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My Conversation with Douglas Irwin, audio and transcript
Doug’s new book Clashing over Commerce: A History of US Trade Policy is the greatest book on trade policy ever written, bar none. and also a splendid work of American history more generally. So I thought he and I should sit down to chat, now I have both the transcript and audio.
We covered how much of 19th century American growth was due to tariffs, trade policy toward China, the cultural argument against free trade, whether there is a national security argument for agricultural protectionism, TPP, how new trade agreements should be structured, the trade bureaucracy in D.C., whether free trade still brings peace, Smoot-Hawley, the American Revolution (we are spoiled brats), Dunkirk, why New Hampshire is so wealthy, Brexit, Alexander Hamilton, NAFTA, the global trade slowdown, premature deindustrialization, and the history of the Chicago School of Economics, among other topics. Here is one excerpt:
COWEN: Here goes. The claim that 19th century American growth was driven by high tariffs. What’s your take?
IRWIN: Not really true. If you look at why the US economy performed very well, particularly relative to Britain or Germany or other countries, Steve Broadberry’s shown that a lot of the overtaking of Britain in terms of per capita income was in terms of the service sector.
The service sector was expanding rapidly. It had very high productivity growth rates. We usually don’t think as that being affected by the tariff per se. That’s one reason.
We had also very high productivity growth rates in agriculture. I’ve done some counterfactual simulations. If you remove the tariff, how much resources would we take out of manufacturing and put into services or agriculture is actually pretty small. It just doesn’t account for the success we had during this period.
COWEN: Is there any country where you would say, “Their late 19th century economic growth was driven by tariffs?” Argentina, Canada, Germany, anything, anywhere?
IRWIN: No. If you look at all those, once again, in late 19th century, they were major exporters, largely of commodities, but they did very well that way. You know that Argentina was one of the richest countries in the world in the late 19th century. It really wasn’t until they adopted more import substitution policies after World War I that they began to fall behind.
Definitely recommended, and here is Doug’s Wikipedia page.
Off Label Prescribing as Good as On Label
Once a drug has been approved for some use it may be legally prescribed for any use. New uses for old drugs are discovered quite often so off-label uses can be very different from FDA approved uses. Mitomycin, for example, was approved to treat stomach and pancreatic cancer but is used off-label in laser-eye surgery. Drugs prescribed off-label have not been through FDA-approved efficacy trials for the off-label use. In Assessing the FDA via the Anomaly of Off-Label Drug Prescribing I pointed out that off-label prescribing, therefore, gives us a window onto a world with much less FDA regulation.
Since off-label prescribing is common and in rapidly progressing areas of medicine often the gold-standard, I argued that the behavior of physicians validated off-label prescribing and demonstrated that physicians were willing and able to draw upon non-FDA sources of information to make rational prescribing decisions. Dan Klein and I also showed that physicians are supportive of off-label prescribing saying, for example, that it would be “crazy” to require FDA approval for off-label uses.
The support of physicians for off-label prescribing is telling but not dispositive. Perhaps physicians make hubristic mistakes in prescribing off-label. A new paper by Ladanie et al. (including John Ioannidis) provides important information. The authors search the literature for all the RCTs when an off-label drug was pitted against an on-label drug. They conclude:
Our meta-epidemiological analysis of 25 different treatment indications for off-label drug use provides no empirical evidence supporting any assumption of generally inferior treatment
effects associated with off-label use. On the contrary, the summary effect estimates across all indications would even be compatible with more favorable effects, on average, of the off-label
treatment. However, the heterogeneity is substantial and the on-label comparators are not necessarily the best approved treatment option in all 25 topics. While some off-label
treatments are clearly better, others are clearly not.
The finding is especially impressive because although off-label treatments are sometimes the gold standard they are also often used when standard treatments have failed. Thus, in an RCT, off-label treatments could be worse on average and yet still provide a very useful weapon in the medical armory.
