Friday, January 31, 2020

Re-seeding America's Economic and Technological Future

Back in September 2017, Amazon announced that it was planning to build two new headquarters, and solicited proposals from cities. After due consideration of several hundred proposals, Amazon announced that the two winning locations just happened to be an easy commute from two homes of Amazon CEO Jeff Bezos: in Washington, DC, and New York City. It's easy to be cynical Amazon's process, and I have been. But here's an awkward question: What if in a pure business sense, Amazon made the right decision?

After all, we know that technology companies like to have a large available pool of local talent, and New York City and Washington, DC, rank at the top of all metro areas in terms of total number of tech workers. In fact, when you look at the patterns of the US economy in the last couple of decades, there is a growing concentration of tech companies in a few cities. Here's an explanation from Enrico Moretti:
I have just finished a new project where I study how locating in a high-tech cluster improves the productivity and creativity of inventors. If you look at the major fields — computer science, semiconductor, biology, and chemistry — you see a concentration of inventors that is staggering. In computer science, the top 10 cities account for 70 percent of all the innovation, as measured by patents. For semiconductors, it's 79 percent. For biology and chemistry, it's 59 percent. This means that the top 10 cities generate the vast majority of innovation in each field. Importantly, the share of the top 10 cities has been increasing since 1971, indicating increased agglomeration. ...
Companies in industries that are very advanced and very specialized find it difficult to locate in areas where they would be isolated. Nobody wants to be the first to move to a city because they're going to have a hard time in finding the right type of specialized workers. And it's hard for workers with specialized skills to be first because they're going to have a hard time finding the right job. It's an equilibrium in which areas that have a large share of innovative employers and highly specialized workers tend to attract more of both. It is difficult for areas that don't have a large share of innovative employers and highly specialized workers to jump-start that process. Ultimately, that is what generates the divergence across cities. ...
This pattern also helps to explain several of the main political and economic divisions of our time. The economies of US regions are no longer converging as they once did. In political terms, one of the most salient divisions of our time is between those who live and work in those cities where new technology companies and economic growth are concentrated, who often see the global economy as a place of opportunity, and those who live in the other cities where tech companies like Amazon and others are choosing not to locate, and who often see the global economy as a threat. 

The obvious policy prescription here looks something like this: Boost national research and development spending substantially: after all, a variety of estimates suggest that the social return from more R&D spending is 60%, or that the US should be aiming over time to double its R&D spending.  However, when determining the locations for that R&D spending, hold a version of Amazon's contest for a new headquarters. The ultimate goal is to increase dramatically the number of US cities that are hubs for the development and commercialization of new technology.  

Perhaps the most prominent, detailed, and thoughtful example of a proposal to address these issues is the book Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, by Jonathan Gruber and Simon Johnson (published in April 2019). They review the Amazon HQ2 process at the start, and write: 
The lesson from the [Amazon] HQ2 bidding experience is clear. Established big tech companies, left to their own devices, will bring a significant number of good jobs--along with congestion, high house prices, and perhaps even more inequality--to a small set of already successful cities, most of which are located on the East or West Coast. This book is for everyone else. 
They suggest taking steps with the goal of boosting US R&D by $100 billion per year. (For comparison, total US R&D spending is now about $580 billion, with $404 billion from companies,  $127 billion from the federal government, and the rest from higher ed, nonprofits, and other sources.) They would then hold an Amazon-like competition to spread this funding across the US and to create new innovation hubs.

To govern the process so that politicians don't just hand out the money to all their favorite constituencies, they propose a Technology Hub Index System (THIS). They focus on cities with a population of at least 100,000 workers from age 25-64, where the college-educated share of such workers is at least 25%, and where the mean home price is less that $265,000, and the commute is less than 30 minutes. They would also include measures of patents/worker in that area, as well as whether the area already has highly-ranked graduate school programs in science and tech areas. The top city in these rankings is Rochester, New York.

Their idea is to combine the THIS index with an application process, where metro areas could apply to receive R&D funds and other kinds of assistance. The metro areas would need to put together a package of how they would spur business growth in their area, including not just technology support but also support for local education, land, and infrastructure. Decisions about who gets the money would be made by an Innovation Committee, structured after the Base Realignment and Closure Commission process that has led to the closure of over 350 military installations. The commission recommends a list of winners, and if the president approves the list, it goes into effect--unless the entire list is rejected by Congress. The idea here is to recognize that any plan like this needs political approval, but to limit the ability of politicians to tinker and micromanage.

Similar ideas have come up in other forums. For example, on January 29 the Brookings Institution held a conference on the subject "Boosting growth across more of America:  Pushing back against the winner-take-most economy" (audio and transcript available here). In the lead-up to the conference, Mark Muro and Andre Perry wrote:
Can the United States truly prosper when 90% of its R&D- and STEM-intensive “innovation sector” employment growth takes place in just five “superstar” tech hubs? More voices are beginning to doubt it. ... [T]ens of millions of Americans are seriously disadvantaged in job opportunities, income mobility, and health and happiness levels simply by virtue of living in a place other than a `superstar' hub.
The Brookings panel focused on a report by Robert D. Atkinson, Mark Muro, and d Jacob Whiton called "The Case for Growth Centers: How to spread tech innovation across America" (December 2019, published by Brookings and the Information Technology & Innovation Foundation).

The political prospects for this kind of proposal may not be very robust. Although everyone talks a good game about the importance of technology and science to the future of the US economy, US R&D spending as a share of GDP hasn't budged much for decades. If we could agree on how to attain a big boost in R&D spending (presumably through some combination of direct spending and indirect incentives), political representatives of the already tech-successful cities are unlikely to support a focusing that additional funding to other geographical areas. After all, they are more likely to see new tech hubs as potential competitors in a zero-sum game, rather than as ways of deepening the national pool of ideas and talent in a way that will redound to their benefit.

But for the US economy and polity as a whole, policies that set the stage for tech-successful cities can be distributed across the country--something that is just not happening now--may be worthwhile. The goal is to trigger the benefits of agglomeration economies in areas where the costs of agglomeration (congestion, high housing prices, crime) are lower. 

Wednesday, January 29, 2020

Business Formation Statistics: Getting to Know You

In thinking about the state of the economy, it could be useful to know if the number of new business start-ups is trending up or down. Traditionally, the data on business start-ups was only available after a considerable time lag. But the Bureau of the Census is now publishing Business Formation Statistics, which gives quarterly estimates of the patterns of new business start-ups. For example, the BFS report for Fourth Quarter 2019 was published earlier this month on January 15.

The idea here is to get data on new business formation by using data on the number of employers who request "employer identification numbers" from the US Census Bureau--which a new business needs for government reporting on taxes and for other reasons. Thus, it provides a forward-looking view of how many firms are likely to be hiring in the near future.

John Haltiwanger, who played a prominent role in helping to launch this data series, explained ihow it works in an essay on "Synthesizing Micro and Macro Evidence on the US Economy" in the NBER Reporter (2019:3). Haltiwanger writes (footnotes omitted):
One challenge is that the underlying micro administrative data on businesses are typically not sufficiently timely to generate economic indicators on the current health of the economy. The Business Formation Statistics (BFS) are an important exception; I helped develop them with collaborators from the research community, the Federal Reserve Board, and the Census Bureau. BFS are based on the real-time flow of applications for new employer identification numbers that the Census Bureau receives on an ongoing basis. The potential of the BFS, illustrating new applications that have a high propensity for becoming employer businesses, is shown in Figure 3. This data series, along with other new statistical measures, is now released within a couple of weeks of the end of the most recent quarter at national and state levels. More disaggregated series at sub-state and sector levels can also be constructed. Figure 3 shows that ... [h]igh-propensity applications for new businesses in 2019:2 were still 6 percent below the pre-Great Recession levels.

As the figure illustrates, the number of applications by businesses for employer identification numbers plummeted during the Great Recession, and even after a decade without a recession has not yet bounced back to its earlier level. For some earlier posts with other evidence and discussion about this apparently decline in US entrepreneurship, two starting points are:

Tuesday, January 28, 2020

Worries about Automation and Manufacturing Job Loss from 1940

Concern over how robots and automation can lead to loss of jobs are not new. For example, here's a cartoon used to illustrate a New York Times article by Louis Stark back in 1940.

