How Much Does Discrimination Hurt the Economy? (Ep. 480)
Evidence from Nazi Germany and 1940’s America (and pretty much everywhere else) shows that discrimination is incredibly costly — to the victims, of course, but also the perpetrators. One modern solution is to invoke a diversity mandate. But new research shows that’s not necessarily the answer. Listen and follow our podcast on Apple Podcasts, Spotify, Stitcher, or wherever you get your podcasts. Below is a transcript of the episode, edited for readability. For more information on the people and ideas in the episode, see the links at the bottom of this post. * * *
Kilian Huber is an economics professor at the University of Chicago. His specialty?
He recently published a paper, along with two co-authors, that tries to answer a pair of important questions.
This question is even more pressing in the midst of a global reckoning around discrimination. And the second question:
You might think Huber was asking these questions in the context of the so-called Great Resignation. That’s the trend, driven by the Covid-19 pandemic, of people quitting their jobs to find something more meaningful. But no. That’s not the context Huber was thinking about. He was thinking about discrimination in the 1930’s in Germany — discrimination against Jewish business executives.
But in 1933, the Nazis came to power.
One element of that perversion was a complete and ultimately violent discrimination against Jews.
Just how central had Jews been to the German economy?
The story of Jewish accomplishment in early 1930’s Germany could have been told one way — as an astonishing triumph of a tiny minority. But Adolf Hitler turned it into a thoroughly different story, one of the most grotesque manifestations of human hatred. Many of those Jewish business executives, and their families, would be murdered in German concentration camps, part of a Nazi genocide that would total at least six million Jews. Given the enormity of the Holocaust, you might think that a researcher like Kilian Huber would study something more noteworthy than how the removal of these Jewish executives affected the Germany economy. But that’s exactly what he was interested in — for two reasons. One is that Huber grew up in Germany.
The second reason is simply that Huber studies the economics of discrimination. And while the Nazi purge of Jewish business executives may be a particularly heightened example, it is hardly the only example.
There are plenty of even more recent examples.
Today on Freakonomics Radio: what did Huber learn about the effects of discrimination on the German economy?
Also: the Jews in Germany, while a tiny minority, were an established presence who were removed from the economy. What about when a minority isn’t allowed to participate in the economy at all?
One way to fight discrimination today is to create diversity policies. How’s that working out?
The economics of discrimination: it’s even thornier than you’d think. * * * Anti-Semitism is one of the oldest recorded forms of what today we call discrimination — although the phrase “anti-Semitism” is actually a misnomer. “Semites” are people who shared a common language a couple millennia ago, including Jews and Arabs and many others. So an anti-Semite should theoretically also discriminate against the more than 400 million Arabs in the world today. Instead, the term is reserved for Jews, of whom there are only about 15 million. So when we say “anti-Semitism,” we should really just say “anti-Jewish.” Anti-Jewish sentiment has a long and infamous history — expulsions and exiles, periods of relative peace and prosperity punctuated by scapegoating and brutal assault. In the modern era, the scapegoating has often arisen from a simple question: how can this tiny minority produce such an outsized share of successful individuals in business, science, and elsewhere? Jews today make up about one-fifth of one percent of the global population but account for more than 20 percent of all Nobel Prizes. And remember what Kilian Huber told us about the German economy before the Nazi takeover.
How can this be explained? One factor is that education and literacy have always been central to the Jewish experience.
There’s also a propensity toward analytical reasoning, whether derived from religious tradition or Jewish culture. There’s an underlying acknowledgement in Judaism that life is complicated, that the world is in need of repair, and that the proper way to engage with an idea is — in the words of one ancient Jewish sage — to “turn it and turn it, for everything is in it.” In a book called Genius & Anxiety: How Jews Changed the World, 1847-1947, the author Norman Lebrecht puts forth another possible explanation for the high level of Jewish achievement: “Jews in the 19th century and the first half of the 20th century,” he writes, “are gripped by a dread that their rights to citizenship and free speech will be revoked … great minds are driven by a need to justify their existence in a hostile environment and to do it quickly, before the next pogrom.” Whatever the case, at the beginning of the 20th century in Germany, there were a great many Jews at the highest levels of industry, academia, the arts, and elsewhere. Kilian Huber, when he began his research, wasn’t aware of this.
