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economic history
Now Published: Prohibition and Percolation
My new article, “Prohibition and Percolation: The Roaring Success of Coffee During US Alcohol Prohibition”, is now published in Southern Economic Journal. It’s the first statistical analysis of coffee imports and salience during prohibition. Other authors had speculated that coffee substituted alcohol after the 18th amendment, but I did the work of running the stats, creating indices, and checking for robustness.
My contributions include:
- National and state indices for coffee and coffee shops from major and local newspapers.
- A textual index of the same from book mentions.
- I uncover that prohibition is when modern coffee shops became popular.
- The surge in coffee imports was likely not related to trade policy or the end of World War I
- Both demand for coffee and supply increased as part of an intentional industry effort to replace alcohol and saloons.
- An easy to follow application of time series structural break tests.
- An easy to follow application of a modern differences in differences method for state dry laws and coffee newspaper mentions.
- Evidence from a variety of sources including patents, newspapers, trade data, Ngrams, naval conflicts, & Wholesale prices.
Generally, the empirical evidence and the main theory is straightforward. I learned several new empirical methods for this paper and the economic logic in the robustness section was a blast to puzzle-out. Finally, it was an easy article to be excited about since people are generally passionate about their coffee.
Bartsch, Zachary. 2025. “Prohibition and Percolation: The Roaring Success of Coffee During US Alcohol Prohibition.” Southern Economic Journal, ahead of print, September 22. https://doi.org/10.1002/soej.12794.
Manufacturing Jobs of the Past
This post is co-written with John Olis, History major at Ave Maria University.
There is a popular myth that manufacturing jobs of the past provided a leg-up to young people. The myth goes like this. Manufacturing jobs had low barriers to entry so anyone could join. Once there, the job paid well and provided opportunities for fostering skills and a path toward long-term economic success. There is more to the myth, but let’s stop there for the moment. Is the myth true?
One of my students, John Olis, did a case study on Connecticut in 1920-1930 using cross sectional IPUMS data of white working age individuals to evaluate the ‘Manufacturing Myth’. We are not talking causal inference here, but the weight of the evidence is non-zero. The story above has some predictions if not outright theoretical assertions.
- Manufacturing jobs paid better than non-manufacturing jobs for people with less human capital.
- Manufacturing jobs yielded faster income growth than non-manufacturing jobs.
- Implicitly, manufacturing jobs provided faster income growth for people with less human capital.
Using only one state and two decades of data obviously makes the analysis highly specific. Expanding the breadth or the timescale could confirm or falsify the results. But historical Connecticut is a particularly useful population because 1) it had a large manufacturing sector, 2) existed prior to the post WWII boom in manufacturing that resulted from the destruction of European capacity, and 3) had large identifiable populations with different levels of human capital.
Who had less human capital on average? There are two groups who are easy to identify: 1) immigrants and 2) illiterate people. Immigrants at the time often couldn’t speak English with native proficiency or lacked the social norms that eased commercial transactions in their new country (on average, not always). Illiterate people couldn’t read or write. Therefore, having a comparative advantage in manual labor, we’d expect these two groups to be well served by manufacturing employment vs the alternative.
Being cross-sectional, the individuals are not linked over time, so we can’t say what happened to particular people. But we can say how people differed by their time and characteristics. Interaction variables help to drill-down to the relevant comparisons. There are two specifications for explaining income*, one that interacts manufacturing employment with immigrant status and one that interacts the status of illiteracy. The baseline case is a 1920 non-operative native or literate person. Let’s start with the below snapshot of 1920. The term used in the data is ‘operative’ rather than ‘manufacturer’, referring to people who operate machines of one sort or another. So, it’s often the same as manufacturing, but can also be manufacturing-adjacent. The below charts illustrate the effect of lower human capital in pink and the additional subpopulation impacts of manufacturing in blue.