Stark's article was called "Does Machine Displace Men in the Long Run? New Studies Cited as Old Argument is Renewed over Significance of Technological Unemployment" (February 25, 1940). Here are a few thoughts stimulated by the article.

1) It's interesting to note that 80 years ago, the controversy about how thinking robots as show in the cartoon might lead to long-term job loss was described in the headline as an "old argument."

2) The article describes studies about jobs lost to automation in the preceding decades. Here's one example from Stark: 
The cigar industry is a striking example of mechanization on productivity and employment, for the four-operator cigar machine reduced the amount of labor by 62 per cent as compared with the hand process. In terms of production costs, the reduction in labor time represented a difference in favor of the machine process of at least $3 per thousand of cigars. In 1921 the industry employed 112,000 wage earners ... By 1935 it was estimated that 44,000 hand workers had been severed from the industry due to use of the long-filler cigar machines alone and that concurrently jobs had been provided on the machine for 17,000 new workers, mostly unskilled. 
3) These shifts were widespread enough that article quotes someone named Corrington Gill. an assistant at the Works Project Administration, to the effect that "there is little likelihood that more jobs will be available in manufacturing unless there was a substantial gain in production or a further decrease in working hours. Stark added: "Therefore, he [Gill] felt, manufacturing industries were unlikely to serve as a reservoir of jobs for the growing labor supply."

In the short-term, Gill was incorrect, because wartime production boosted the number of manufacturing jobs substantially. But in the long run, he was more correct than perhaps he could have imagined. The blue line in the figure shows the total number of US manufacturing jobs since 1940. The red line shows total US employment. In short, Covington Gill was quite correct in his supposition back in 1940 that manufacturing jobs were not going to absorb future growth of the labor supply over time.

4) The preceding figure is perhaps unfair. The scale needed on the vertical axis to show total jobs over time tends to minimize the rise and fall of manufacturing jobs more specifically. Here's a figure just showing total manufacturing jobs.
You can see the sharp rise in manufacturing jobs during World War II, and some additional rise in the 1960s and 1970s. But in a big picture sense, the total number of manufacturing jobs doesn't change much from the 1950s up through about 2000, despite all the other dramatic shifts in the US economy during those five decades.

The recent sharp drop in US manufacturing jobs starting around 2000 is also more visible in this figure, which result from a hard-to-decompose mixture of technology and trade, varying across industry. In addition, many US manufacturing firms have an increasing share of non-manufacturing employment. For a more detailed discussion of these shifts, one useful starting point is Teresa C. Fort, Justin R. Pierce, and Peter K. Schott. 2018. "New Perspectives on the Decline of US Manufacturing Employment." Journal of Economic Perspectives, 32 (2): 47-72.

5) At the end of Stark's article, he discusses the short-run stresses of long-run changes: "Those who maintain that there is a real `technological unemployment' may agree that there is re-employment `in the long run,' but that the displaced wage-earners must eat and care for their families `in the short run.'" Writing in 1940, Stark describes a list of policies aimed at smoothing the transition:

Suggested remedies revolve around the problem of how to provide steady income for displaced wage-earners, rather than steady work. Among these proposed remedies are unemployment insurance, old-age pensions, public works programs, minimum-wage and maximum-hour laws, dismissal compensation and proper timing of technological improvements. A number of these are already in effect.
My sense is that no plausible safety net will eliminate the trauma of how technological change can affect workers, jobs, and labor markets.  On the other side, technological change is also what makes leads to higher wages, new products, and a higher standard of living. We are further along in trying to spread the benefits and cushion the costs of technological change in 2020 than in 1940, but we remain bedeviled by the same basic trade-offs.

Monday, January 27, 2020

The Inflation Puzzle: Why Has it Moved So Little for 25 Years?

Sometimes the mystery is why something did not happen. The classic statement of this description is in the Arthur Conan Doyle story "Silver Blaze," in which Inspector Gregory asks Sherlock Holmes:
“Is there any point to which you would wish to draw my attention?”
“To the curious incident of the dog in the night-time.”
“The dog did nothing in the night-time.”
“That was the curious incident,” remarked Sherlock Holmes.
When it comes to the US inflation rate, the mystery is that it has moved so little for the last 25 years. The blue line shows the US inflation rate as measured by the Personal Consumption Expenditure price index, leaving out energy and food prices on the ground that they can add short-term volatility that obscures the underlying pattern. If this seems like an odd measure of price inflation--perhaps because the Consumer Price Index is a better-known measure of inflation--I'll just say that it's measure on which the Federal Reserve focuses (for reasons explained here). The red line shows the unemployment rate.

Back in the late 1980s and early 1990s, the inflation rate reached the range of 4-5%. There was a recession (shaded bar) in 1990-91, and you can see the unemployment rate rise while the inflation rate falls. This pattern is standard intro econ wisdom, going under the name of the "Phillips curve:" a tradeoff is expected, at least over the short-run of a few years, because a slowed down recessionary economy will tend to have more unemployment but less inflationary pressure, while an economy in an upswing of economic growth will tend to have lower unemployment but greater inflationary pressures. 

But since about 1995, you can see that the inflation rate has moved in a narrow range, rarely venturing out of the range of 1-2% per year, and then by only small amounts. Inflation stays in this range during the late 1990s, as the unemployment rate falls during the dot-com boom; and after the recession of 2001, when the unemployment rate rises; and in the housing boom of the early 2000s, when unemployment is falling; and during the Great Recession of 2007-2009, when unemployment shoots up; and in the decade since then, as the unemployment rate has dropped. Why hasn't the inflation dog barked? 

For a readable quick overview of the issues, the Hutchins Center at Brookings has published "What’s (Not) Up With Inflation? (January 2020). The report starts with a short essay by Janet Yellen laying out the issues, and then is followed with an essay by Sage Belz and David Wessel listing possible explanations why inflation has seemed stuck in place (with references and links to recent supporting literature). Here are some possibilities for why inflation is stuck: 

Inflation expectations. "Professional forecasters and financial market analysts today generally believe price inflation will run at the Fed’s 2 percent target over the medium run. As a result, businesses may not respond as much as in the past to changes in economic conditions, anticipating whatever movements in inflation that might occur will dissipate quickly."

Monetary policy. The Federal Reserve has targeted an inflation rate of 2%, so inflation staying near that range just shows that monetary policy is working.

Changes in the labor market. Workers may be less likely to receive able wage increases when economic conditions are good. Some possible reasons are that the "weakening power of unions in the private sector" or that "and increased global competition may have suppressed wage growth, reducing workers’ abilities to negotiate for higher wages." 

Trade and global value chains. "[D]omestic producers may be keeping prices low because they compete with foreign firms."

Technology and online competition. There is discussion sometimes of an "Amazon effect," where increased online purchasing puts pressure on all sellers to keep prices low. 

The inflation puzzle raises other questions, too. 
  • Is it possible that inflation is not being well-measured in certain areas--like a rise in health care costs--so that it is actually more variable than the graph above suggests? 
  • Is it possible that the past tradeoff between lower unemployment and higher inflation is less visible in national data, but still visible in state or metropolitan-area data?  
  • Does the low inflation rate mean that the US economy can run large budget deficits or keep interest rates very low without fear of future inflation? 
  • Can we count on inflation remaining low in the future, or could high inflation return with a rush? 
  • Instead of focusing on inflation,should policymakers instead focus on the possible of  future asset pricing boom-and-bust cycles, like the experiences with dot-com stocks in the late 1990s or housing markets in the early 2000s, and how problems in financial markets might disrupt the economy? 
Inflation is one of the basic outcomes of macroeconomic models, along with economic growth and labor market outcomes like unemployment rates. It is thus a little jarring to watch a recent Fed chair like Janet Yellen forthrightly accept that we don't really understand what has been driving inflation these last 25 years. But the admission is an honest one, and an invitation to consider the puzzle further. 

Saturday, January 25, 2020

Coffee-nomics: A Supply Chain Story

How does the market for coffee take raw coffee beans at $3.24 per pound and turn them into coffee retailing at $2.80 for a cup? This chart produced by the Specialty Coffee Association (in November 2019) tells the bare bones of the story. I leave the commentary to you.

