be in even
higher demand, and thus the abundant factor itself will be in higher demand. The supply
of the abundant factor is fixed, so the equilibrium price (or wage) paid for the abundant
factor rises. The reverse happens for the scarce resource: demand shrinks, while supply is
fixed, so its price falls. For this to work, in the long-run all factors are assumed to be
mobile. Because a factor can move between industries without material cost, the industry
in which it is currently employed does not matter. Even if a factor is employed in an
industry that is expected to lose from free trade, if that factor is relatively abundant, it
will be able to move to a growing industry and benefit.40 Baldwin-Magee focuses on the
divide in the labor market between skilled and unskilled labor. The model predicts that
because the US has a relative scarcity of unskilled labor and a relative abundance of
skilled labor, the wages for unskilled labor will fall, and the wages for skilled labor will
rise. Thus, variables that are proxies for unskilled labor will be negatively correlated with
voting for NAFTA, GATT and MFN for China. Baldwin-Magee predicts that
Congressmen whose districts have lower levels of education and per-capita income and
increases in unionization41 will be less likely to vote for free trade.
While the Ricardo-Viner model evolved from the H-O model and bears
similarities to it, there is a key difference. R-V holds that, at least in the short-run, (this
could well be the relevant time horizon for congressmen), some factors of production are
fixed (immobile), meaning that they are tied down in a specific industry. Physical capital
is difficult to repurpose in the short-run. Labor is more complex: while laborers often
develop sector-specific skills, they are considerably more mobile than capital, and are
40
A caveat: all factors will move toward the expanding, exportable industry. The abundant factor simply
benefits the most, thus it is the ‘winner.’
41
In the 1990s, unionization was positively correlated with low-skilled workers.
28
treated as mobile in the standard R-V model. The relevant question in R-V, for the
owners of fixed factors of production (usually capital), is whether a specific industry will
expand or contract from free trade. One way to exemplify R-V’s potential outcomes is to
create a model with two industries owned by two separate owners of capital, KA in
Industry A and KB in Industry B, and a homogenous group of Labor (L). When free trade
occurs, industry A will sell more products abroad and expand; industry B, faced with
more efficient foreign competitors, will sell fewer products at home and nothing abroad,
and shrink. When A and B expand and shrink, respectively, it is the owners of capital
who are affected, because they cannot repurpose their capital (they have high fixed, sunk
costs), while labor is mobile and can move to the expanding industry. L’s outcome
depends on what laborers consume—if their consumption bundle (the basket of goods
they, as consumers, purchase) becomes more expensive, they lose; if it becomes cheaper,
they gain. If they consume more of the exportable product, they lose, because the price of
their consumption bundle rises more than nominal wages rise, so real wages decline. If
they consume more of the importable good, they gain, because its price falls and nominal
wages rise. 42
Baldwin-Magee makes a key adaptation to the R-V model: while standard R-V
assumes that labor is mobile, Baldwin-Magee’s adaptation of R-V treats labor as fully-
42
Consumers are often classified into two categories: those who spend a majority of income on food, and
those that spend a majority of income on manufactured products. In another paper, I argue that the French
Revolution reached its point of no return not because of the actions of power hungry noblemen, but because
of rioting working-class men. In the 1780s, the price of all goods rose because of inflation, but so did
wages. However, the price of bread, on which the working classes spent up to 90% of their income, (cite
source) rose exponentially faster than prices of other goods and wages. (To be fair to King Louis XVI, a
large portion of the increase in bread prices can be attributed to meteorological bad luck, namely a series of
droughts leading to low crop-yields.)
29
fixed.43 What matters most for both capital and labor in this adapted model is whether the
industry in which each is employed grows or shrinks as a result of free trade. To measure
this, Baldwin-Magee includes variables measuring employment in specific industries. It
predicts that Congressmen whose districts have high levels of employment in industries
that expand with freer trade—those that have high export ratios—will support it, and vice
versa.
For Congressmen to optimize the economic welfare of their campaign
contributors they must know whether campaign contributors support or oppose free
trade.44 Baldwin-Magee uses the H-O model to predict that labor PACs, which in the
1990s mostly represented low-skilled labor, oppose free trade; at the same time, business
PACs who donated are assumed to support free trade, on the assumption that capital is an
abundant resource compared to capital in Mexico and Canada.
III-B. Economic Model of This Paper
This paper’s economic model incorporates Balwin-Magee’s dual use of the H-O
and R-V models, while also changing a number of components, to interpret how
congressmen seek to optimize the economic welfare of their constituents. The key
difference for H-O is in which relative factor endowments are competing with each other.