One might argue that if off-label treatments are as good as FDA-approved treatments then the FDA should have higher standards. FDA required clinical trials, however, already cost hundreds of millions of dollars and years of effort, creating drug lag and drug loss. Rather than condemning the FDA, what these results indicate is that the medical system–physicians, hospitals, insurers, scientists–does a good job at evaluating new uses for old drugs. As Dan Klein and I noted in our precis on off-label prescribing:
The off-label experience testifies to the fact that much knowledge about efficacy and safety is produced outside the FDA regulatory apparatus. The Pharmacopoeia’s recognition of off-label
indications years ahead of the FDA demonstrates that physicians and scientists have certified thousands of drug indications quite independently of the FDA, even when those indications are not
very closely related to the original indications. In addition to the Pharmacopoeia, there are several other forms of professional certification, including the American Hospital Formulary Service Drug Information, HMO formularies, and a wide array of specialist professional periodicals and information services. NIH studies, clinical results and determinations from other countries, and other professional, science-based judgments are examples of nongovernmental, non-mandatory certification.
Hat tip: Michelle Dawson.
Might tech super-firms mean the Great Stagnation is over?
I am now giving this a chance of somewhat over 50 (!) percent, and that is the topic of my latest Bloomberg column. Here is one bit:
Gross domestic product growth for the last two quarters was over 3 percent, even in light of hurricane damage in August and September, and middle-class income growth has resumed. You might think that would mean high price inflation from credit growth and “overheating,” but the 12-month change in core prices for personal consumption expenditures has fallen to 1.3 percent.
And:
Low rates of inflation, however, reflect productivity gains that already are here. The tech giants — Google, Amazon.com Inc., Facebook Inc. and Apple Inc. — have become major managers of our information, our businesses and our lives. They’re meeting political resistance, but whatever you think of those complaints, they are signs the major tech companies are having transformative effects. I used to say that we are overrating what tech has done for us to date, and underrating what it will do in the future. Perhaps reality has caught up with that prognostication.
And:
The major tech companies are growing their platforms quickly, supporting low prices with scale, product diversity, data ownership and superior service. Hardly anyone today worries about the eventual disappearance of competition and monopoly prices from Amazon or the other major tech companies. Do you really think Amazon is going to double book prices five years from now?…The tech companies have shown that their radical model of low price, high market share, high quality rapid expansion will keep them profitable for a long time to come.
Big if true, as they say…do read the whole thing. The still-remaining negative possibility, of course, is that the current positive wave is like 1995-1998, and we will sink back to less positive economic times, as we did back then.
“The Only Fed Rule Is That There Are No Fed Rules”
That is the title of my latest Bloomberg column, here is one excerpt:
Now enter the Fed, which I think of as a tool of Congress and the president. It gives Congress a means of promoting economic growth and stability (one hopes), as well as a path for deflecting the blame if tough decisions must be made. Congress insists that the Fed is “independent,” precisely for this reason. But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so.
If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. Many monetary rules call for higher rates of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. The Fed would probably lose its political capital if it had to follow through on the rule, and monetary policy would end up politicized for a long time.
Central bank quasi-independence is a quite a fragile institution, and it is maintained only by allowing central banks to juggle lots of balls at once. If you make a rule too tough, even a good rule, sometimes what you get is a rule that snaps and breaks.
Do read the whole thing.
The reserve army of the unemployed ant?
Social insect colonies are highly successful, self-organized complex systems. Surprisingly however, most social insect colonies contain large numbers of highly inactive workers. Although this may seem inefficient, it may be that inactive workers actually contribute to colony function. Indeed, the most commonly proposed explanation for inactive workers is that they form a ‘reserve’ labor force that becomes active when needed, thus helping mitigate the effects of colony workload fluctuations or worker loss. Thus, it may be that inactive workers facilitate colony flexibility and resilience. However, this idea has not been empirically confirmed. Here we test whether colonies of Temnothorax rugatulus ants replace highly active (spending large proportions of time on specific tasks) or highly inactive (spending large proportions of time completely immobile) workers when they are experimentally removed. We show that colonies maintained pre-removal activity levels even after active workers were removed, and that previously inactive workers became active subsequent to the removal of active workers. Conversely, when inactive workers were removed, inactivity levels decreased and remained lower post-removal. Thus, colonies seem to have mechanisms for maintaining a certain number of active workers, but not a set number of inactive workers. The rapid replacement (within 1 week) of active workers suggests that the tasks they perform, mainly foraging and brood care, are necessary for colony function on short timescales. Conversely, the lack of replacement of inactive workers even 2 weeks after their removal suggests that any potential functions they have, including being a ‘reserve’, are less important, or auxiliary, and do not need immediate recovery. Thus, inactive workers act as a reserve labor force and may still play a role as food stores for the colony, but a role in facilitating colony-wide communication is unlikely. Our results are consistent with the often cited, but never yet empirically supported hypothesis that inactive workers act as a pool of ‘reserve’ labor that may allow colonies to quickly take advantage of novel resources and to mitigate worker loss.