Coffee-philiac readers may also be interested in "When Coffee Was the Newly Introduced Good Under Attack" (December 24, 2019).

Friday, January 24, 2020

Earlier Childhood Intervention: Before Pre-K

Discussions of early childhood interventions often work backward from kindergarten--with a focus on providing preschool programs. Whatever the merits of such programs (and I've described some weaknesses of the evidence supporting them here and here), they arrive too late for many at-risk children. For example, some evidence suggest that the cognitive gap for black children as a group opens up somewhere between ages 1 and 2--that is, well before a pre-K program starts. 

The Spring 2019 issue of Future of Children is devoted to a seven-paper symposium, plus and introduction, on the theme of "Universal Approaches to Promoting Healthy Development." The overall theme is to explore programs that start with home visits for parents of new babies. The idea is that such home visits can help link new parents to other community and health care resources, in a way that helps improve child development (and reduces child mistreatment).

It's easy to hypothesize about reasons why universal visit for new parents might work really well, or on the other side might be unwanted or too costly or impractical. Thus, the issue focuses on actual programs of this type and evidence on how they have worked. Here are a few examples, as summarized in the introductory essay by Deborah Daro, Kenneth A. Dodge, and Ron Haskins.

One example involves a program called Family Connects, which is described in this issue in a paper called “Universal Reach at Birth: Family Connects,” by Kenneth A. Dodge and W. Benjamin Goodman. As summarized by Daro, Dodge, and Haskins:
In this article, Dodge and Goodman report the results of three studies using the Family Connects model that illustrate its feasibility and show the strengths it could bring to broader implementation. The first trial encompassed nearly 5,000 children born in two hospitals in Durham, NC, between July 1, 2009, and December 31, 2010. Half the babies and their families were randomly assigned to an experimental group, the other half to a control group. ...
The Family Connects program consists of three pillars: home visiting, community services, and data and monitoring. During the home visiting portion, a discussion took place between a parent, usually the mother, and a program nurse. The interview was conducted in the family home during the first few weeks of the child’s life and lasted from 90 to 120 minutes. The visiting nurse assessed family risk in 12 domains, and then the mother and nurse developed a plan to promote the child’s development and wellbeing. Where necessary, and when agreed to by the mother, the nurse arranged visits to community agencies. Birth records were used to record family needs and services received. 
The results of the intervention are encouraging. First, while 94 percent of the families had at least one need that merited intervention, most were minor or moderate. Only 1 percent of the families required immediate intervention because of serious need; about half had serious to moderate needs that could be resolved by home visits, brief counseling, or other nonemergency services; and 44 percent had serious needs that required connection with community resources, such as treatment for substance abuse or depression, or intensive home visiting programs and other social services. Because Family Connects reaches the full population of birthing families in a community, it can reinforce targeted home-visiting programs by becoming a primary source of referral to them. In Durham, for example, Family Connects is the single most frequent source of referrals to Early Head Start and to Healthy Families Durham ...  One important finding was that a month after the nurse’s involvement ended, 79 percent of families said they’d followed through to make a community connection. Even more impressive, 99 percent of the families involved with Family Connects said they would recommend the program to other new mothers. 
A longer-term follow-up was conducted when the children were six months old. In this study, when compared with control group mothers, those in the experimental group reported 16 percent more community connections; reported more positive parenting behaviors and higher-quality father-infant relationships; were nearly 30 percent less likely to show signs of clinical anxiety; and reported 35 percent fewer serious injuries or illnesses among their infants that required hospitalization. Throughout their first year of life, infants of experimental families had many fewer emergency medical episodes than did control babies. In addition to these positive findings, the Dodge team examined records of Child Protective Services over the children’s first five years. Their review showed that children in the program group received 39 percent fewer protective services investigations than children in the control group.

In another article, Christina Altmayer and Barbara Andrade DuBransky discuss the "Welcome Baby " program in an essay called “Strengthening Home Visiting: Partnership and Innovation in Los Angeles County.” Again, as summarized by Daro, Dodge, and Haskins:
The authors discuss how a universal offer of assistance establishes a foundation on which public and private agencies can plan meaningful systemic reform—and spark incentives for greater investments in services directed to vulnerable families. The vision builds on Welcome Baby, the county’s universal home visiting program funded by First 5 LA, which provides as many as nine contacts to pregnant women and new parents until a child’s ninth month. Three contacts occur before birth, one at bedside in the birthing hospital, and five afterward in the home. Piloted in one hospital in 2009, the program is now available to new parents delivering in 14 hospitals throughout the county. These facilities deliver more than a third of all births in the county, and almost 60 percent of births occurring in the county’s highest-risk communities. As of June 2018, the program had reached more than 59,000 families. ...
One evaluation of the pilot program compared Welcome Baby participants to new parents in the same communities who didn’t access the program; it found favorable impacts on parental capacity, child development, and service utilization up to three years following program enrollment. A randomized trial of the program is currently being conducted to provide a more rigorous account of its effects. 
Other examples include the First Born program. "a targeted universal home visiting program that serves all first-time parents in several New Mexico communities," and discussion of the options opened up by the he Family First Prevention and Service Act, approved by Congress as part of the Bipartisan Budget Act of 2018.

The basic instinct behind these programs is similar to that behind pre-K programs like Head Start: that is, addressing child development issues earlier could potentially be more effective and less expensive than trying to address them later. However, it pushes that insight into looking at the period before and after birth, rather than waiting until pre-K arrives at ages 3 or 4. Indeed, some scholars in the field have even suggested that there could be a positive social payoff from redistributing some spending from standard pre-K programs to programs that affected parents and their even younger children.

Tuesday, January 21, 2020

Americans Don't See Economy as a Nation's Most Important Problem

The Gallup Poll regularly asks about what people see as the nation's most important problem. The share of people mentioning economic issues has been plummeting, from as high as 86% back in the Great Recession of 2009, down to 11-12% at present--the lowest level of concern over economic issues in the 21th century. This decline started during President Obama's second term, but has continued during the first three years of President Trump.

Of course, the real-world economy will always have issues and problems. But given that the previous recession ended more than a decade ago in June 2009 and the unemployment rate has been 4% or lower since March 2018, it makes perfect sense that economic issues should not be at the top of the current worry list.

Monday, January 20, 2020

Academics and the New York Times on the History of Slavery

Even if we didn't live in a time of political hyperpolarization, which we do, the combustible topic of slavery's history and legacy would be deeply controversial, which it is. The New York Times poured some gasoline on this fire last summer with its "1619 Project," in which the Times  apparently decided that because it had mastered the task of reporting "all the news that's fit to print" with unquestioned and unimpeachable fairness and accuracy, it was now time to move on to providing a definitive take on the US history of race. This seems to me roughly like someone who is working hard to swim 21 laps in an Olympic pool deciding next to swim 21 miles across the English channel. One can admire the spirit behind attempting a much bigger challenge, but still be unsurprised when it doesn't go well.

The kerfuffle interests me, in part, because of what it reveals about how how academics and journalists think differently about fact and opinion. There's an old motto that the "newspaper is the first rough draft of history."  Back in the 1980s, I worked for a few years (as an editorial writer) for the San Jose Mercury News.  I remember talking with reporters about how the newspaper for any day mainly focused on what happened the day before. Thus, one day's might feature an accusation or a claim, while the next day would feature a denial of that accusation or claim, the following day would feature some new evidence, and so on. A broader narrative would gradually emerge from this process, but reporting on any given day was not expected to be definitive.

This issue often arises in news reporting about academic studies on health and science. A common pattern is for the news story to report, accurately, that a "study" has found that some diet or exercise or drug or lifestyle either helps or injures health, or that a "study" finds something about whether the universe expanding or whether batteries will become more efficient or evidence on climate change. The news story is often fully accurate in the sense that it summarizes the conclusion of a recently published study. But the daily news story isn't intended to be a balance summary of research in the field. It's a first draft of history.

When a newspaper says "we stand behind our reporting," it is often just saying that the story accurately reported a claim or an accusation made by someone else, typically with an attempt to get a reaction from someone on the other side of the accusation. A newspaper article isn't a legal brief or a PhD dissertation, seeking to weigh and balance all the evidence.