While in the 1990s Baldwin-Magee’s H-O model tests for a dichotomy between skilled
labor and unskilled labor, this paper’s H-O model for 1913 tests for a dichotomy between
43
Baldwin-Magee makes the assumption that Labor is fully-fixed, but does not empirically prove it. It
could have done so by using a labor mobility measure to determine how mobile labor is (it is not a binary)
and thus whether labor is best described as lining up by consumption bundles or by industry in which it is
employed. To measure this, real wages could be used to determine purchasing power after price changes
resulting from changes in tariffs. (Judith Dean, February 15, 2014.)
44
Working under the assumption of reciprocity, that if Congress imposes tariffs, other countries will
reciprocally place tariffs on American exports.
30
two other factors of production: capital and land. The prediction is that congressmen from
states that are land abundant will favor Underwood, and that congressmen from states
that are capital abundant will oppose Underwood. This prediction is based on the
historical evidence that agriculture was primarily a competitive, heavily exporting sector,
while manufacturing was mixed in its desire for protection. In line with this prediction, in
debates on the Underwood Tariff congressmen often stated or suggested that Europe was
capital abundant relative to land compared to the U.S., and that the U.S. was land
abundant relative to capital compared to Europe. The inequalities for this are:
KE/LE > KA/LA and LA/KA > LE/KE
where the subscripts E and A respectively stand for Europe and America.45
While Baldwin-Magee’s R-V model tests for the effects of employment in a
number of industries, this paper’s R-V model aggregates many industries into one of two
sectors: agriculture or manufacturing. This model predicts that congressmen from states
with high levels of employment in agriculture will favor Underwood, while congressmen
from states with high levels of employment in manufacturing will oppose Underwood.
The reasoning, that agrarians favor free trade more than manufacturers, is the same
reasoning underpinning H-O.
In addition to the H-O and adapted R-V models, this paper’s economic model
incorporates a third influence that is unique to 1913: the income tax effect. Passage of the
Underwood Tariff was tied to implementation of the income tax. The reduction in
government revenues from a cut in the tariff would necessitate an offsetting raise in the
income tax. The income tax in 1913 only affected the highest-earning sliver of the
45
The form for this H-O inequality is from Robert E. Baldwin, “Determinants of the Commodity Structure
of U.S. Trade,” The American Economic Review, Vol. 61, No. 1 (Mar., 1971), 126-146. Europe can also be
taken to stand for the rest of the world.
31
population. The model predicts that congressmen from states with the highest proportion
of high-income earners will oppose Underwood.
Campaign contributions are not included in this paper’s model. The data on
campaign contributions does not exist for this period. Yet the exclusion of campaign
contributions from this model theoretically should have a statistically insignificant effect
on the model’s internal validity—it is not a part of the H-O or R-V theory. In 1913,
campaign contributions and expenditures were significantly smaller than those of the
1990s when Baldwin-Magee formulated their model.
The efforts of congressmen to optimize the economic welfare of campaign
contributors is not included in this paper’s model. There are two reasons why campaign
contributions are not included. First, the influence of contributors had a significantly
smaller magnitude in 1913 versus in the 1990s. Second, the data on campaign
contributions do not exist for this period.
An additional key difference between this paper’s model and Baldwin-Magee’s is
that while Baldwin-Magee have district level data, this paper incorporates data at the state
level. Baldwin-Magee’s model gives each congressman equal weight, because the goal is
to determine which variables affect individual congressmen’s votes. This model gives
each state equal weight, because the goal is to determine which variables affect the vote
of the congressional delegation of a state, as a whole.
The results from Baldwin-Magee indicate that factor abundance or scarcity is
generally more significant than the industry in which it is employed. Therefore, the H-O
model is found to be more relevant than the R-V model in the 1990s. Before running any
32
regressions it is unclear whether the abundance or scarcity of a factor, the industry in
which it is employed, or the income tax effect, will be most important.
IV-A. Econometric Model: Influences
From their political economy framework, Baldwin-Magee states that the two
relevant groups of variables to measure in a regression are those that measure
constituency characteristics and the magnitude and type of campaign contributions. For
the dependent variable, if a Congressman votes for a bill, and thus for free trade, the
value is ‘1.’ A no vote, against free trade, is assigned as ‘0.’ Due to the correlation
between voting yes for one trade bill and voting yes for the others, and the consequent
correlation of residuals (error terms), Baldwin-Magee uses FIML (full information
maximum likelihood) estimation. To abbreviate the equation, Baldwin-Magee uses three
vectors: one vector captures all variables measuring constituency variables, one vector
measuring campaign contributions from labor, and one vector measuring campaign
contributions from business.
Within the constituency vector, Baldwin-Magee includes variables measuring
within each congressional district the proportion with no high school degree over age 25,
the proportion with a high school degree but with no college degree, the per-capita
income, the unionization rate, and the unemployment rate, to capture the H-O effect.46 If
a congressman’s district has a relatively high proportion without a high school degree, a
relatively low per-capita income, and a high unionization rate, this would indicate that the
district has an abundance of low-skilled labor (while the U.S. as a whole in the 1990s is
46
Baldwin-Magee also measures the proportion of the population that is Hispanic, only for the NAFTA
vote.