That is by Daniel Charbonneau, Takao Sasaki, and Anna Dornhaus, file under “speculative.” For the pointer I thank Eric Durbrow.
Are we just practicing “defensive innovation”?
That is the topic of my latest Bloomberg column. Electric cars, insofar as they limit climate change, are an example of defensive innovation. Here is further explanation:
Defensive innovation is when you create a new product or capability to protect yourself against an impending disaster, such as the worst scenarios for climate change. It’s important, of course, to practice defensive innovation, but don’t confuse it with progress. The defense only stops your living standards from falling.
The military response to foreign threats is another example of defensive innovation. The risk and potential costs of cyberwarfare are escalating rapidly, and terrorist threats seem worse than they did in the 1980s or 1990s. The best case scenario is that we come up with better means of tracking and hindering cyber and terrorist attacks — by cutting off funding or by tracing and halting potential perpetrators. Those too will be defensive innovations, aimed mostly at preserving capabilities we already have.
The American military might someday develop better protection against the new threat of North Korean intercontinental ballistic missiles, which might be capable of delivering nuclear weapons to U.S. cities, possibly even New York and Washington. Imagine something akin to Israel’s “Iron Dome,” but protecting a broader geographic area against a greater diversity of weapons. That would be an impressive achievement, but would be an essentially defensive innovation.
Here is the uh-oh sentences:
Note that in the earlier stages of economic growth, there is usually less defensive innovation, if only because there is less to defend.
Do read the whole thing.
10 Chinese Megacities to See Before You Die
That is the title of my latest Bloomberg column; I love Chinese megacities, don’t you? Here is the first and most general point:
Chinese megacities are associated with the greatest migration in human history, namely the movement of several hundred million people from the countryside into urban areas. This has created over 100 cities with a population of more than one million. And while Westerners tend to see only the harmful effects of that transformation, it’s gone fairly smoothly. Wages and living standards have risen to create the biggest rapid boost in prosperity the world has seen, ever. Surely it’s worth taking a closer look at that.
Here is the most important point:
If you spend a few days in these places, they will stand out as quite distinct. To suggest otherwise is actually to repeat a common Western imperialist meme about the Chinese, namely that they “are all the same” in some underlying manner. Observing and understanding diversity is a skill, and the Chinese megacities are one of the best places for cultivating this capacity.
By the way, the cameo appearance in the opening bit is Dan Wang.
In Praise of Extreme Medicine
This Buzzfeed article on unauthorized poop transplants has much of interest:
A spate of studies over the last decade have convinced microbiologists and doctors that “fecal microbiota transplantation,” or FMT, works for at least one disease: a deadly bacterial infection in the gut known as Clostridium difficile, or C. diff. No one knows whether the procedures work on other conditions, though dozens of clinical trials are testing them on people with irritable bowel syndrome, Crohn’s disease, obesity, diabetes, epilepsy, autism, and even HIV.
The science is advancing rapidly, with more and more scientists excited about the potential and potency of fecal matter and the microbes in it. The FDA regulations on these procedures, however, keep them out of reach for most patients: Since 2013, the agency has banned doctors from doing fecal transplants on anything except C. diff.
A rogue clinic in Tampa, however, provides the carefully sourced material and explains to patients how the procedure is done. Since the procedure is simple, lots of experimentation is going on which upsets some people.
Poop from an unscreened stranger could carry serious infections, like hepatitis or gonorrhea, or dormant viruses.