But the 1619 Project does claim to be something else. From the "Editor's Note" at the start:
Out of slavery — and the anti-black racism it required — grew nearly everything that has truly made America exceptional ... The goal of The 1619 Project, a major initiative from The New York Times that this issue of the magazine inaugurates, is to reframe American history by considering what it would mean to regard 1619 as our nation’s birth year. Doing so requires us to place the consequences of slavery and the contributions of black Americans at the very center of the story we tell ourselves about who we are as a country.
Later on, when leading historians criticized many prominent claims in the issue, the response of the editor included a number of conciliatory platitudes like "historical understanding is not fixed," "differing views exist,"  it's "an important discussion to have," and we are "planning to host public conversations next year." But that kind of rhetoric conflicts directly with how the 1619 Project was described originally. The issue isn't framed in terms of "there are arguments over history, and while conventional US historians believe X, a number of younger historians are challenging their views."

Instead, the 1619 Project had a stated goal, and it wasn't some gentle claim how historical understanding is not fixed, or how there are differing views of history. Instead, it says quite bluntly that "[t]he goal .. is to reframe American history" in a specific way, and further suggests that the goal will be pursued in an ongoing way in the future. Opinionated essays can be illuminating, but fair-minded essays give the reader a sense of the broader context. Here, as discussed below, the substantially differing view of leading US historians and economists were ignored.  Meanwhile, as the editor's note at the start points out: "Alongside the essays, you will find 17 literary works that bring to life key moments in African-American history." I'm a fan of history, and a fan of literature, but for me, but mixing the two in a project that wants to change "the story we tell ourselves" doesn't raise one's confidence in the underlying historical narrative.

Finally, the 1619 Project made clear that took its goal of reframing American history very literally, by taking active steps with the Pulitzer foundation to turn the series into material for high school history classrooms. In other words, this newspaper project had gone a long way past being a first rough draft of history. It had gone a long way past trying to report or describe the differing views among US historians on race and slavery. Instead, the 1619 Project was making big claims about historical truth.

Here, I'll offer some examples of how some leading US historians reacted to the 1619 Project. But the underlying intellectual history here is that there have some books in recent years that have been called "New History of Capitalism," which argue in different ways that US industrial capitalism is founded on slavery. After mentioning reactions from historians, I'll turn to what economists working in the field of economic history have had to say about this work.

It's not clear whether the writers  in the 1619 project were unaware of prominent existing US historians, or were aware of them and chose to ignore their work. Either way, it's not good journalistic practice. Tom Mackaman interviewed several eminent US historians, Gordon S. WoodJames McPherson, and James Oakes, at the World Socialist Web Site. All three have spent their lifetimes publishing articles and books in this field.  For example, Gordon Wood wrote the Pulitzer Prize-winning book The Radicalism of the American Revolution, as well as Empire of Liberty: A History of the Early Republic, 1789–1815. James McPherson wrote Battle Cry of Freedom, perhaps the bestpkn known account of the Civil War. James Oakes, write two books which have won the prestigious Lincoln Prize: The Radical and the Republican: Frederick Douglass, Abraham Lincoln, and the Triumph of anti-slavery Politics; and Freedom National: The Destruction of Slavery in the United States, 1861–1865.

In short, if you are going to commit an issue of the NYT Magazine to issues of slavery and race in US history, you might want to check in with these kinds of authors. Here's what Wood had to say:
Well, I was surprised when I opened my Sunday New York Times in August and found the magazine containing the project. I had no warning about this. I read the first essay by Nikole Hannah-Jones, which alleges that the Revolution occurred primarily because of the Americans’ desire to save their slaves. She claims the British were on the warpath against the slave trade and slavery and that rebellion was the only hope for American slavery. This made the American Revolution out to be like the Civil War, where the South seceded to save and protect slavery, and that the Americans 70 years earlier revolted to protect their institution of slavery. I just couldn’t believe this.
I was surprised, as many other people were, by the scope of this thing, especially since it’s going to become the basis for high school education and has the authority of the New York Times behind it, and yet it is so wrong in so many ways. ... [N]o one ever approached me. None of the leading scholars of the whole period from the Revolution to the Civil War, as far I know, have been consulted."
Of course, one can dismiss Wood and the others as old fuddy-duddies who cling to outdated myths about US history. But history isn't just a made-up set of stories. Statements about history or conclusions about history are mostly not "right" or "wrong" in the sense that an arithmetic problem is "right" or "wrong," but historical claims certainly can be ranked along a spectrum from "extremely unlikely" to "highly plausible," based on the underlying evidence. When leading historians think your claims fall into the "couldn't believe it" category, they can't just be brushed aside. You can read the interviews with Wood, McPherson, and Oakes in full, but here are a few tidbits:

From Gordon S. Wood:
In 1776, Britain, despite the Somerset decision, was certainly not the great champion of antislavery that the Project 1619 suggests. Indeed, it is the northern states in 1776 that are the world’s leaders in the antislavery cause. The first anti-slavery meeting in the history of the world takes place in Philadelphia in 1775. That coincidence I think is important. ... The idea that the Revolution occurred as a means of protecting slavery—I just don’t think there is much evidence for it, and in fact the contrary is more true to what happened. The Revolution unleashed antislavery sentiments that led to the first abolition movements in the history of the world. ...
We should understand that slavery in the colonial period seemed to be simply the most base status in a whole hierarchy of dependencies and degrees of unfreedom. Indentured servitude was prevalent everywhere. Half the population that came to the colonies in the 18th century came as bonded servants. Servitude, of course, was not slavery, but it was a form of dependency and unfreedom that tended to obscure the uniqueness of racial slavery. Servants were bound over to masters for five or seven years. They couldn’t marry. They couldn’t own property. They belonged to their masters, who could sell them. Servitude was not life-time and was not racially-based, but it was a form of dependency and unfreedom. The Revolution attacked bonded servitude and by 1800 it scarcely existed anywhere in the US. ... The elimination of servitude suddenly made slavery more conspicuous than it had been in a world of degrees of unfreedom. The antislavery movements arose out of these circumstances. As far as most northerners were concerned, this most base and despicable form of unfreedom must be eliminated along with all the other forms of unfreedom. ... 
Central to the middle class revolution was an unprecedented celebration of work, especially manual labor, including the working for money. For centuries going back to the ancient Greeks, work with one’s hands had been held in contempt. Aristotle had said that those who worked with their hands and especially those who worked for money lacked the capacity for virtue. This remained the common view until the American Revolution changed everything. The northern celebration of work made the slaveholding South seem even more anomalous than it was. ... Slavery required a culture that held labor in contempt. The North, with its celebration of labor, especially working for money, became even more different from the lazy, slaveholding South. By the 1850s, the two sections, though both American, possessed two different cultures.
From James McPherson:
She argues that racism is the central theme of American history. It is certainly part of the history. But again, I think it lacks context, lacks perspective on the entire course of slavery and how slavery began and how slavery in the United States was hardly unique. And racial convictions, or “anti-other” convictions, have been central to many societies.
But the idea that racism is a permanent condition, well that’s just not true. And it also doesn’t account for the countervailing tendencies in American history as well. Because opposition to slavery, and opposition to racism, has also been an important theme in American history. ... From the Quakers in the 18th century, on through the abolitionists in the antebellum, to the radical Republicans in the Civil War and Reconstruction, to the NAACP which was an interracial organization founded in 1909, down through the Civil Rights movement in the 1950s and 1960s, there have been a lot of whites who have fought against slavery and racial discrimination, and against racism. Almost from the beginning of American history that’s been true. And that’s what’s missing from this perspective.
From James Oakes:
One of the things that Desmond does in his piece ... is to leap from the inequality of wealth in slavery to enormous claims about capitalism. He will say that the value of all the slaves in the South was equal to the value of all the securities, factories, and railroads, and then he’ll say, “So you see, slavery was the driving force of American capitalism.” But there’s no obvious connection between the two. Does he want to say that gross inequalities of wealth are conducive to robust economic development? If so, we should be in one of the greatest economic expansions of all time right now, now that the maldistribution of wealth has reached grotesque levels. ...
But what’s clear, to me at least, is that the slave economy inhibits the kind of development that northern farmers are engaged in. So that the average wealth of a non-slaveholding farmer in the South is half the wealth of a northern farmer.
This is one of the things I find so disturbing about the argument that slavery is the basis of capitalism. Slavery made the slaveholders rich. But it made the South poor. And it didn’t make the North rich. The wealth of the North was based on the emerging, capitalist internal market that allowed the North to win the Civil War. It’s true that cotton dominated the export market. But it’s only something like 5 percent of GDP. It’s really the wealth of the internal northern market that’s decisive. That depends on a fairly widespread distribution of wealth, and that doesn’t exist in the South. There’s a lot of evidence from western Virginia, for example, that non-slaveholders were angry at the slaveholders for blocking the railroads and things like that that would allow them to take advantage of the internal market. So the legacy of slavery is poverty, not wealth. The slave societies of the New World were comparatively impoverished. To say things like, the entire wealth of “the white world” is based on slavery seems to me to ignore the enormous levels of poverty among whites as well as blacks.
[Added later: Just noticed that there now one more interview up, this one with Claybourne Carson. As he says: "[T]he saddest part of this is that the response of the Times is simply to defend their project.” In addition, there is an interview with Richard Carwardine: "[T]his is a tendentious and partial reading of American history. ... It is also wrong in some fundamentals." Or here is a gentle destruction of the central arguments from Sean Wilentz in the Atlantic: "The New York Times’ 1619 Project launched with the best of intentions, but has been undermined by some of its claims.")

