Economic Losses Due to Forecasting Error and the U.S. Populist Movement
Halcoussis, Dennis, Economic Inquiry
Populism is perhaps the most significant third-party movement in American history. Although there was strong support for the movement in the South and West, the greatest shift to Populist candidates occurred in the Midwest. In the presidential election of 1888, Kansas gave Republican Benjamin Harrison a greater margin of victory than did any other state, and the vast majority of local and state offices in Kansas were captured by the Republicans that year. Just two years later Kansas voters gave Populist party candidates nearly 40 percent of the vote. In 1892 the Populists combined with the Democrats to take the governor's office along with 91 of 125 seats in the state legislature. By 1896 the Populists controlled all branches of the Kansas state government.(1) James B. Weaver, the Populist candidate for president, won Kansas in 1892 and Populist-Democrat William Jennings Bryan took Kansas's electoral votes in 1896.(2)
In 1898, Populist support evaporated as quickly as it evolved; the party lost both the governor's seat and control of the Kansas House of Representatives.(3) Forty-four thousand Kansas voters who participated in the presidential election of 1896 chose not to vote in 1898, thirty-four thousand of which had voted Populist in 1896.(4) In the presidential election of 1900, William Jennings Bryan lost Kansas, even though he was supported by both Democrats and Populists and had captured the state in 1896.
Populist support, in Kansas and elsewhere, was based in rural areas while urban voters typically remained Republican. The question is: What were the economic forces, if any, behind the rise of the Populist movement, and what caused its rapid decline?
Economic historians offer a possible answer to the question. McGuire  provides evidence that agricultural uncertainty spurred Populist support, and DeCanio  shows that the cost of price uncertainty (the economic loss from forecasting error) was highest during the Populist movement. Although McGuire and DeCanio both make a substantial contribution to understanding Populism, McGuire does not measure the cost to farmers of increased uncertainty, and the method used in DeCanio can be improved upon to distinguish between different components of the economic loss to forecasting error. In the present paper, I introduce new data and develop a new method for estimating the economic loss from forecasting error which allows the loss to be attributed to different causes. By studying the different sources of economic loss, insight can be gained into the economic transitions underlying the rise and fall of Populism.
The next section discusses previous work and competing explanations of Populism, along with relevant policy changes advocated by the Populists. Section III presents the model used here to estimate economic losses from forecasting error, and section IV presents the empirical results. Section V gives some concluding remarks and is followed by a data appendix.
II. ROOTS OF POPULISM
Scholars have attributed support for Populism to deteriorating economic conditions for farmers. Farmers complained of being victimized by railroads, money-lenders, and land speculators. They claimed the prices they received fell faster than the prices they paid, thereby reducing their purchasing power.(5) However, Bowman and Keehn  as well as others have shown that the agriculture sector's terms of trade actually improved between 1870 and 1900.(6)
This discussion leads us back to the original question: What economic forces drove farmers to form a third-party movement? Mayhew  claims farmers were responding to the increased commercialization of the agriculture industry.(7) McGuire  states that the increased commercialization of the agriculture industry generated a higher level of "agricultural uncertainty" for farmers, which in turn fueled agrarian unrest. McGuire provides empirical evidence supporting this hypothesis by investigating the relationship between uncertainty and agrarian discontent for fourteen northern states. …