No doubt–this is why we also ban sex and french kissing.
I suspect that many of the so-called treatments are crazy but people do a lot of crazy things. It’s odd that we allow some crazy things and ban others—even more that the crazy things we allow are sometimes socially useless while the crazy things that we ban are sometimes socially valuable.
The case for banning extreme sports, for example, is much stronger than the case for banning extreme medicine. Extreme sports don’t provide much benefit to the rest of humanity, other than some entertainment of questionable social value. Extreme medicine, on the other hand, has the potential to improve all our lives and at the very least is a useful warning about what not to do. Yet, extreme sports are lauded, or at least treated as mostly your own business (we do put some regulations on boxing and race car driving), while extreme medicine is heavily regulated and socially frowned upon.
My attitude is the reverse. You want to risk your life climbing without ropes? Knock yourself out–but don’t expect any support from me. I won’t even watch Alex Honnold because I think that what he does is Russian roulette and I do not approve. But, you want to risk your life trying an unapproved medical treatment? Sir, I salute you. Give that man a Nobel prize.
Germany is the Silicon Valley of political innovation
That is the theme of my latest Bloomberg column, here is a snippet of the argument:
After the war, Germany undertook an extensive and largely successful campaign of denazification. Other defeated nations, such as Austria or Japan, didn’t attempt anything comparable, much less succeed. In a relatively short period of time, Germany really did turn into a largely tolerant, peace-loving nation, acutely aware of the extreme nature of its previous wrongdoing. For all the imperfections in this process along the way, it is difficult in world history to find a comparable switch in attitudes.
Or take German unification. It was hardly obvious this project to bring together East Germany and West after the fall of communism would succeed or even come to fruition, as there was plenty of talk at the time of a binational federation or perhaps a slowly phased evolution toward unity. Yet Chancellor Helmut Kohl and other German leaders, supposedly staid figures, had the vision to see unification could be achieved rapidly and relatively smoothly. They just went ahead and did it, even though many of the world’s leaders, such as U.K. Prime Minister Margaret Thatcher, were squeamish about the idea.
There are more arguments at the link, running up through the present day. You also can count Germany’s role in the EU and also the construction of social welfare states. Germany is in fact remarkably underappreciated as a political and also social innovator.
Is low expected market volatility good for the world but bad for America?
That is the topic of my latest Bloomberg column, here is one bit, the optimistic part:
When observing the evolution of market prices in reaction to Trump, I am currently left with a mix of very optimistic and very pessimistic sentiments.
First, the European Union, and not the U.S., really does remain the center of Western civilization. The underappreciated good news is that European growth rates are edging up, the euro as a currency appears to have a more secure future, and Brexit, though I view it as a major mistake for the U.K., is not pulling apart the broader European project. The refugee crisis has stabilized, and right-wing populist parties are not taking over Europe. I see that (legitimate) concerns about the impact of Trump are distracting many people from these quite positive developments.
Second, I now view many asset classes as at least partially dependent on Chinese capital, but I’m not so afraid of that capital going away, as those positions have built-in hedges. If China does well, the flow of Chinese capital will continue. If China does poorly, capital will leave China rather rapidly and seek out foreign investments, and that too gives non-Chinese markets a fair degree of protection. China’s highly leveraged position may be precarious internally, but the West has a built-in hedge, namely that bad times for China still send more capital our way, at least for a while. That’s another piece of security that we have been distracted from seeing, though I’m not sure it is good news for China itself.
If you were wondering what to make of low expected volatility in markets, it’s typically worth looking at which asset prices have been volatile. I have two nominations: Chinese corporate bonds and Chinese commodity prices, both of which have fluctuated considerably with changing expectations about Chinese deleveraging. But those have not created a broader crisis of volatility, which is consistent with the above story about how the world as a whole has been growing economically safer. Furthermore, the ongoing growth of emerging economies implies more global diversification over the long run for both trade and investment.
Do read the whole thing.
How long until another Industrial Revolution would have taken place?