Of course, gentle reader, you can read the articles and links above and form your own judgments. One can certainly read the 1619 Project essays and get something out of them. But it seems to me very difficult to read the interviews with the historians and to believe that 1619 Project essays should be treated as "history."

Behind the scenes in the world of economic history, there has been a set of ongoing disputes which bear on these issues (and which are mentioned in passing in the Oakes interview). A group of authors have been pushing for what is sometimes called the "New History of Capitalism," which argues that US industrial capitalism is founded on slavery. Some common examples of books along these lines include Empire of Cotton: A Global History by Sven Beckert, River of Dark Dreams by Walter Johnson, The Half Has Never Been Told: Slavery and the Making of American Capitalism by Edward Baptist, and The Business of Slavery and the Rise of American Capitalism, 1815– 1860 by Calvin Schermerhorn. The common reaction of economists to this work is that sometimes offers useful additions to social history, but it seems written without having bothered to come to grips with several decades of work by economic historians on the main themes. 

For example, here's a comment from at 2017 review by Eric Hilt. 2017. "Economic History, Historical Analysis, and the“New History of Capitalism," in the Journal of Economic History (June, 77:2, pp. 511-536, footnotes omitted).
The past decade has seen a resurgence of interest in economic history among historians. ...  Particularly among Americanists, this shift is gathering momentum, and works on economic history have been among the most celebrated books produced by historians in recent years. Yet this new wave of research has not brought historians back to the academic field of economic history. The scholars producing it do not think of themselves as participants in the field and have worked in isolation from it. Instead, many of them have styled themselves “historians of capitalism.” A separate community of economic historians seems to be emerging. ... 
The lack of engagement with the work of economic historians leads these authors to make assertions that have been conclusively refuted. Each of these books argues that slavery depended on the acquisition of new territory for its survival or at least for its economic vitality. Yet the amount of unexploited land suitable for the cultivation of cotton within the slave states at the time of the outbreak of the Civil War was immense. There is also a revival of the notion that plantations grew only cotton and were dependent on imports from other regions for food. This view, which figured prominently in Douglass North (1961), was based on a misinterpretation of trade statistics that did not account for the fact that agricultural products shipped to New Orleans were re-exported to other destinations at high rates, as shown by Albert Fishlow (1964) and Robert Gallman (1970). There are discussions of productivity gains in cotton production that minimize the role of the introduction of new cotton varieties, which are now known to be among the primary drivers of those gains. Among the most labor intensive phases of cotton production is the harvest; biological innovations that produced taller plants and bolls that were easier to pick significantly increased slave-labor productivity. Indeed, the narrow focus on cotton in these works prevents them from assessing the full significance of slavery in the development of the American economy. Although cotton was certainly the most valuable slave crop, large numbers of slaves in Kentucky, Missouri, and Virginia were employed in the production of crops that are traditionally associated with small family farms, such as wheat (Wright 2006).
For a sense of the tone in which the economic hypotheses of these authors are discussed, here is Hilt's comment on one of the works:
[T]he focus of The Half Has Never Been Told is not cultural but economic, and much of its economic analysis is so flawed that it undermines the credibility of the book. For example, Baptist makes the astonishing claim that all of the increase in productivity in cotton picking observed in the antebellum era was due to increases in the whipping and torturing of slaves. This claim enables him to make the central argument of the book, that the “ultimate cause” of the Industrial Revolution was the “systematized torture” of American slaves (pp. 135, 141; see also p. 413). Notwithstanding the fact that the Industrial Revolution began before American slaves were producing cotton in any significant quantities, Baptist's claim regarding torture and productivity is false, and the evidence he offers in support of it consists of a selective account of the quantitative and narrative record.
For another example, here a clip from a 2017 review by Stanley L. Engerman, . "Review of The Business of Slavery and the Rise of American Capitalism, 1815– 1860 by Calvin Schermerhorn and The Half Has Never Been Told: Slavery and the Making of American Capitalism by Edward E. Baptist. by Stanley L. Engerman, Journal of Economic Literature, "2017, 55(2), 637–643):
 The review argues that both books overstate the importance of slavery and cotton production for US economic growth. .... It is not fully accurate, as Baptist claims, that `some fundamental assumptions about the history of slavery and the history of the United States remain strangely unchanged' (p. xvii) since the nineteenth century, as a review of the current literature concerning slavery that fills in the gaps in his introduction might indicate.
Or here's a 2016 review by Alan L. Olmstead and Paul W. Rhode,"  Cotton, slavery, and the new history of capitalism," in Explorations in Economic History (January 2018 pp. 1-17, pre-press version available online here): 
There are good reasons why slavery remains a topic of keen interest. Slavery’s pervasive impact on American society, the misery it caused, and its toxic effects on American’s troubled history of race relations are all legacies of the nation’s original sin. Slavery and the war that ended it led to an impoverished South. It was in this backward, largely rural and agricultural setting, that freedmen and women, lacking education and capital, and often surrounded by hostile whites, had to start new lives. For too long there was a general acquiescence to a southern revisionist version of slavery, the causes of the Civil War, and the subsequent southern white supremacy governments and policies. The NHC [new history of capitalism] has rightly highlighted past injustices and their ramifications.
However, to recognize the pure evils of the slave system, does not mean that slavery was “absolutely essential” for U.S. economic growth, for the Industrial Revolution, or for world development. Neither the NHC’s evidence nor its methodology supports such deterministic conclusions. If slavery had been abolished nationally in 1790, we still would have had the Cotton South, and we still would have had an American Industrial Revolution. The British Industrial Revolution was already underway, and it would have continued. The slave system did increase the scale of farm size in the South, made many slave owners rich, and oppressed blacks. It also impoverished many whites who existed on the margins of the more stratified, less urbanized, and less educated society that slave system created. The riches of slave owners were not essential for national development, and the policies that this elite imposed on local, state, and national governments were on balance detrimental to development. The slave system was an effective way to produce cotton, but hardly the only way. Slavery was a national tragedy that inhibited economic growth over the long run.
Overall, the 1619 Project is explicitly precommitted to a particular version of history and economics, while failing to mention that professional historians and economists who are long-time experts in these matters fundamentally disagree with many of its central claims. It seeks to "reshape American history," but fails to provide the context that it is presenting a highly disputed set of views. It is an untrustworthy guide. 

Friday, January 17, 2020

The Prisoner's Dilemma: Celebrating its 70th Anniversary

The "prisoners' dilemma" game originated in 1950, and thus commemorates its 70th anniversary this year. The underlying ideas are remarkably important to social scientists, and to economists in particular, because they describes a situation in which the pursuit of self-interest can make all parties worse-off. More broadly, I think the prisoner's dilemma game captures a popular intuition about why society would be better off with more cooperation and less pursuit of self-interest.