33
assumed to have a scarcity of low-skilled labor compared to its NAFTA trading partners).
Under the H-O model, this district’s congressman is predicted to vote against free trade,
because his district is predicted to see the value of its scarce resource decline. The
opposite is true if the constituent variables have relatively opposite values, for symmetric
reasoning.
Within the same vector, Baldwin-Magee includes a variable called ‘export ratio’
to measure the adapted R-V effect. This variable measures employment in export
manufacturing industries divided by employment in import-competing manufacturing
industries in each district. To define export and import-competing manufacturing
industries, Baldwin-Magee compiles data on employment in each district in a number of
industries, and calculates whether each industry is net exporting or importing. To
calculate each district’s export ratio, Baldwin-Magee divides employment in export
industries by employment in import-competing industries. In the adapted R-V model both
labor and capital are fixed in the industries in which they begin. Constituents will prefer
freer trade if the district has a relatively high export ratio, as the price of the good they
are producing will rise, and consequently the marginal product of both labor and capital
will rise, leading to higher rents on capital and higher wages for labor. The opposite will
happen for districts with a relatively low export ratio. (Baldwin-Magee then tests R-V
with many variables measuring employment in various industries, rather than the single
export ratio variable.)
Within the two vectors measuring campaign contributions from labor and
business, Baldwin-Magee has variables measuring labor and business group contributions
(in thousands of dollars) from 1991-92. According to H-O, congressmen with relatively
34
high levels of business contributions are expected to vote in favor of free trade, and those
with relatively high levels of labor contributions are expected to oppose it (because labor
contributions often represent low-skilled labor). Within these vectors Baldwin-Magee
also includes variables measuring the rankings of congressmen by various ideological
groups, to ascertain how closely congressmen align with their ideological interests in
general, with a higher rating equal to a closer alignment. The ideological rankings
included were produced by the American Conservative Union, AFL-CIO, National
Security Council, Chamber of Commerce, and League of Conservation Voters. Finally,
Baldwin-Magee uses a Haussmann test to test for endogeneity, or correlation between the
error term and any of the independent variables.
The equation Baldwin-Magee uses is:
Pr(Y = 1|X1, X2,…., Xk) = Φ(β0 + β1X1 + β2X2 + … + BkXk)
in which Y=outcome of voting on NAFTA, GATT or MFN with 1=yes and 0=no; Φ= the
cumulative standard normal distribution function; X1= district unemployment rate, 1990;
X2= district per-capita income, 1990; X3= fraction of district population age 25+ with no
high-school degree, 1990; X4= fraction of district population age 25+ with no college
degree, 1990; X5= Party (1=Democrat, 0=Republican), and X6…N=district employment in
various industries and the other variables mentioned above.
IV-B. Econometric Model of This Paper
This paper uses a different econometric model from Baldwin-Magee, beginning
with the type of regression used: Ordinary Least Squares (OLS), instead of probit. OLS
provides a simpler and better fit for the data, and allows the dependent variable to be
35
changed from the probability of an individual congressman voting for Underwood to a
variable measuring the proportion of a state’s congressmen voting for Underwood (with
variable name “Underwood”). The coefficients on the independent variables are also
easier to measure: they simply measure the effect, positive or negative, of an increase of
one unit of the variable on the dependent variable. By choosing a state-level proportion
instead of a binary 1 or 0 probit measuring the vote of individual congressmen, the model
is better formed to answer questions examining aggregate data of past events.
To measure the H-O effect, one variable is included: a state’s capital stock in
1905 divided by its land (“KL”).47 To measure the R-V effect, two variables are included:
percentage of a state’s labor force employed in agriculture, forestry and animal
husbandry in 1910 (“Agg”), and percentage of a state’s labor force employed in
manufacturing and mechanical industries in 1910 (“Man”). To measure the income tax
effect, one variable is included: each state’s per capita income in 1929 (“PCI”). To
control for party affiliation, one variable, the percentage of a state’s congressmen who are
Democrats (“Dem”) is included.
The following table concisely displays this information, along with information
on units, year, and source.
Table I: Variables in Regression
Variable
Explanation
Underwood Proportion of state’s
congressmen voting for
Underwood
Dem
Proportion of state’s
congressmen affiliating as
Democrats
47
Unit
%
Year
1913
Effect
Dependent
Variable
Source
%
1913
Party
Bibliographical
Directory of the
United States
Congress
Congressional
Record, 1913
This variable is then scaled down by a factor of 1/1,000 so that the coefficient’s effect is more easily
understood. This has no impact on the statistical significance of the variable.