Let’s say that somehow Britain had let its opportunity pass by (lost the wrong war?), or perhaps never had been in the right position at all (no Gulf Stream?). When would the world have seen an Industrial Revolution? Keep in mind Song China came relatively close to having a break through of some kind, but still did not pull it off; some commentators suggest the same about the Roman Empire.
My initial presumption is that “industrial revolutions,” if we can even make the term plural in that way, are remarkably difficult to see through. I offer a few points:
1. Mankind spent about a hundred thousand years before making enough progress to attain the civilizations of Sumeria and Mesopotamia. Along the way, people discovered how to tame fire and use various stones and metals, but still it was a long, tough slog to a point that still was almost 6000 years short of an industrial revolution.
2. I see, in world history, only two regional units being in a position at all to make a run at an industrial revolution, namely Rome and its offshoots, and China. That is discouraging, especially because each of those required a fairly large, semi-unified territorial area. (As an aside, I view “how did China get so big so quickly?” as one of the most under-discussed questions of world history. Try it sometime, it’s better than arguing about Trump or ACA.)
2b. Were the Roman Empire and China actually independent events?
3. I fear what I call “the James C. Scott dead end,” namely that many territories will develop strong enough “state capacity-resistant” units that further Chinas and Romes will be difficult to achieve in terms of the size of the political unit. Imagine a world like Laos or northern Thailand. You may think that is a “mountains effect,” but neither the Great Plains nor Africa developed a China or Rome equivalent in earlier times, or much in the way of a very large or effective political unit. By the way, when is the next James C. Scott book coming out?
4. I also fear the “energy dead end.” The Aztec empire and its precursors created an amazing time, most of all for biotechnology — they bred corn out of a crummy weed, one of mankind’s greatest achievements, and without external grants. Tenochitlan may have been larger and more impressive than any European city, and the residents probably ate better too. Yet they used the wheel only for children’s toys and, more importantly, they stuck with direct uses of solar power. There is no evidence of them coming remotely close to a major deployment of fossil fuels. They did burn coal for fuel, and to make ornaments, but seemed to have no idea of how to put the pieces together to make it an energy source for powerful machines. For most of their purposes, solar energy seemed to work remarkably well, and Mexico had plenty of it. It nourished their food and kept them warm.
5. The economic historian R.C. Allen overrated the role of coal in the British Industrial Revolution, and this has kept many people away from seeing #4. Don’t assign coal a dominant monocausal role in the Industrial Revolution, just have an n-factor model where fossil fuels are one of the binding constraints; circa 2017 we still need them! By the way, here is an Allen essay on the Britishness of the Industrial Revolution, closely related to this blog post. I agree with most of his sentences as stand-alone claims, though he vastly underrates the role of non-energy factors in the bigger picture.
6. The Incas also had a remarkably advanced civilization, in select areas ahead of Europeans and spanning a fairly large geographic area at its peak with plenty of state capacity. They too seemed to be in a cul-de-sac with respect to an industrial revolution, energy again being one factor as best we can tell.
7. Many people fear internecine warfare as preventing an industrial revolution in alternative locales, and while that is a factor, I worry more about “the James C. Scott dead end” and “the energy dead end.” What other possible dead ends are there?
8. At what point was a European/British industrial revolution “in the bag”? 1740? 1600? 1050? If the Brits had failed us, at what point would Japan or Bohemia have picked up the ball and run with it? Seventy years later? Three hundred years? Never?
9. The optimistic perspective is gained from studying the history of the arts. Then one sees European culture as having a series of mini-industrial revolutions, starting in late medieval times and rapidly accelerating progress in painting, sculpture, perspective, bookmaking, goldsmithing, musical instruments, musical notation, paper-making, and many other areas, most of all in northern Italy and also Franco-Flemish territory and a bit later Germany. Bach came before the British “Industrial Revolution” and his genius had a lot of preconditions too! The “special” thing about the British IR is that it overturned Malthusian assumptions, but from the point of view of understanding how the inputs related to the outputs, and how so many new, complex innovations were possible all at once, that is arguably of secondary import. Study Monteverdi, not coal!
For this post I am thankful to a recent lunch conversation with John Nye, Bryan Caplan, and Robin Hanson, of course implicating none of them in these views, though can you guess who disagreed the most?