But when you look into the prisoner's dilemma game more closely, it also offers insights about what it takes to sustain cooperative behavior, and also can help in understanding why the lines between self-interest and cooperation can get so blurry. My goal here is to review the concepts of the prisoner's dilemma game for those not especially familiar with it, and to explain how the prisoner's dilemma helps to illuminate one's thinking about the possibility concepts of self-interest and cooperation may often tend to overlap.

I'm not going to provide an intellectual history of the prisoner's dilemma game: the origins of formal game theory in the work of John von Neumann and Oskar Morgenstern, especially in their 1944 classic Theory of Games and Economic Behavior; how this approach spread to the RAND Institution, where Merrill Flood and Melvin Dresher experimented with a series of different games in 1950, and Flood wrote up the results that included a game with the structure and payoffs of a prisoner's dilemma game in a 1952 working paper; how Albert Tucker was asked to give a talk on these issues to the Stanford psychology department in 1950, and came up with the idea of discussing the game as ac dilemma facing a prisoner as a way of describing the ideas to a nontechnical audience. For those stories and a detailed follow-up on applications of the idea over time, I recommend William Poundstone's 1992 book, The Prisoner's Dilemma. Poundstone writes:
I asked Flood if he realized the importance of the prisoner's dilemma when he and Dresher conceived it. "I must admit," he answered, "that I never foresaw the tremendoust impact that this idea would have on science and society, although Dresher and I certainly did think that our result was of considerable importance ...
For those interested in a more algebraic overview of the prisoners' dilemma and it's relationship to a double-handful of applications and games that are close cousins,  Steven Kuhn provides a nice overview in the Stanford Encyclopedia of Philosophy on the "Prisoner's Dilemma" (updated April 2, 2019).

Here's my own description of the prisoner's dilemma game lifted from my Principles of Economics textbook:
Two prisoners are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. Eventually, a police officer enters the room where Prisoner A is being held and says: “You know what? Your partner in the other room is confessing. So your partner is going to get a light prison sentence of just one year, and because you’re remaining silent, the judge is going to stick you with eight years in prison. Why don’t you get smart? If you confess, too, we’ll cut your jail time down to five years.” Over in the next room, another police officer is giving exactly the same speech to Prisoner B. What the police officers don’t say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will
end up with only two years in jail each. ...
To understand the prisoner’s dilemma, first consider the choices from Prisoner A’s point of view. If A believes that his partner B will confess, then A ought to confess, too, so as to not get stuck with the eight years in prison. But if A believes that B will not confess, then A will be tempted to act selfishly and confess, so as to serve only one year. The key point is that A has an incentive to confess, regardless of what choice B makes! B faces the same set of choices and thus will have an incentive to confess regardless of what choice A makes. The result is that if the prisoners each pursue their own self-interest, both will confess, and they will end up doing a total of 10 years of jail time between them. 
But if the two prisoners had cooperated by both remaining silent, they would only have had to serve a total of four years of jail time between them. If the two prisoners can work out some way of cooperating so that neither one will confess, they will both be better off than if they each follow their own individual self-interest, which in this case leads straight into longer jail terms for both.
So this is the underlying structure of the basic prisoner's dilemma game: two players, two choices that can be phrased as "cooperate" or "defect" by following one's own immediate self interest. If the game is played one time, both players have no reason to cooperate. But if both players recognize that the logic of the game applies to both parties, and if both parties follow the self-interested logic they end up in the worst possible outcome, they they may also recognize that by cooperating they can avoid this worst-for-everyone outcome.

The underlying idea of the prisoner's dilemma game was soon applied in the 1960s to the situation of nuclear deterrence.  Consider a game with two players, the US and the USSR. The choices are "build more nuclear weapons" or "don't build." Each country will reason as follows: If the other country does build nuclear weapons, then we need to keep up, and so we should build. However, if the other country doesn't build nuclear weapons, then we can improve our geostrategic position by deciding to build, so again we should build. Thus, if both countries pursue this logic of self-interest, a costly arms race results, in which neither side comes out ahead. The challenge is to find a method for the two countries to cooperate in a way where they both decide to make a "not build" choice.

But applications of the prisoner's dilemma game have become very widespread, and many of have a similar "arms race" interpretation."

Or think about the choice of those in a dispute on whether to  hire a lawyer or to use arbitration. Each of the parties may see the choice this way: If the other party hires a lawyer, then I must also hire one, or I risk being underrepresented and losing. If the other party doesn't hire a lawyer, then I should hire one because it gives me a better chance of winning. As a result, both parties hire lawyers in a different sort of "arms race." Orley Ashenfelter, David E. Bloom and Gordon B. Dahl lay out this argument in a 2013 paper,  "Lawyers as Agents of the Devil in a Prisoner's Dilemma Game" (Journal of Empirical Legal Studies, 10:3 399-423).

Think about a decision of an athlete as to whether to use performance-enhancing substances. If others use such substances, the I must use them too, or I have no chance of winning. If others do not use such substances, then I can get an advantage by using them. Or think about a firm's decision to advertise. If others advertise, then I must do so or risk losing market share. If others do not advertise, then I should to do to gain market share. The result is the common lament: "Half the money I spend on advertising is wasted, and the trouble is I don't know which half."

However, other versions of the prisoner's dilemma idea are perhaps more comfortably interpreted through the idea of a "free rider" who benefits from the actions of others. (For earlier posts on the history of the "free rider" idea, see here and here.)

For example, consider whether a country should enact costly rules to reduce carbon emissions. One fact about such policies is that a large share of benefits of actions taken by any country to reduce carbon emissions happen for other countries--whether those other countries take actions to reduce their own carbon emissions or not. Thus, a country may reason  that if it decides to bear the costs of reducing carbon emissions when no other country does so, its policies will have little effect on the overall global problem and so it should decide not to bear such costs. However, if other countries do decide to bear the costs of "carbon-reducing investments," then the problem will largely be addressed and the individual country can decide not to bear such costs.

A similar version of the prisoner's dilemma idea arises for investments in public goods more broadly: that is, if others don't contribute to the cost, I would be foolish to contribute, but if others do contribute to the cost, the my little contribution won't make any difference and I can just be a "free rider" benefiting from the result. The result of this argument is that everyone decides against contributing and the public good doesn't get built. In formal terms, this is an example of a prisoner's dilemma game with many players, each making their own decision.

Over the decades, the prisoner's dilemma has been applied to a wide range of other situations. In a recent paper, Graciela Chichilnisky argues that an economy where men tend to specialize in paid market work and women tend specialize in unpaid family-and-home work can be interpreted as a prisoner's dilemma, and if society could cooperate, it could reach an outcome where both economic and family-based outcome are improved ("The Widening Gender Gap," Capitalism & Society, 14: 1. 2019). Kuhn reports in his Stanford Encyclopedia of Philosophy overview: "Donninger reports that “more than a thousand articles” about it were published in the sixties and seventies. A Google Scholar search for “prisoner's dilemma” in 2018 returns 49,600 results."

Indeed, one can argue, and Poundstone points out: "Even among the most law-abiding, most transactions are potential prisoner's dilemmas." Poundstone illustrates this theme with a version of the prisoner's dilemma due to cognitive scientist Douglas Hofstadter.

You have stolen the Hope Diamond. You make contact with an underworld figure named Mr. Big, who offers to buy it from you for a suitcase full of cash. You agree to make the exchange in this way: you leave the diamond in a wheat field in North Dakota, while Mr. Big leaves the cash in a wheat field in South Dakota. But after agreeing on this plan, you start thinking. If Mr. Big decides not to leave the cash, then I should definitely not leave the diamond. If Mr. Big does leave the cash, then I should also keep the diamond and re-sell it to someone else. Of course, you recognize that Mr. Big is having the same thoughts about not leaving the money. The result is likely to be that the market transaction will not happen in this way.

The example is intentionally theatrical. But it raises a real problem that applies in many market transactions. How does a buyer enforce delivery of the desired good, with the appropriate quality? How does a seller assure getting paid in full? For many purchases, from getting your roof fixed to paying with a credit card for  what is supposed to be "fresh" produce at a roadside stand, these issues come up in one way or another.