In the left-hand specification, native operatives made 2.2% less than the baseline population. That is, being an operative was slightly harmful to individual earnings. Being an immigrant lowered earnings a substantial 16.8%, but being an operative recovered most of the gap so that immigrant operatives made only 6.1pp less than the baseline population and only 3.9pp less than native operatives. In the right-hand specification, unsurprisingly, being illiterate was terrible for one’s earnings to the tune of 23.4pp. And while being an operative resulted in a 1.2% earnings boost among natives, being an operative entirely eliminated the harm that illiteracy imposed on earnings.
Both graphs show that manufacturing had tiny effects for a typical native or literate individual. But manufacturing mattered hugely for people who had less human capital. So, prediction 1) above is borne out by the data: Manufacturing is great for people with less-than-average human capital.
But what about earnings *growth*? See below.
Continue readingCoffee’s Supply & Demand Dance during Prohibition
I’ve written about coffee consumption during US alcohol prohibition in the past. I’ve also written about visualizing supply and demand. Many. Times. Today, I want to illustrate how to use supply and demand to reveal clues about the cause of a market’s volume and price changes. I’ll illustrate with an example of coffee consumption during prohibition.
The hypothesis is that alcohol prohibition would have caused consumers to substitute toward more easily accessible goods that were somewhat similar, such as coffee. To help analyze the problem, we have the competitive market model in our theoretical toolkit, which is often used for commodities. Together, the hypothesis and theory tell a story.
Substitution toward coffee would be modeled as greater demand, placing upward pressure on both US coffee imports and coffee prices. However, we know that the price in the long-run competitive market is driven back down to the minimum average cost by firm entry and exit. So, we should observe any changes in demand to be followed by a return to the baseline price. In the current case, increased demand and subsequent expansions of supply should also result in increasing trade volumes rather than decreasing.
Now that we have our hypothesis, theory, and model predictions sorted, we can look at the graph below which compares the price and volume data to the 1918 values. While prohibition’s enforcement by the Volstead act didn’t begin until 1920, “wartime prohibition” and eager congressmen effectively banned most alcohol in 1919. Consequently, the increase in both price and quantity reflects the increased demand for coffee. Suppliers responded by expanding production and bringing more supplies to market such that there were greater volumes by 1921 and the price was almost back down to its 1918 level. Demand again leaps in 1924-1926, increasing the price, until additional supplies put downward pressure on the price and further expanded the quantity transacted.
We see exactly what the hypothesis and theory predicted. There are punctuated jumps in demand, followed by supply-side adjustments that lower the price. Any volume declines are minor, and the overall trend is toward greater output. The supply & demand framework allows us to image the superimposed supply and demand curves that intersect and move along the observed price & quantity data. Increases toward the upper-right reflect demand increases. Changes plotted to the lower-right reflect supply increases. Of course, inflation and deflation account for some of the observed changes, but similar demand patterns aren’t present in the other commodity markets, such as for sugar or wheat. Therefore, we have good reason to believe that the coffee market dynamics were unique in the time period illustrated above.
*BTW, if you’re thinking that the interpretation is thrown off by WWI, then think again. Unlike most industries, US regulation of coffee transport and consumption was relatively light during the war, and US-Brazilian trade routes remained largely intact.
Manufacturing Compensation in the Long Run
You may have heard that there is a new viral song which deals with a few economic issues. Noah Smith has a good analysis of “Rich Men North of Richmond,” which he mostly finds to be incorrect in its analysis (for example, of welfare policy). But Smith does say that the song has a point: manufacturing wages haven’t performed well in recent years. Not only has pay for factory workers “[lagged] the national average in recent years,” for those workers in Virginia, it’s lower in real terms than in 2010.
Well that all doesn’t sound good! Smith is only going back to about 2000 with the data he shows. What if we took a longer run perspective? What if we took a really long-run perspecitive?