Globalization and Davos Man are underrated
That is the topic of my latest Bloomberg column, here is one excerpt:
One of the biggest objections to recent globalization is that it extended international trade at a destabilizing pace. Whether or not you agree with this negative assessment, from 1950 to 2008, international trade grew about three times faster than global gross domestic product. Since then, cross-country trade has grown much more slowly, at about the pace of global GDP growth or perhaps slower. For better or worse, that is a significant deceleration.
Elites didn’t just decide trade growth had to be slowed down. Rather, the initial rapid growth had some self-reversing properties built in. For instance, China’s growth and exports slowed down as the economy matured and wages rose, trade-intensive Europe became a smaller percentage of the global economy, and protectionist nontariff pressures have recently been rising.
The wisdom behind globalization isn’t a belief that it will be steered by very wise elites. Rather, most economic processes show elements of convergence, stability and mean-reversion, without anyone planning them.
The conclusion:
I’m not saying that all is well, as I see significant possibilities for instability in the current political configuration. But the elites have in fact been working at their job, and now it is up to voters to catch up in their understanding.
Do read the whole thing.
Carlsen > Karjakin
1. Karjakin played some of the best defensive chess ever, finding resources where there appeared to be none.
2. Carlsen had become a bit lazy, relying too much on his stamina advantage to beat opponents (yes I do understand that is an odd notion of lazy!). Yet he had no real stamina advantage over Karjakin, who is of the same age and came to the match in very good physical shape. So Carlsen simply could not grind him down, and it took Carlsen the entire match to realize that.
3. Karjakin made very few attempts to achieve demonstrable, sharp advantages. That limited his total number of victories to one.
4. In the rapid tie-breaker — four consecutive games in the final day — Carlsen couldn’t try to win on stamina and simply showed he was the better player across many dimensions of the game. Karjakin posed him no problems at all in these contests.
5. Karjakin played as Carlsen’s equal for the twelve regular time control games. Yet I don’t think he will be back as a challenger. His style is too “drab” (Kasparov’s description) to get through all of the risk-rewarding tournaments to reach the final championship match again.
6. Perhaps rapid chess is the future of chess as a spectator sport. Four games in a row, each twenty-five minutes per player, plus increments. It was thrilling, and I watched on the train.
7. Putin finally lost one this year, let’s hope this reverses the trend.
Here is the Chessbase account, here is the quite good NYT story.
Upward Mobility and Discrimination: Asians and African Americans
Asians in America faced heavy discrimination and animus in the early twentieth century. Yet, after institutional restrictions were lifted in the late 1940s, Asian incomes quickly converged to white incomes. Why? In the politically incorrect paper of the year (ungated) Nathaniel Hilger argues that convergence was due to market forces subverting discrimination. First, a reminder about the history and strength of discrimination against Asians:
Foreign-born Asians were barred from naturalization by the Naturalization Act of 1790. This Act excluded Asians from citizenship and voting except by birth, and created the important new legal category of “aliens ineligible for citizenship”…Asians experienced mob violence including lynchings and over 200 “roundups” from 1849-1906 (Pfaelzer, 2008), and hostility from anti-Asian clubs much like the Ku Klux Klan (e.g., the Asiatic Exclusion League, Chinese Exclusion League, Workingmen’s Party of CA), to an extent that does not appear to have any counterpart for blacks in CA history. Both Asians and blacks in CA could not testify against a white witness in court from 1853-73 (People v. Hall, 1853, see McClain, 1984), limiting Asians’ legal defense against white aggression. The Chinese Exclusion Act of 1882 and the “Gentlemen’s Agreement” in 1907 barred further immigration of all “laborers” from China and Japan.