36
K
Capital Stock
$
L
Land
Mi2
KL
Agg
K/(L*1,000)
Labor force employed in
agriculture, forestry or
animal husbandry
Labor force employed in
manufacturing and
mechanical industries
Per-capita income
$ / Mi2
%
1905
1910
H-O
R-V
%
1910
R-V
Ibid.
$
1929
Income tax
St. Louis Federal
Reserve (FRED)
Man
PCI
1905
H-O
H-O
Statistical
Abstract, 191003, no. 111
Statistical
Abstract 1913-02,
no. 1
Ibid.
1910 Census, Vol.
4: Population. Ch.
1, p. 45.
Note: all variables are state level
A note on data: 1905 and 1910 are the last years prior to WWI for which data is
available respectively for capital and for sector employment breakdowns. 1929 is the first
year for which state level per capita income is available. On first glance, this appears
problematic. However, the matter of importance to the statistical regression is not the
absolute value of these economic indicators, but rather the relative quantities of each in
one state compared to the other forty-seven states. While capital stocks in 1905 are
different from those in 1913, and income levels are different in 1913 versus 1929, relative
differences between states likely are roughly constant. The year 1929 is ostensibly
problematic as well; however the shock of the Crash occurred with roughly equal effect
across the 48 states. There are small discrepancies: capital stocks likely grew more
quickly between 1905 and 1913 in “developing” western states than in more developed
eastern states, and the stock market crash likely hit New York harder than other states,
but these discrepancies likely have limited statistical significance.
The equation measured is:
Underwoodi = β0 + β1Demi + β2KLi + β3Aggi + β4Mani + β5PCIi + εi
37
This is the standard form of an OLS regression, with each β signifying the effect of an
increase of one unit of the variable for which it is a coefficient on the dependent variable,
the percentage of a state’s congressmen voting for Underwood. β0 is the constant, ε is the
error term, and the subscript i denotes the particular state.
V-A. Data Summary Statistics
In order to describe the range of values the variables take in the dataset, a table of
summary statistics is displayed.
Table II: Summary Statistics
Variable
Obs
Mean
Std. Dev.
Underwood 47
.6527234
.3731686
Dem
48
.5975417
.3717423
K*
48
263653.4
438349.9
L
48
61557.93
46760.63
KL**
48
16.159
38.0531
Agg
48
.3727083
.1913375
Man
48
.248625
.1242805
PCI
48
610.6875
223.3965
*In this table, K = K/1000.
**KL = K/(L*1000), referring to the original K.
Min
0
0
2695.889
1033.81
.0263433
.049
.075
266
Max
1
1
2031460
261231.7
208.8405
.772
.563
1151
The summary statistics display the range of values of the variables. In the
observations column, there are 48 observations for the economic variables because there
were 48 states in 1913, but 47 observations for Underwood, because no congressmen
from Wyoming voted. Underwood and Dem range from zero to one because they are
percentage terms, while Agg and Man have ranges that fall within zero and one for the
same reason. It is noteworthy that because each state is weighted equally, the summary
statistics do not portray the statistics of America as a whole at this time. Rather, they
portray the average economic indicators of each state.
38
The summary statistics illustrate a diverse American economy in 1913. For Dem
the mean is .598, but the standard deviation of .372 indicates that it was common for
states to differ greatly in their party affiliation makeup. The same can be said for KL,
which has a mean of 16.2 and a standard deviation of 38.1, and whose maximum is 7,927
times bigger than its minimum. Agg and Man likewise differ greatly between states. Percapita income fits the same mold of heterogeneity: it has a mean of $610.69, with a
standard deviation of $223.40. Unlike the other variables, its maximum value is a mere
4.3 times as large as its minimum.
V-B. Regional Breakdown of Data
Before running regressions, it is useful to graphically illustrate how the variables
differ between the North, South, Midwest and West.
Regional Disparities in Capital and Land Endowments
0
Capital
500000 100000015000002000000
Graph I
0.00
50,000.00
100,000.00 150,000.00
Land, Square Miles
Northeast
Midwest
Source: Statistical Abtract 1910
K=K/1000
South
West
200,000.00
250,000.00
39
This graph confirms the qualitative and anecdotal evidence: the Northeast is capital
abundant, the South and West are land abundant, and the Midwest lies in the middle. The
pattern of regions grouping together is very strong. Because manufacturing is capital
intensive, and agriculture is land intensive, the model expects states that have high capital
ratios to support protectionism, and those with high land ratios to support freer trade. This
graph portrays the H-O model.