Here’s wages for blue-collar factor workers that goes back to 1939 in the US:
The wage data (for manufacturing production workers) is from BLS and the PCE price index is from the BEA. What do you notice as you look at the data?
First, it is true that the last 20 years or so hasn’t been great. Only about 8% cumulative growth since 2002. That’s not great!
But as you look back further, you’ll notice that gains are substantial. Compared to what some might consider the “golden age” of manufacturing wages, the early 1950s, real wages have roughly doubled. It’s true, the growth rate from 1939-1973 is much, much better than the following 50 years. Wouldn’t it be nice if that growth rate had continued! But no doubt you’ve seen many memes saying something like “in the 1950s you could support a family on one high-school graduate income, but not today!” This data suggests that view of the 1950s is a little distorted by nostalgia.
One final thing to note: we might think that one big change in recent decades is that a lot more compensation goes to benefits, rather than wages. There’s actually a total compensation series for blue-collar workers going all the way back to 1790:
The total compensation data, as well as the CPI data that I used to inflation-adjust the figures (to 2022 dollars), comes from the fantastic resource Measuring Worth. This is a total compensation measurement, so it includes benefits, but the source data tells us that up until the late 1930s, it’s really just a wage measure. So potentially we could splice this together with the above chart, to get a “wage only” series covering the entire history of the US.
However, when we look at total compensation, we still see the post-1970s stagnation. Real compensation is roughly the same as about 1977. Yikes! Note here that we’re using the CPI, since the PCE index only goes back to 1929, and the CPI tends to overstate inflation (yes, that’s right, sorry CPI truthers). Still, it’s not the most optimistic picture.
Or isn’t it? With all of the automation and global competition in manufacturing coming on board in the past 50 years, perhaps our baseline is that things could have been much worse. In any case, if we look at total compensation, it’s currently about double what it was in the post-WW2 era. That’s even with the dip in 2022 due to high CPI inflation.
Wages and compensation of blue-collar productions workers have indeed been growing slowly for the past few decades. That much is true. On the other hand, they are still among the highest they have ever been in history, over 50 times (not 50%, 50 times!) higher than at the birth of this nation. This ranks them as probably the highest wages anywhere in world history for an occupation that doesn’t require an advanced degree. That history is worth knowing.
Prohibition Reversals
We have all heard of the prohibition era. Popularly, it refers to the period from 1920-1933 during which it was illegal to sell, transport, and import alcohol in the US. National prohibition was enacted by the 18th amendment and repealed by the 21st amendment. That’s the basic picture.
But did you know that there were state alcohol prohibitions prior to the national one? In fact, there were 3 major waves of state alcohol prohibitions. The first was in the 1850s, the 2nd was in the 1880s, and then the 3rd preceded the 18th amendment. The image below illustrates the number of states that had statewide dry policies. You can see the first two waves and then the tsunami just prior to 1920.
Continue reading“Good Money at the Time”
On summer vacation, I recently visited Mount Rushmore. It’s amazing structure, and the story of its construction is as impressive as the monument itself. Much of the story you learn when visiting is the story of its creation. As an economist, of course seeing the following display with wage data got me very excited:
While the sign says that laborers made 30 cents per hour, searching online it appears that 50 cents was more common. More skilled workers, such as assistant sculptors, made $1.50 per hour. These were, as the sign says, “good wages” for that time. In the economy generally, production workers made around 50 cents per hour our as well around that time period, and most of the construction of Rushmore was during the Depression (some of the workers were WPA funded), so having any job, much less one that paid pre-Depression wages, was certainly a good one.
How does this compare to wages today? This is always a tricky question, as I have documented on this blog several times before, but the most straight forward approach (and good first approximation) is a simple CPI inflation adjustment. Using 1929 as the baseline year, when construction was in full swing, 30 cents an hour is roughly $5 today, 50 cents per hour is close to $9, and $1.50 would be about $26.50. That doesn’t sound too bad!