…Asians have also faced intense economic discrimination. Many cities and states levied discriminatory taxes and fees on Asians (1852 Foreign Miner’s Tax, 1852 Commutation Tax, 1860 Fishing License, 1862 Police Tax, 1870 “queue” ordinance, 1870 sidewalk ordinance, and many others). Many professional schools and associations in CA excluded Asians (e.g., State Bar of CA), as did most labor unions (e.g., Knights of Labor, American Federation of Labor), and many employers declined to hire Asians well into the 20th century (e.g., Mears, 1928, p. 194-204). From 1913-23, virtually all western states passed increasingly strict Alien Land Acts that prohibited foreign-born Asians from owning land or leasing land for extended periods. Asians also faced laws against marriage to whites (1905 amendment to Section 60 of the CA Civil Code) and U.S. citizens (Expatriation Act 1907, Cable Act 1922). From 1942-46, the US forcibly relocated over 100,000 mainland Japanese Americans (unlike other Axis nationalities, e.g. German or Italian Americans) to military detention camps, in practice destroying a large share of Japanese American wealth. In contrast, blacks in CA were eligible for citizenship and suffrage, were officially (though often not de facto) included in CA professional associations and labor unions that excluded Asians, were not covered by the Alien Land Acts, and were not confined or expropriated during WWII.
Despite this intense discrimination, Asian (primarily Japanese and Chinese) incomes converged to white incomes as early as 1960 and certainly by 1980. One argument is that Asians invested so heavily in education that convergence has been overstated but Hilger shows that convergence occurred conditional on education. Similarly, convergence was not a matter of immigration or changing demographics. Instead, Hilger argues that once institutional discrimination was eased in the 1940s, market forces enforced convergence. As I wrote earlier, profit maximization subverts discrimination by employers:
If the wages of X-type workers are 25% lower than those of Y-type workers, for example, then a greedy capitalist can increase profits by hiring more X workers. If Y workers cost $15 per hour and X workers cost $11.25 per hour then a firm with 100 workers could make an extra $750,000 a year. In fact, a greedy capitalist could earn more than this by pricing just below the discriminating firms, taking over the market, and driving the discriminating firms under.
If that theory is true, however, then why haven’t black incomes converged? And here is where the paper gets into the politically incorrect:
Modern empirical work has indicated that cognitive test scores—interpreted as measures of productivity not captured by educational attainment—can account for a large share of black-white wage and earnings gaps (Neal and Johnson, 1996; Johnson and Neal, 1998; Fryer, 2010; Carruthers and Wanamaker, 2016). This literature documents large black-white test score gaps that emerge early in childhood (Fryer and Levitt, 2013), persist into adulthood, and appear to reflect genuine skills related to labor market productivity rather than racial bias in the testing instrument (Neal and Johnson, 1996). While these modern score gaps
have not been fully accounted for by measured background characteristics (Neal, 2006; Fryer and Levitt, 2006; Fryer, 2010), they likely relate to suppressed black skill acquisition during slavery and subsequent educational discrimination against blacks spanning multiple generations (Margo, 2016).
…A basic requirement of this hypothesis is that Asians in 1940 possessed greater skills than blacks, conditional on education. In fact, previous research on Japanese Americans in CA support this theory. Evidence from a variety of cognitive tests given to students in CA in the early 20th century suggest test score parity of Japanese Americans with local whites after accounting for linguistic and cultural discrepancies, and superiority of Japanese Americans in academic performance in grades 7-12 (Ichihashi, 1932; Bell, 1935).
Hilger supplements these earlier findings with a small dataset from the Army General Classification Test:
…these groups’ cognitive test performance can be studied using AGCT scores in WWII enlistment records from 1943. Remarkably, these data are large enough to compare Chinese, blacks and whites living in CA for these earlier cohorts. In addition, this sample contains enough young men past their early 20s to compare test scores conditional on final educational attainment, which can help to shed light on mechanisms underlying the conditional earnings gap documented above.
Figure XII plots the distribution of normalized test score residuals by race from an OLS regression of test z-scores on dummies for education and age. Chinese Americans and whites have strikingly similar conditional skill distributions, while the black skill distribution lags behind by nearly a full standard deviation. Table VIII shows that this pattern holds separately within broad educational categories. These high test scores of Chinese Americans provide strong evidence that the AGCT was not hopelessly biased against non-whites, as Neal and Johnson (1996) also find for the AFQT (the successor to the AGCT) in more recent cohorts.