Graph II
0
.2
Agg
.4
.6
.8
Regional Disparities in Sector Employment
.1
.2
.3
Man
Northeast
Midwest
.4
.5
.6
South
West
Source: Census of 1910
The graph above illustrates the same story as Graph I, except that it portrays the R-V
model instead of H-O. The primary difference in this graph is that there is a strong
negative correlation of 0.8717 between Agg and Man, leading to a clear linear form. K
and L by contrast only have a negative correlation of 0.2031 in the preceding graph.
40
V-C. Multicollinearity
A fundamental problem with the initial regression equation listed at the end of
section IV-B is the presence of multicollinearity, meaning that some of the independent
variables are correlated with one another. The table below quantifies the correlations.
Table III: Correlations
Under Dem
Underwood 1.0000
Dem
0.4097 1.0000
K
-0.1733 0.0013
L
0.0154 0.0029
KL
-0.2180 -0.0326
Agg
0.1202 0.2293
Man
-0.1375 -0.1508
PCI
-0.1154 -0.1875
K
L
KL
Agg
Man
PCI
1.0000
-0.2031
0.3712
-0.5098
0.5149
0.5535
1.0000
-0.4160
0.2178
-0.4879
-0.1615
1.0000
-0.5634 1.0000
0.7311 -0.8717 1.0000
0.5124 -0.8993 0.7969 1.0000
The results show that while many variables are correlated with Underwood, they are also
correlated with themselves. Dem has a correlation of 0.2293 with Agg, -0.1508 with
Man, and -0.1875 with PCI. KL has a correlation of -0.5634 with Agg, 0.7311 with Man,
and 0.5124 with PCI. Agg and Man are naturally highly negatively correlated with each
other, at -0.8717. A matrix graph is used to illustrate these correlations.
41
Graph III: Correlations Across Regressed Variables (sans K and L).
Underwood
1
Dem
.5
0
200
KL
100
0
1
Agg
.5
0
.6
.4
Man
.2
0
1000
PCI
500
0
0
.5
10
.5
10
100
2000
.5
10
.2
.4
.6
Before even running any regressions, the correlations illustrate the validity of at least
some of the predictions of the model. Voting for Underwood is positively correlated with
Dem, L, and Agg, and negatively correlated with K, Man and PCI. The fit for Dem and
KL is very strong from the graphical view, though the fit for Agg, Man and PCI appears
less strong.
The correlations table identifies a fundamental problem with the initial regression
equation: KL, Agg, Man and PCI are highly correlated with each other. Multicollinearity
is potentially problematic, as a regression involving two or more of these variables likely
will either compute at least one variable as either statistically insignificant or will assign a
coefficient with the opposite sign of what it would have had, had it been the only variable
from among that group in the regression.
42
Quantification of collinearity comes from a statistical test named VIF, an acronym
for variance inflation factor. VIF checks for multicollinearity, with a result of greater than
ten, or close to it, signifying potentially multicollinearity. The reciprocal 1/VIF equals the
tolerance, which is a measure of the percentage of variance in the predictor (the variable)
that is not measured by other predictors. A small tolerance value indicates potential
redundancy of a variable. The results of a VIF test following the regression of Dem KL
Agg Man PCI on Underwood is listed in the table below. While none of these variables
reach ten, many are close and display a degree of collinearity.48
Table IV: Collinearity of Variables
Variable
VIF
Agg
8.37
Man
6.45
PCI
5.26
KL
2.27
Dem
1.07
Mean VIF
4.69
1/VIF
0.119519
0.154930
0.190097
0.440025
0.930792
V-D. State by State Breakdown of Data
To provide a graphical representation of the correlations between each
independent variable and Underwood, and to plot the exact points of each state, five
univariate regressions are graphed below. The fitted blue lines and adjacent grey 95%
confidence bands mirror the values expected from the correlation table above. These
graphs do not represent the paper’s econometric model, as a univariate model is
necessarily mis-specified. The goal is only to provide more descriptive information.
48
UCLA Statistical Consulting Group. “Regression with SPSS. Chapter 2 - Regression Diagnostics.” At
http://www.ats.ucla.edu/stat/spss/webbooks/reg/chapter2/spssreg2.htm. A collin test could be used to
provide supplementary diagnostic statistics.
43
Graph IV
Univariate Regression: Dem on Underwood
WI
WV
DE
TN
.8
1
SD
VT
UT
WA
CT
.6
IL
NY
AR
AZ
AL
CO
GA
FL
MS
MT
TX
NJ
IN
NC
MD
MO
OH
KS
NE
MA
.4
Underwood
NV
KY
NH
VA
CA
ME
LA
NM
.2
IA
MI
SC
MN
0
ID
ND
0
PA
.2
OR
RI
.4
OK
Dem
.6
.8
1
As predicted, the fitted line has an upward slope, representing the positive effect of Dem
on voting for Underwood.