Hitler came to power at a time of deep political and economic upheaval in Germany. In the aftermath of Germany’s defeat in World War I, the Allies had imposed heavy reparations. That burden now intersected with a worldwide recession, sending Germany even further into distress. When Hitler and other angry Germans started looking around for internal scapegoats, the Jews provided a familiar target.
Which quickly led to the removal of even the top executives of the most successful German firms, if they happened to be Jewish.
Wasserman, remember, was the C.E.O. of Deutsche Bank.
The sudden removal of Jewish business executives in Germany was, in essence, a perverse sort of natural experiment that allowed Huber and his co-authors — Volker Lindenthal and Fabian Waldinger — to address a couple issues that economists are always thinking about. First, what are the effects of discrimination on the economy in general? And, second, how much does a given senior executive actually matter to the success of a firm?
To answer these questions, you would need a lot of data.
The published paper is called “Discrimination, Managers, and Firm Performance: Evidence from ‘Aryanizations’ in Nazi Germany.”
So the Jewish managers who were expelled had valuable characteristics that were hard to replace. But how did their expulsion affect the firms?
This theory of Gary Becker’s came to be known as “taste-based discrimination.” Another model of discrimination is called “statistical discrimination.” The idea there is that an employer infers certain qualities about an individual based on their subgroup — like race, gender, sexual orientation, or religious affiliation. I asked Huber how these different models of discrimination — taste-based and statistical — intersect with his research.
Coming up, we put these theories of discrimination to the test — in America.
And if you want to hear another, totally different story about the German economy — the modern German economy — check out episode No. 304 from the Freakonomics Radio archive. It’s called “What Are the Secrets of the German Economy — and Should We Steal Them?” * * * There are many forms of discrimination, and many channels. So if you’re trying to measure the economic costs of a discriminatory act, you need to consider the particulars. The expulsion of Jewish business executives in Nazi Germany was an abrupt reversal of the status quo. The fact that it was abrupt allowed Kilian Huber to isolate and calculate the impact. For an economist like Huber, this alignment of timing and data is relatively rare.
More common, however, are forms of discrimination that prevent a discriminated group from fully assimilating into society and the economy altogether. Consider, for instance, the story of the great American boxer Joe Louis. He was a Black man, born in Alabama, who moved with his family to Detroit when he was about 12.
That is Silke-Maria Weineck.
Szymanski is a sports economist, by the way. Also, Weineck’s colleague at Michigan — and her partner, as well.
As you can perhaps tell from her accent, Weineck — like Kilian Huber — is German.
The book she and Szymanski wrote is called City of Champions: A History of Triumph and Defeat in Detroit. Weineck’s research led her to this conclusion:
In examining the history of sports in Detroit, Weineck found that sport was in constant collision with race and with industry — especially the auto industry.
But what Joe Louis was primarily was a boxer, at a time when boxing was the most popular sport in the world. By his mid-twenties, he’d become the heavyweight champion of the world, a title he’d hold for nearly 12 years. He was known as the Brown Bomber, and he was an icon.
One reason Joe Louis became so popular in America was because of a pair of fights he had with Max Schmeling, from Nazi Germany. The first fight took place relatively early in Louis’s career, in 1936; it was at Yankee Stadium in New York, and Schmeling won in a twelfth-round knockout. The rematch took place in 1938, again at Yankee Stadium. By now, Louis was the heavyweight champion. By now, the Nazi regime had overtaken Austria and was well on its way to war. Inside Germany, the purge of Jewish business executives, scientists, and others was also well underway. Schmeling himself apparently did not embrace Nazism, but this nuance was lost in the buildup to the second Schmeling-Louis fight.
Max Schmeling was seen as not just Hitler’s favorite boxer, but practically as an embodiment of Hitler’s regime.
So Joe Louis was an American hero, and he kept the world heavyweight title for another 10 years. By 1948, he wanted to hang up his gloves: the war was over; Louis was in his mid-thirties. So, what’d the world’s most beloved athlete want to do for his second act?
As Weineck learned in her research, Joe Louis met personally with Henry Ford II, who was by now the company’s C.E.O. Louis now lived in Chicago, and that’s where he wanted to open a dealership.
“To test the waters” because Joe Louis would be the first Black person to run a Ford dealership.
