American Exceptionalism: The Economic Benefits of USA Statehood

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Abstract

The 19th century witnessed the transformation of the United States from peripheral economy to global economic leader. This gave birth to the idea of American exceptionalism, stating that certain aspects of the American experience gave it a unique edge (De Tocqueville 2003 [1840]). Most notably, the unique political institutions and culture of the US were singled out as setting the country apart and contributing to its upward economic trajectory (Lipset 1996). Thus far, it has been hard to assess the economic benefits of ‘being the US’ in general and its political institutions in particular in quantitative terms.

This paper aims to address that. Specifically, we answer the questions (1) what the economic benefits of US statehood are, and (2) to what extent these effects are driven by the U.S. political institutions. We do so in two ways.

First, we exploit another part of the economic story of the 19th century US, which is the continuous westward expansion of the country. The sequential addition of territories to the United States acts as a natural experiment of exposure to American institutions, markets and culture. To exploit this, we adapt extant static synthetic control models into a dynamic model similar to Arellano and Bond (1991). We are thus able to construct the counterfactual growth paths of Texas, California, Arizona, New Mexico, Colorado, Utah, Wyoming and Nevada had they not joined the USA. The American Exceptionalism thesis suggests that territories joining the United States would experience a bonus in terms of economic performance.

The second way in which we address the question is by focusing on territories that
at one point in time were (remotely) considered candidates for joining the United States. Specifically, we construct counterfactual growth paths of Puerto Rico, Cuba, the Philippines, and Greenland in the scenario where they joined the USA as states at times in history where this might have been a possibility. If America is indeed exceptional, the real growth of these countries lags behind their counterfactual growth paths as US states.

Both analyses point at large economic performance premiums of being part of the USA, which increase over time. The second question we address is to what extent these premia are driven by political institutions.
To get a better sense of the role of political institutions in the accession effect, we use the same set of predict calculate counterfactual institutional quality in US states had they not joined the federation. As institutional quality indicators, we use V-Dem scores (Coppedge et. al. 2019). We are thus able to show that institutional quality of the USA as a whole resembles the quality one would expect to arise in New England, which is significantly higher than the predicted, counterfactual quality of the new states. This strongly suggests that upon joining, new states experienced an institutional quality boost. Finally, we ask the question to what extent this institutional quality boost is
responsible for the growth premium. We estimate the counterfactual growth paths of all countries in the world had they joined the USA. We subsequently regress the gap between factual and counterfactual economic performance on the gap between US institutional quality and actual country-level institutional quality. Doing so, we show that the institutional quality gap explains about 40% of the economic performance gap. We
conclude that upon joining the United States, territories typically gain in institutional
quality which leads to a long-run premium in economic performance.

Our paper contributes to the large literature on American development in the 19th and early 20th century by tracking quantitatively the economic performance effect of being part of the US. We are thus able to shed a novel light on the theory of American exceptionalism. In addition, we contribute to the literature on institutions and economic development, by assessing the large role of American federal political institutions in its 19th century economic development.
We conclude that the economic benefits of US statehood are sizable, and that they are driven to a strong extent by the unique political institutions of the US. We thus find strong historical support for the notion of American Exceptionalism.

References:
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Economic Studies58(2), 277-297.

Coppedge, M., et al (2019). V-Dem Dataset, Version 9, Varieties of Democracy (V-Dem) Project. Available at: https://doi.org/10.23696/vdemcy19

De Tocqueville, A. 1840 [2003]. Democracy in America. Washington D.C., Regnery
Publishing.

Lipset, S. M. (1996). American Exceptionalism: A Double-Edged Sword. New York, NY: WW Norton & Company.

Authors

• Robbert Maseland, University of Groningen

• Rok Spruk, University of Ljubljana