How can those who find themselves in a prisoner's dilemma setting get to cooperative outcomes? In the original example of the two prisoners, one mechanism is the "snitches get stitches" philosophy--that is, if you inform on your partner, you will pay a price. In the case of nuclear weapons or climate change, an international agreement using "trust but verify" principles might work. For investments in public goods, many societies use taxation to fund such projects (at least to some extent) so that free-riding on the contributions of others becomes difficult. In the case of market transactions, the reputation of the seller, along with more formal mechanisms like money-back policies and warranties, can offer reassurance to all parties. In some cases, like hiring lawyers or spending money on advertising, no method for assuring cooperation has fully emerged. 

Given the power and widespread application of the prisoner's dilemma idea, is it fair to conclude that cooperation beats self-interest? That sweeping conclusion is much too facile. For example, if cooperation in some situations leads to better outcomes than narrow self-interest, shouldn't someone pursuing their self-interest agree to cooperate? And if pursuit of self-interest in some situations leads to better outcomes than cooperation, shouldn't we agree to cooperate by letting self-interest guide our actions in certain areas?

One can even apply a prisoner's dilemma approach to argue that cooperation may be bad for society. Indeed, this conclusion is obvious in the original prisoner's dilemma, where cooperation between the two prisoners means that they are less likely to be punished.

But as another example, consider the case of two profit-seeking oligopoly firms, who can keep profits and prices high if they can avoid competing and instead cooperate with each other.  However, each firm reasons that if the other firm starts cutting prices, then it also needs to cut price to keep market share. And if the other firm doesn't cut prices, then it could gain market share by cutting prices. In this situation, both firms have a self-interested motive to cut prices and compete, but if two companies cooperate they in effect create a monopoly for exploiting consumers. One way for antitrust policy to work is to make it much harder for big firms to cooperate with each other in keeping prices high, and instead let their self-interested incentive to compete take over.

It's of course easy to think of ways in which pressure for social "cooperation" can be used for undesirable purposes. Oppressive social forces often cooperate with each other and with government quite effectively. With a given society, war can be viewed as an ultimate act of social cooperation. Government can enact regulations or college tax revenues both for useful social purposes and also for the benefits of special interests, or for inefficient or corrupt reasons. Perhaps the pragmatic lesson here is that "competition" and "cooperation" need to be judged in context, and in  "The Blurry Line Between Competition and Cooperation," I argue that the idea have considerable overlap. I wrote there:
Instead, a concept of cooperation is actually embedded in the meaning of the word “compete.” According to the Oxford English Dictionary, “compete” derives from Latin, in which “com-” means “together” and “petÄ•re” has a variety of meanings that include “to fall upon, assail, aim at, make for, try to reach, strive after, sue for, solicit, ask, seek.” Based on this derivation, valid meanings of competition would be “to aim at together,” “to try to reach together,” and “to strive after together.”
Competition can come in many forms. The version of competition that economists typically invoke when discussing markets is not about wolves competing in a pen full of sheep; nor is it competition among weeds to choke a flowerbed. The market-based competition envisioned in economics is disciplined by rules and reputations, and those who break the rules through fraud, theft or other offenses are clearly outside the shared process of market competition. 
The prisoner's dilemma game is a lasting contribution  to how social scientists think about incentives and the context behind incentives, self-interest, group cooperation, commitment, and more.  It's a true dilemma, in the sense that it doesn't have a "solution." As Poundstone writes:
Both Flood and Dresher say they initially hoped that someone at RAND would "resolve" the prisoner's dilemma. ... The theory would address the conflict between individual and collective rationality typified by the prisoner's dilemma. ... The solution never came. Flood and Dresher now believe that the prisoner's dilemma game will never be "solved," and almost all game theorists agree with them. ...

Social problems are never simple. Many political and military debates are so enmeshed in contingencies and uncertainties that it is possible to argue forever over the details. There is a sense that if only these ancillary issues were resolved, the dilemma would be slain and all would agree on the proper course to take. This is not necessarily so. In many cases the central dilemma is genuine and seemingly irresolvable. To the extent that a real social problem poses a prisoner's dilemma, it will be an agonizing choice even when all the side issues are settled. There will be no "right" answer, and reasonable minds will differ.

Thursday, January 16, 2020

Cultivated Ginseng and Marathon County, Wisconsin

About 80% of all the commercially produced processed pumpkin in the US happens within a 90-mile radius of Peoria, Illinois.  About half of all US mushroom production happens in Chester County in southeastern Pennsylvania. And as I recently learned, about 95 percent of the commercially produced ginseng in the United States comes from Marathon County, which is a few hours drive north of Madison, Wisconsin.

I ran across this fact as a throwaway line in a National Geographic article, "Demand for ginseng is creating a ‘wild west’ in Appalachia: With poachers cashing in on the Chinese appetite for American ginseng, growers are arming up" (by Rene  Ebersole, January 2020). As the title implies, the focus of the article is on those who hunt in forests for ginseng roots and sell them to dealers. Some of this hunting happens on public lands, but the price has risen enough that some owners of private forest-land have started seeding their woods to grow "wild-simulated" ginseng, which attracts ginseng poachers. Of course, the National Geographic article is laced with fun history and facts. Ebersole writes:
Asian ginseng has been consumed in the Far East since ancient times. It became scarce there as far back as a thousand years ago, spurring a cultivation industry in China, Korea, and Japan. After wild American ginseng was discovered near Montreal in the 1700s by a French Jesuit priest, Canada began exporting it to China. Within decades, the plant became scarce in Canada, and traders looked to the United States for other sources of wild ginseng. They gravitated to Appalachia, where the Cherokee were using the root as a tonic for colic, colds, and other ailments. The legendary frontiersman Daniel Boone made much of his fortune from the ginseng trade in the late 1780s, hiring sang collectors, or “sangers,” to mine for golden root and shipping barge loads to a market in Philadelphia.
During the late 1800s, as prices for wild ginseng soared and supplies diminished, Wisconsin farmers began cultivating it in fields. Farmed ginseng has a smooth, parsnip-like appearance and is considered far less potent than its wild counterpart. Wisconsin’s ginseng board reports that one county in the state now exports more than a million pounds of the cultivated root each year—95 percent of U.S. production. Used in commercial goods, from face and body products to sports drinks and even cigarettes, cultivated ginseng sells for about $250 a pound in Asia, according to the latest market analysis by the International Ginseng Institute in Murfreesboro, Tennessee. More than 45 percent of wild American ginseng, gnarly and twisted from growing between rocks and thick tree roots, goes to Hong Kong, where the roots are sorted, graded, and shipped to China or other parts of Asia, retailing for an average of $8,000 a pound. Only connoisseurs can tell the difference between wild ginseng and the [wild-simulated] ginseng that farmers such as Harding produce.
While the National Geographic article focuses on giving a blow-by-blow account of conflict over wild and wild-simulated ginseng in Appalachia, I wanted to know more about the concentration cultivated ginseng market in Marathon County. At the website of the Marathon County Historical Society, Ben Clark offers a capsule portrait of "Wausau's Ginseng King," John H. Koehler, who gets a lot of the credit for learning how to cultivate ginseng (September 14, 2018). Clark writes: 
The valuable ginseng root had been gathered from the [Wisconsin] woods where it grew wild for generations, and there had long been interest in growing it on farm. After a number of disastrous attempts to transplant the crop onto a farm in the 1870s, almost everyone had come to believe it was simply impossible to grow ginseng outside its natural environment or in larger quantities.
But in the 1890s, advances that led to ginseng being cultivated in small batches out East, and when Koehler heard about a successful farm in Missouri, he decided to try ginseng farming for himself. He resigned his position [as a land agent] and convinced his family to let him try raising some of the crop on the farm. In those early years Koehler was derided as crazy and he was close to financial ruin before he found success.
And find success as a ginseng farmer he did. In 1901, Koehler established the Wisconsin Ginseng Garden, the first of its kind in Marathon County. While his first garden was modest, it proved he could successfully grow ginsing, and he would go on to found the larger Wausau Ginseng Company in 1908 and the Badger Ginseng Gardens in 1910.
Because the ginseng farm was a very new thing, and because of the many difficulties in growing ginseng, Koehler recognized that the would-be ginseng farmers needed to work together. He was a founding member of both the Wisconsin and American Ginseng Growers Associations. These associations helped farmers compare experiences to learn what worked and what did not when figuring out how to grow ginseng, as well as functioning as a cooperative to provide resources for farmers to market and sell their crops in international markets.
Koehler became such an expert in the field of ginseng farming, that he literally wrote the book on how to do it. In 1912, he published the Ginseng and Goldenseal Growers’ Handbook. The book outlined everything a potential ginseng farmer needed to know about the crop, from the basic history and uses to detailed steps that took the process from planting seeds to shipping the cleaned and dry roots to market.
Here's a picture of Koehler at his Badger Ginseng Garden circa 1910:

For economists and entrepreneurs, this history strikes a number of resonant themes. It illustrates the importance of international demand, not just now but for several centuries. Indeed, international demand can even lead to almost wiping out a product in a certain area, like wild ginseng in 18th century Canada (or the buffalo in the 19th century United States). New technologies, like how to cultivate ginseng, often flourish with a cluster of producers in a certain area. As the producers share ideas and knowledge, they also create a local workforce with special skills, as well as often sharing connections to transportation and customers. I've read that there are ginseng farms in northern Wisconsin where phone calls are answered with a greeting in Mandarin.

Wisconsin ginseng also illustrates how small industries and producers can get caught in the gears of larger trade conflicts. The Winconsin producers have for a long time relied on China's market. In an article written for the Wisconsin Ginseng Board, Naomi Xu Elegant describes how "Wisconsin Ginseng Farmers Had Been Exporting to China for a Century. ThenCame the Trade War" (August 31, 2019). She writes:
The first ever trade ship from the U.S. to China, in 1784, set sail with 30 tons of ginseng in its cargo—a strategic decision by the U.S., which needed new markets and knew there was high demand for ginseng in China. The Revolutionary War had only just ended and Britain had placed a trade blockade on the U.S. American ginseng became favored in China for its yin, or "cooling" effects, while Asian ginseng, the species indigenous to China, is thought to have yang, or "heaty" effects, meaning the two are complementary.
Chinese demand for American ginseng was so high that the U.S. had to switch from wild harvests to farm cultivation of the slow-growing root in the late nineteenth century. ...

U.S. exports of ginseng account for less than 10% of the global supply, according to the Ginseng Board of Wisconsin. Canada produces three times as much and charges a lower price, but Wisconsin-grown ginseng is considered a luxury product, coveted by consumers for its superior taste and quality, thanks to the area's "ideal growing conditions." ...
The [Wisconsin ginseng] farmers send about 65% of their crop to mainland China and another 20% to Hong Kong, a major trading point for mainland distributors, meaning Chinese consumers effectively set the market. As a new harvest season looms, almost half of last year's Wisconsin ginseng crop remains unsold. In 2018, the previous year's supply sold out by March. ...

Wisconsin's small market share means the farmers have little leverage in negotiations with their Chinese buyers, who want them to absorb the cost of the tariffs. A 2018 news release from the Ginseng Board of Wisconsin said that "many Chinese distributors have expressed concern that they may have to shift purchases to Canadian ginseng." Another side effect of the trade war is that direct sales of ginseng to Chinese customers visiting the U.S. have stalled over fears that customs officers will confiscate or tax travelers' purchases when they return to China.
One a location has established a strong presence--in ginseng, pumpkin, mushrooms, or other products--that expertise and economic strength can be persistent. But if the market conditions for that product are severely disrupted, and it loses that strong presence, the loss of economic strength can be persistent, too.

Wednesday, January 15, 2020

Why are Men Detaching from the Labor Force?

Labor economists refer to "prime-age" men and women, by which they mean those in the 25-54 age group who are in the prime age group for working.  But there is half-century trend that prime-age males are becoming less likely to be in the labor force. Nicholas Eberstadt discusses the subject in "Education and Men without Work" in the Winter 2020 issue of National Affairs

Eberstadt presents some data from the Bureau of Labor Statistics. This measures being "out of the labor force," which is to say neither employed nor officially "unemployed," because the person does not have a job and also is not looking for work. As Eberstadt writes: "This monthly exodus from the workforce has been so steady since 1965 that it almost traces a straight line. ... [W]e might even be tempted to call this a "social-sciences straight line," considering how unruly observed social patterns for collections of human beings tend to be."

The steadiness of this pattern over a half-century suggests that it's not about trade with China in the last couple of decades, or about specific recessions. Something deeper and steadier is going on. This decline in men in the workforce is concentrated in groups with lower skills, but Eberstadt points out that not all men with lower education levels are experiencing the decline. Instead, there are sharp differences in labor force participation among low-skilled men across geography, foreign- vs. native-born, and married vs. unmarried. He writes:
Modern America has witnessed increasing dispersion in state-level prime-age male labor-force participation rates since at least 1980. Moreover, major, enduring, and sometimes even widening gaps in prime-age male labor-force participation rates are evident for geographically adjoining states (compare, for example, Maine to New Hampshire, or West Virginia to Virginia or Maryland). ... [A] gap of roughly 25 percentage points separated the labor-force participation rates of foreign-born and native-born prime-age male high-school dropouts in 2015. Elsewhere I have shown that the gap in labor-force participation rates between married and never-married prime-age male high-school dropouts was on the order of 20 percentage points as of 2015. ... 
To my taste, Eberstadt underemphasizes the poor labor market prospects of low-skilled US workers; for example, his article does not include the word "wages." But he is focused instead on a different theme, which is that the long-term reduction in male participation in the labor force is also wrapped up changes in "family structure, government-benefit dependence, and mass incarceration and felonization." Of course, these factors are often intertwined and mutually reinforcing. Here's a flavor of his argument on each theme:

On the connection from marriage to workforce participation:
Even after controlling for age, ethnicity, and education, married men are decidedly more likely to be in the workforce than men who have never married. This "marriage effect" is so powerful that married prime-age male high-school dropouts generate labor-force participation rates in the same league as their never-married, college-graduate peers. ... Lest it go unsaid: The collapse of work for men in modern America is much more closely associated with family structure than race.
Many of the men who are out of the workforce are supported in substantial part either by government payments that come directly to them or that come to family members. Eberstadt notes further:
Available information, however, points to a number of troubling features about the world of prime-age male disability and non-work. Apart from the small fraction (around 13% in 2015) of prime-age male non-workers who are adult students, the remainder report spending many of their waking hours watching and playing on screens — over 2,000 hours per year on average. Almost half of these non-working men report taking pain medication on any given day (which should raise a red flag for those worried about the opioid crisis). And when we stratify by educational attainment, we find that around three-quarters of prime-age non-working men without a high-school diploma are reporting disability benefits, while over four-fifths report access to government health-program support. These facts taken together would perhaps be unexceptionable if we did not already know, thanks to journalist Sam Quinones and others, that the Medicaid and Medicare programs have been widely abused for opioid consumption.
On the issue of mass incarceration:
America incarcerates a larger share of its population than virtually any other country on earth. But the vast dimensions of mass felonization are little known to the public, mainly because, scandalously, the U.S. government simply does not collect data on this demographic characteristic of the national population. One signal study attempting to reconstruct the stock and flow of the U.S. felon population, however, estimated that, as of 2010, nearly 20 million adults in America had been convicted of at least one felony. A little bit of arithmetic would suggest that the current U.S. felon and ex-felon population is now on the order of 24 million — meaning that well over 20 million felons and ex-felons today are not behind bars. Since sentenced criminals are disproportionately male, this means that over one in eight adult men in the civilian non-institutional population (the pool from which labor-force statistics are drawn) has a felony in his background — and the ratio for prime-age men today is most likely even higher than this. ... The "felonization effect" in reducing post-war prime-age male labor-force participation rates has not yet been calculated, but it is clearly significant in quantitative terms.
For a more in-depth dive into these issues, including lower wages for low-skill workers, as well as links to marriage, government benefits, and incarceration, a useful starting point is a three-paper symposium in the Spring 2019 issue of the Journal of Economic Perspectives (where I labor in the fields as Managing Editor):