44
Graph V
Univariate Regression: KL on Underwood
1
SD
AZ
UT
MT
TX
FL
A
CO
MS
WA
RAL
GA
TNWV
VA
VT
WI
.8
NC
KY
NH
MO
NV
MD
IL
.6
NY
OH
KS
.4
NE
CA LAME
NM
IA
.2
Underwood
DE
IN
SC
MN
MI
0
ND
ID
OK
OR
PA
0
10
20
30
KL
40
50
Sans outliers Rhode Island Massachusetts and New Jersey
As predicted, KL has a negative slope.
Graph VI
Univariate Regression: Agg on Underwood
1
WA
CO
AZDE
UTMT WI
VT WV
FLVA
.6
NY
MS
NC
.8
CT
KY
NHMD
MO
NV
IL
OH
KS
NE
MA
.4
Underwood
TNSD TX GA AL AR
IN
NJ
CA
ME
LA
NM
.2
IA
MI
SC
MN
0
RI
0
PA
OR
.2
As predicted, Agg has a positive slope.
ID
.4
Agg
OK
ND
.6
.8
45
Graph VII
1
Univariate Regression: Man on Underwood
MS AR
AL
SD
TX
GA TN
MTVA
AZCO
WV
FL
UT
WAVT
WI
.8
NC
KY
.6
NJ
MD
NH
MO
NV
IL
CT
NY
OH
KS
NE
MA
.4
Underwood
DE
IN
LA
ME
CA
NM
.2
IA
MI
SC
0
ND OK
MN
ID
.1
OR
.2
.3
PA
RI
.4
Man
.5
.6
As predicted, Man has a negative slope.
Graph VIII
Univariate Regression: Per Capita Income on Underwood
1
MSAR
ALGATN SD
VAWV
TX FL UT MT
AZ VT
CO WI
DE
IN
NC
.8
WA
KY
NJ
NH
MD
.6
CT
NV
IL
NY
OH
KS
NE
MA
.4
Underwood
MO
LA
ME
CA
NM
.2
IA
MI
SC
MN
0
ND
200
400
OK ID
OR
600
As predicted, PCI has a negative slope.
PCI
PA
800
RI
1000
1200
46
In univariate regressions, the five variables behave exactly as predicted. The fitted line
for Dem has a positive upward slope, KL has a negative downward slope, Agg is
positive, Man is negative, and PCI is negative.
VI. Regression Results
The regression of the initial equation
Underwoodi = β0 + β1Demi + β2KLi + β3Aggi + β4Mani + β5PCIi + ε
gives a strong fit, and has an R2 of .224. However, potentially due to the multicollinearity
issue, only two variables, Dem and KL, are significant and have the signs predicted by
theory, and the coefficient on Man is positive, when all of the other indicators state that it
should be negative. To decide which coefficients are significant, F-tests are run. First,
Dem KL Agg Man and PCI are regressed on Underwood (robust), again. The F-stat for
the whole set of variables is 5.68, with a p-value of 0.0005. The variables as a whole are
significant. However, since Agg, Man and PCI may not be significant, a F-test is run on
the null hypothesis that
(β0 + β1Demi + β2KLi + β3Aggi + β4Mani + β5PCIi) - (β0 + β1Demi + β2KLi) = 0
The result of this F-test on Agg, Man and PCI is an F-stat of 0.28, and a p-value of 0.843.
Agg, Man and PCI are not significant. Further F-tests show that Dem and KL are
significant. Therefore in the regression table a second regression consisting of only Dem
and KL on Underwood is included.
47
VARIABLES
Dem
KL
Agg
Man
PCI
Constant
(1)
Underwood
(2)
Underwood
0.442**
(0.168)
-0.00304**
(0.00128)
-0.279
(0.704)
0.276
(0.699)
-0.000128
(0.000441)
0.546
(0.608)
0.412**
(0.167)
-0.00199**
(0.000864)
0.434***
(0.137)
Observations
47
47
R-squared
0.224
0.210
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
To judge the results of this table, the original economic theories are briefly
restated. The H-O model predicted that a rise in Capital over Land would cause a
decrease in voting for Underwood. As predicted by H-O, KL has a negative coefficient of
-0.00304 in regression I, meaning that for every $1,000 increase in a state’s capital over
land, 0.304% fewer of its congressmen voted for Underwood. The adapted R-V model
predicted that where labor was employed, not relative factor endowments, was key and
that agricultural laborers would support freer trade, while those working in manufacturing
would be opposed. The two variables measuring this, Agg and Man, however are
statistically insignificant. The Income Tax effect predicted that in an increase in percapita income would cause a decrease in voting for Underwood, because a decrease in
tariffs was thought to lead to an increase in income tax rates. The variable measuring percapita income is statistically insignificant. Therefore, the H-O model is the relevant and
48
most accurate model in 1913. Unsurprisingly, and as predicted by party affiliation, Dem
is consistently positive across all regressions. In regression I, it has a positive coefficient
of 0.442, meaning that for every unit increase in the percentage of a state’s congressmen
who are Democrats, its total congressional delegation is 44.2% more likely to vote for
Underwood. Scaling this down for an example, if New York’s delegation is
proportionally 10% more Democratic than is Iowa’s, 4.42% more (proportionally
speaking) of New York’s congressmen are predicted to vote for Underwood than are
Iowa’s.