With the help of an archivist at the Benson Ford Research Center, Weineck was able to track down this file. Its existence was apparently unknown to any previous biographers of Joe Louis.
The file included 32 memos from Ford dealers and district managers around the country. They were responding to a question from Ford headquarters.
Here, from the archive, are some of the excerpted responses:
Now, there may have been other reasons to deny Joe Louis a Ford dealership besides the fact he was Black. But the rejections — at least the ones that found their way into the archive — were united in their focus on race. I asked Weineck whether Ford or the other Big Three automakers discussed having Black dealers if only to appeal to Black buyers.
This goes back to the Gary Becker theory of discrimination: when firms discriminate, they’re leaving money on the table. There’s also the theory that diversity creates opportunity. Kilian Huber again:
It is of course hard to say what sort of economic position any one person might achieve. Joe Louis was one of the best boxers ever. You could imagine his athletic afterlife would have been much better if he’d simply been white. As it was, he fell deep into debt — to the I.R.S. especially — and drug addiction.
He was 66 years old.
According to the National Association of Minority Auto Dealers, fewer than two percent of Ford dealerships have a Black owner; barely five percent are owned by any minority. A recent paper by three economists looked at discriminatory hiring within Fortune 500 companies. They found that five of the top 10 discriminatory firms were auto retailers. These days, of course, many firms and institutions are trying to undo and reverse the discrimination that’s been standard operating procedure for most of history. Many institutions have adopted a D.E.I. program — that stands for “diversity, equity, and inclusion.” This can often include a diversity mandate, with set targets for minority hires. This suggests a fundamental economic question: if discrimination can be costly for firms, what sort of benefits are created by diversity?
Sophie Calder-Wang is an economist at the Wharton School at the University of Pennsylvania. She and two co-authors — Paul Gompers and Kevin Huang — recently published a study examining this question.
What Calder-Wang would be measuring, then, was the performance of groups that were assembled by the algorithm versus groups where the members chose themselves.
The student population was a relatively diverse mix of men and women from various ethnic and racial backgrounds. Calder-Wang found that when students could choose collaborators for themselves, the groups were significantly less diverse than when the algorithm created intentionally diverse groups. Given how human beings work, you probably don’t find this surprising. So how did the organically chosen groups perform, compared to the randomly assigned groups — or what Calder-Wang calls the “forced diversity” groups?
In other words, when people were allowed to choose on their own:
Sophie Calder-Wang has written another paper that gives some reason for optimism. In an analysis of venture capitalists — and that’s a field that is overwhelmingly male — she found that “parenting more daughters leads to an increased propensity to hire female partners.” She also found that greater gender diversity — not forced by an algorithm, but driven by the experience of having a daughter — “improves deal and fund performances.”
I thought back to Kilian Huber’s research about the Jewish business executives in Germany — expelled first from their jobs, then their homes, many of them ultimately murdered by the Nazis. It is a highly imperfect parallel to compare that campaign of brutality to the sort of discrimination that has shaped our labor markets. Still, I asked Huber whether his research suggests any policy thoughts for the modern era.
I also asked Huber how he’d been taught about the Nazi era in school.
I asked the same question of Silke-Maria Weineck, who also grew up in Germany.
Thanks to Kilian Huber, Silke-Maria Weineck, and Sophie Calder-Wang for sharing their research and insights; thanks also to the archivist Sam Rood for sharing with Weineck that file of letters about Joe Louis. * * * Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison Craiglow, Greg Rippin, Joel Meyer, Tricia Bobeda, Mary Diduch, Ryan Kelley, Emma Tyrrell, Lyric Bowditch, Jasmin Klinger, Eleanor Osborne, and Jacob Clemente. Our theme song is “Mr. Fortune,” by the Hitchhikers; the rest of the music this week was composed by Luis Guerra. You can follow Freakonomics Radio on Apple Podcasts, Spotify, Stitcher, or wherever you get your podcasts. Here’s where you can learn more about the people and ideas in this episode: SOURCES
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The post How Much Does Discrimination Hurt the Economy? (Ep. 480) appeared first on Freakonomics. Via Finance http://www.rssmix.com/via Blogger http://annadesuza.blogspot.com/2021/10/how-much-does-discrimination-hurt.html October 27, 2021 at 11:18PM
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