From Hilger’s conclusion:
Using a large and broadly representative sample of WWII enlistee test scores from 1943 both on their own and matched to the 1940 census, I document the striking fact that these test scores can account for a large share of the black, but not Asian, conditional earnings gap in 1940. This result suggests that Asians earnings gaps in 1940 stemmed primarily from taste-based or some other non-statistical discrimination, in sharp contrast with the black earnings gap which largely reflected statistical discrimination based on skill gaps inherited from centuries of slavery and educational exclusion. The rapid divergence of conditional earnings between CA-born Asians and blacks after 1940—once CA abandoned its most severe discriminatory laws and practices—provides the first direct empirical evidence in support of the hypothesis of Arrow (1972) and others that competitive labor markets tend to eliminate earnings gaps based purely on taste-based but not statistical discrimination.
Hilger’s other research is here.
Trump and the stock market: what was the debate about?
The two people (Wolfers and Ozimek) who did the empirical work did a great job, but much of the rest of the exchange from other commentators has missed the point.
If you approach the debate as an emotional referendum on how good or bad Trump (Clinton) would be, you’re probably going to get it wrong. You will view yesterday’s exchange as being about choosing the Wolfers estimation or the Ozimek one, the latter showing that increases in Trump’s odds didn’t seem to hurt the stock market up through a particular date. If then you sided with Wolfers, you could keep a very negative view of what Trump would be like, or if you sided with Adam’s investigation you could still wonder to a greater extent.
The better way to think about the exchange is that Adam (and I) raised a puzzle. Given that economists as a whole don’t like Trump (look at endorsements), why haven’t the regular fluctuations in his odds had more of an impact on the stock market?
Now comes the Justin Wolfers study, showing the stock market went up a lot as Hillary Clinton was winning the debate. That makes the puzzle bigger not smaller. It adds to the preexisting prior about what correlations we should find in those earlier data points. Why for instance didn’t Trump’s fairly rapid pneumonia-inspired, pre-debate rise from 30 to 36 spook the markets in a big way? Why didn’t Trump’s longer-term rise from near zero to 36 bring a lot of market turmoil? And since a strong economy should help the incumbent Party, the puzzle is all the stronger; you can’t expect a strong economy to boost both the stock market and Trump’s odds as a confounding third factor. And note of course that Justin himself, in other contexts including on Twitter, will assign weight to the churning movements in the prediction markets, even if he doesn’t consider them any kind of decisive test.
A few of the options on the table are to say gridlock is stronger than we had thought, prediction markets less reliable, other candidates less reliable, or that Trump cutting taxes on capital relative to HRC will for the stock market outweigh some of the costs of his presidency. I’m not pushing any one of those, I am suggesting that at least one from this and a broader list ought to be true.
Many many of you have responded to such conundrums with answers starting with but not ending with the concept of noise and low-powered tests. That is a perfectly fine set of responses but then you must apply the resulting beliefs consistently to all other spheres. You could say for instance: “So much noise comes along in our economy. I do prefer Clinton to Trump, but because of all this noise I’m really not so sure Clinton will work out better for the economy. All of the other intervening economic events is what the prediction market and stock market data were picking up and that is why Adam’s test was imperfect. My judgments are imperfect too.”
That is an entirely permissible answer, if you really believe it and embrace it. The error is to segment your belief space. If you say “Wolfers beats Ozimek because Ozimek doesn’t consider noise enough, therefore I stick with my belief that Trump is really bad for the economy,” well that kind of mistake belongs in a Jonathan Haidt novel. I find few people are willing to embrace the more consistent statistical preference plus agnosticism, rather they play the game of “statistical noise for thee but not for me.”
Plenty of statistical tests have low power, including, believe it or not, the ones you run with your political intuitions.
Most generally, don’t look to throw out information, or see one study as trumping another, rather seek to use and interpret all of the information available.
By the way, one possible answer that fully reconciles the data of both Wolfers and Ozimek is to suggest stock markets started seeing Trump as “incurably terrible” only during the debate itself. That is hardly a confirmed hypothesis (we’ll see going forward), but it is another way of recognizing why Wolfers and Ozimek have not produced competing hypotheses, rather two pieces of information for revising a broader Bayesian mosaic.