It should be noted that the validity of H-O does not rest on the validity of R-V and
Income Tax effect. They are three independent models that are tested for at once in the
regression. Consequently, a highlight of the results is the similarity to Baldwin-Magee’s
results. Baldwin and Magee prove that H-O is a much more significant predictor than RV for voting on trade policy in the 1990s.
The first model has an R2 of .224, which should be considered to be a strong fit,
because the data is only on a state, not district, level. Given this limitation, the model has
a strong fit—a stronger fit would be abnormal, given the degree of economic
heterogeneity within states. It is also noteworthy that multicollinearity does not appear to
be problematic, or indeed to exist at a strong degree. At the same time, the second
regression column only loses a small measure of fit (R2) by dropping Agg, Man and PCI.
(They are dropped because they are proven to be insignificant by the F-test.)
To briefly step outside of the data-based framework of this paper, and to enter
into the mind-set of a congressman in 1913, a new question can be posed. Does the
congressman care about the owners of factors of production, capital and land, in his
49
district, or does he care more about where his constituents are employed, or does he
worry about the potential income tax faced by the highest-earning? The quantitative
answer here is that the owners of factors of production matter most. On the other hand, a
qualitative answer, garnered through reading the Congressional Record, indicates that RV is most important.
VII. Conclusion
While this paper’s model anticipated economic variables to have more predictive
power than party affiliation, it appears from the results that party affiliation is the most
significant variable. Despite this, the significance of at least one economic variable in
affecting congressional voting on tariff policy was proven with 95% statistical confidence
in this paper. This empirical finding vindicates the qualitative assertion of Kentucky
Representative Powers, who pithily stated that local economic conditions, specifically
whether a congressman expects his district to benefit or suffer from increased free trade,
are crucial to understanding the forces behind and the changes to U.S. tariff policy. The
empirics prove the H-O model to be correct and the R-V model and Income Tax effect
models to be incorrect. Congressmen, it seems, care more about relative factor
endowments than in which sectors their constituents are employed, or the income tax
burden faced by their wealthiest constituents. One explanation for the insignificance of
the Income Tax effect is that the 1913 iteration only affected less than the highest
percentile of earners—who were likely concentrated in only a handful of districts.
Much of the motivation for studies of economic history comes from the ability to
extrapolate lessons learned from the past to contemporary events. The best example of
50
this is the Federal Reserve’s use of studies of the Great Depression in deciding on
policies to combat the Great Recession. In this vein, it is hoped that lessons learned from
this thesis are applicable to analysis of motives behind voting on contemporary trade
bills.
Even after successfully passing Underwood in 1913, the tariff issue remained a
lifelong concern for Wilson.49 After leaving office sick and fatigued, he was incensed by
the policies of his successor Warren Harding, including his reintroduction of higher
tariffs that wiped out Underwood, in the form of the Fordney–McCumber Tariff of 1922.
This anger caused Wilson to contemplate running for a third term in 1924, despite his
paralyzing stroke in 1919.50 Wilson died in February 1924.
“For what do we wait? Why should we wait to crown ourselves with consummate
honor?” Wilson quoted from Shakespeare’s Henry V upon signing the Underwood Bill,
on October 3, 1913. The indefatigable Wilson used his signing remarks first to offer
thanks, and then to fire the opening salvo in the fight to pass a bill “to control and guide
and direct the credits of the country.” Pushing for a more perfect economy, guided by a
Federal Reserve System, Wilson reflected, “So I feel tonight like a man who is lodging
happily in the inn which lies half way along the journey and that in time, with a fresh
impulse, we shall go the rest of the journey and sleep at the journey’s end like men with a
49
Wilson used every intellectual concept he could to attack the tariff. In a talk in Hartford, Connecticut, on
September 25, 1912, discussing the Payne-Aldrich Tariff of 1909, Wilson employed “allusions to Alice in
Wonderland, England’s seventeenth-century Petition of Right, the god Baal, Gladstone, Bagehot, Henry
Clay, the direct election of Senators, initiative and referendum, the concept of a tabula rasa in politics, and
the Latin derivation of the word ‘radical’” (Berg, 242).
50
Berg, 713.