The best comparison I like to use is BLS’s average hourly earnings for private production and non-supervisory workers. Averages aren’t perfect, but this measure excludes management occupations that will be distorting the average. In May 2023, that wage was $28.75 per hour. So the average worker today earns 3-6 times as much per hour as these “good paying jobs” in the late 1920s and the Depression. And, as the Rushmore signage notes, these jobs were seasonal. Their off-season jobs probably paid even less.
The wage of the assistant sculptor does compare well with average wages today, but that pay was unusual for the time and was likely a highly skilled worker. The only record I can find of anyone making that much at Rushmore was Lincoln Borglum, the son of the main sculptor Gutzon Borglum. Lincoln oversaw the completion of the project after Gutzon’s death, and it was only in later years on the project that his pay was increased to $1.50 per hour.
For the typical laborer on Rushmore, having a good job was indeed good to have, but the wages pale in comparison to a typical worker today.
Minor Investment
Gary Becker, the Nobel laureate in economics, applied economic reasoning to social circumstances and particularly to families. He argued that children are a normal consumption good, and people consume more children with higher incomes. However, he also emphasized a quantity-quality trade-off. More children in a family means fewer resources and attention for each child. Higher-income couples may opt to invest in classes, training, and spend more time with a unitary child rather than increasing the number of children.
However, goods have multiple attributes and children do not merely provide a stream of consumption value while in the household. They offer access to future resources when they become employed themselves. Having more children or higher-quality children increases the economic benefits that older parents can enjoy, such as more help with household activities and the ability to travel with their adult children. Old-age benefits such as social security now serve the function of insulating people from their prior investments in future consumption.
Continue readingWhat is $100 from the Late Nineteenth Century Worth Today?
Recently I was watching a lecture by historian Marcus Witcher which addressed the treatment of African Americans in the Jim Crow era. Witcher mentioned the “pig laws,” which were severe legal punishments given to Blacks in the South for what used to be petty crimes. Such as stealing a pig. He mentioned that the fines could be anywhere from $100 to $500, and then he asked me directly: how much is $100 adjusted for inflation today?
My initial, immediate answer was about $3,000. That turns out to be almost exactly correct for around 1880. But the more I thought about it, the more I realized that this wasn’t a satisfactory answer. We were trying to put $100 from a distant past year in context to understand how much of a burden this was for African Americans at the time. Does knowing that adjusted for inflation it’s about $3,000 give us much context?
Continue readingIt’s Never Good News When Deposit Insurance is in the News
As you may have heard, there have been a few bank failures in the US in the past week. This has led ordinary people to start refreshing their memory about exactly what “deposit insurance” is and what it means for them. It has also led regulators, politicians, and economists to start refreshing their memory about the social purpose of deposit insurance, which is to stabilize the banking system. There are lots of aspects of the bank failures and deposit insurance to consider, but I think we can all agree that when ordinary people are thinking about this topic, bad things are going on.
While I can’t find a systematic survey of economists on this topic, my guess is that most economists would agree with the statement “on balance, deposit insurance promotes stability in the financial system.”
But there is a minority view, and one with (in my opinion) considerable historical support. Deposit insurance could potentially be destabilizing, since it has the potential (like any form of insurance) to create moral hazard. By lowering the cost of making mistakes, we would expect more mistakes. The cost need not be lowered all the way to zero for moral hazard to be a problem (bank owners still have some skin in the game), but the cost is certainly lower. These problems may be even more of a threat to the financial system than other areas of life covered by insurance.
That’s the theory. What’s the evidence?
My favorite paper on this topic is a 1990 article by Charles Calomiris called “Is Deposit Insurance Necessary? A Historical Perspective.” Not only does it conclude that deposit insurance isn’t necessary, but even more: it may be destabilizing. (You can also read a version of the article intended for a more general audience that Calomiris wrote for the Chicago Fed.)
Continue reading
Economist Writing Every Day 