51
quiet conscience, knowing that we have served our fellow men and have, thereby, tried to
serve God.”51
51
Woodrow Wilson, “Remarks Upon Signing the Tariff Bill, Oct. 3, 1913.” In Arthur S. Link, editor, The
Papers of Woodrow Wilson, Vol. 28: 1913 (Princeton: Princeton University Press, 1978), 351-2.
52
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55
Data Sources
Variable Source
Underw Congressional Record
ood
Dem
Bibliographical Directory of the United States Congress, 1774-Present.
http://bioguide.congress.gov/biosearch/biosearch.asp
K
Department of Commerce and Labor, Statistical Abstract of the United
States, 1910-03. “Summary of Manufactures: no. 111—Summary of
Manufactures: By States and Territories,” p.196-97.
https://www.census.gov/prod/www/statistical_abstract.html
L
Department of Commerce and Labor, Statistical Abstract of the United
States, 1913-02. “Area, Natural Resources, and Population: no. 1-The
United States: Dates of Acts of Organization or Admission of States and
Territories and Areas of Their Land and Water Surfaces,” p. 9-10.
https://www.census.gov/prod/www/statistical_abstract.html
Agg
United States Census Bureau, Thirteenth Census of the United States:
1910, Volume 4: Population. Chapter 1: Report on Occupations.
“Population. Distribution by General Divisions of Persons 10 Years of
Age and Over Engaged in Gainful Occupations, By Divisions and States:
1910,” p. 45.
https://www.census.gov/prod/www/decennial.html
Man
Ibid.
PCI
Federal Reserve Bank of St. Louis, FRED Economic
Data>Releases>State Per Capita Personal Income.
http://research.stlouisfed.org/fred2/search?pageID=1&ob=os&od=&t=st
ate&st=per+capita+income
1912
Popular vote for President in 1912, by state, is from Department of
Election Commerce and Labor, Statistical Abstract of the United States, 1913-06.
No. 344, p. 137.
56
Table V: Voting % by State in 1912 Presidential Election, and Congressional Party
Affiliation, 1913
State
Wilson
Roosevelt
Taft
Debs
Dem
Alabama
69.94
19.24
8.24
2.57
1
Arizona
43.52
29.29
12.74
13.33
1
Arkansas
55.01
17.3
20.45
6.52
1
California
41.81
41.83
0.58
11.68
0.231
Colorado
42.8
27.09
21.88
6.15
1
Connecticut
39.16
17.92
35.88
5.28
0.714
Delaware
46.48
18.25
32.85
1.14
0.667
Florida
69.52
8.96
8.42
9.45
1
Georgia
76.63
18.1
4.27
0.87
1
Idaho
32.08
24.14
31.02
11.31
0
Illinois
35.34
33.72
22.13
7.09
0.724
Indiana
43.07
24.75
23.11
5.64
1
Iowa
37.64
32.87
24.33
3.45
0.231
Kansas
39.3
32.88
20.47
7.33
0.6
Kentucky
48.48
22.48
25.52
2.57
0.769
Louisiana
76.81
11.71
4.84
6.64
1
Maine
39.43
37.41
20.48
1.96
0.333
Maryland
48.57
24.91
23.69
1.72
0.875
Massachusetts 35.53
29.14
31.95
2.58
0.444
Michigan
27.36
38.95
27.63
4.21
0.133
Minnesota
31.84
37.66
19.25
8.23
0.083
Mississippi
88.9
5.5
2.42
3.18
1
Missouri
47.35
17.8
29.75
4.07
0.889
Montana
35
28.13
23.19
13.64
1
Nebraska
43.69
29.13
21.74
4.08
0.5
Nevada
39.7
27.94
15.89
16.47
0.667
New Hampsh. 39.48
20.23
37.43
2.25
0.75
New Jersey
41.2
33.6
20.53
3.69
0.923
New Mexico
41.39
16.9
35.91
5.79
0.333
North Carolina 59.24
28.34
11.95
0.42
1
New York
41.27
24.56
28.68
3.99
0.711
North Dakota
34.14
29.71
26.67
8.05
0
Ohio
40.96
22.16
26.82
8.69
0.833
Oklahoma
46.95
0
35.77
16.42
0.8
Oregon
34.34
27.44
25.3
9.74
0.4
Pennsylvania
32.49
36.53
22.45
6.87
0.316
Rhode Island
39.04
21.67
35.56
2.63
0.4
South Carolina 95.94
2.57
1.06
0.33
1
57
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
42.07
52.8
72.73
32.55
24.43
65.95
26.9
42.11
41.06
36.2
50.56
21.45
8.86
21.51
35.22
15.9
35.22
29.43
15.61
21.83
0
24
9.45
37.46
37.13
17
21.82
21.11
32.65
34.42
4.01
1.41
8.25
8.03
1.48
0.6
12.43
5.67
8.37
6.53
0
0.833
1
0
0
0.917
0
0.375
0.231
0