Monday, January 17, 2011

Macroeconomics and the Black Community

Yesterday I was thinking about a puzzling question - why are racial disparities primarily thought of by economists as fundamentally microeconomic problems, and not as macroeconomic problems?

The reason why you would want a microeconomic theory (or theories) of racial disparity is quite obvious. Discrimination, which always looms large in the diagnosis, is a microeconomic phenomenon. Human capital investment and education is likewise a traditional labor problem. Many have highlighted the importance of wealth inequality in perpetuating disparities, and those sorts of saving, investing, and asset building questions are similarly microeconomic. There's also still a tendency to talk about parenting, culture, crime, etc. - all of which are best engaged at the microeconomic level. You can't do without microeconomics in thinking about these questions, but it still seems like there is a notable gap.

What we're dealing with is a situation of a persistent underemployment equilibrium in the black community. A persistent underinvestment equilibrium. A persistent failure to utilize productive capacity that happens to find itself in darker skin. That sounds like a macroeconomic problem to me, and a fertile area for thinking about solutions.

A lot of groundwork is laid. There are shelves of research on labor mismatch and black unemployment, and as the recent Nobel laureates demonstrate, matching is a fundamental component of modern macroeconomics. Normal work with the matching literature is hard, though, because how do you define a job vacancy? It's easy to define a black job seeker and the duration of their search process, but you'd have to think about how to conceptualize job vacancies. On the one hand there are clearly not "black vacancies" and "white vacancies" like there might have been several decades ago. But you also don't want to assume an equivalence of job offer rates.

More traditional macroeconomic models are hard to work through too. I was sketching out a basic IS-LM model last night, and I came up with some plausible reasons to expect an underemployment equilibrium for blacks but not whites, but it was unclear how to model some things. I relied on varying the slope of the investment demand curve and the liquidity preference curve between the black and the white community for my result - but other questions remain. Do the two communities share the same money market? The same rate of interest? If we think credit rationing is important in some communities the answer probably isn't strictly "yes", but it's unclear to me at least how to take all this into account.

I also took some time to read through the report of the 1966 White House "Conference To Fulfill These Rights", which discussed practical steps to help the black community benefit from what was achieved legislatively by the Civil Rights movement. They do mention traditional Keynesian responses to black unemployment, specifically a federal jobs guarantee and public works program. But I can't help feeling that this has more of a welfare function than a full employment function. Any improvement in effective demand from such a policy would be divided between the black and the white community. It's precisely the problem that you have in a currency union with open economies where one depressed economy implements fiscal policy and the other economies in the currency union don't. The benefits are going to leak out. This isn't a reason to oppose a jobs guarantee, but it is a reason to be hesitant about its benefits as a macroeconomic policy.

Where to go from here? Well an article in The Nation from last year suggests I oughta pick up King's last book, Where Do We Go From Here: Chaos or Community?, in which the author suggests:

"King articulated a Keynesian, demand-side critique of the American marketplace. He argued, "We have so energetically mastered production that we now must give attention to distribution." Unless working Americans and the poor were able to obtain good jobs and increase their purchasing power--their ability to pump money back into the economy--it would be sapped of its dynamism. "We must create full employment or we must create incomes," King wrote. "People must be made consumers by one method or the other."

King criticized Johnson's War on Poverty for being too piecemeal. While housing programs, job training and family counseling were not themselves unsound, he wrote that "all have a fatal disadvantage. The programs have never proceeded on a coordinated basis.... At no time has a total, coordinated and fully adequate program been conceived."

Rather than continuing with "fragmentary and spasmodic reforms," King advocated that the government provide full employment. "We need to be concerned that the potential of the individual is not wasted," he wrote. "New forms of work that enhance the social good will have to be devised for those for whom traditional jobs are not available.""

I think another way to move forward is for me to look more into open economies in currency unions, because that's precisely the circumstance of the black community.

Anyone else have any thoughts or know of any work that has been done?

15 comments:

  1. A jobs guarantee? We already tried that in the USSR. They pretend to pay you, while we pretend to work.

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  2. What I find interesting is just how far we've moved away from promoting anything like what King wanted - and that is for the best. Nothing like that is even remotely on the table and no one is is really advocating it. Yeah, that's right, the libertarians and conservatives have shifted the agenda that much since the 1960s.

    Anyway, blacks are doing far better than they were in the 1960s; what we are witnessing since the 1860s is the normal long term course of events that emancipated people have generally experienced through the course of human history.

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  3. Now one thing that would do a lot of good for the "black community" is to end the drug war - John McWhorter has been writing on this as I recall.

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  4. Oh, and I got pass this on (even though it is OT): http://reason.com/archives/2011/01/17/justice-for-sal

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  5. End the drug war, repeal the minimum wage, yadda yadda. There is no inherent deficiency in black labor. There is only state-erected walls to achieving efficiency.

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  6. So it's simply a micro question Mattheus?

    Actually I think the drug war has very interesting implications for liquidity preference.

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  7. Mattheus,

    Well said. We could also include the plethora of useless licensing, etc. laws, which protect the jobs of insiders. The left, liberals, etc. have done their level best to attack the right to work and labor as one sees fit.

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  8. Xenophon -
    You know I'm no fan of licensing and unionization - but this doesn't seem to explain the persistence of disparities across all parts of the country.

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  9. I think it's more of a macro question, Daniel. The minimum wage - which favors white labor over black - affects the whole country.

    There are a plethora of state-legislated and union enacted policies that deprive blacks of opportunities for remunerative labor.

    It could honestly be something as simple as the war on drugs, or rent control laws. This was something I covered in a Sociology/Economics class here.

    If blacks were not incarcerated at the rate they are (because of drugs), they would have more time to raise two-parent families, devote more resources to education, put higher emphasis on proper child-rearing - and probably raise black test scores and learning ability over a generation. This would certainly have an impact on black labor productivity.

    But like I said before, I don't believe it's inherently a "black" thing in that they are inferior or different in any important way. A lot of unemployed blacks live in the inner cities, which are being destroyed by rent control laws and the war on drugs, and these destroy any incentive or opportunity to provide education for black youths.

    Xeno,

    Of course, there are licensing issues and union policy that inhibit the the free mobility of labor. But that doesn't fully account for the disparity in black (and I would venture to guess, hispanic as well) unemployment. That affects all newcomers equally.

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  10. Disparity will always exist; that isn't really the problem.

    http://www.youtube.com/watch?v=okHGCz6xxiw

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  11. Unrelated, but: http://mises.org/Community/forums/t/22126.aspx

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  12. "End the drug war, repeal the minimum wage, yadda yadda. There is no inherent deficiency in black labor. There is only state-erected walls to achieving efficiency."

    Agreed. But I think it would be even more effective if all the various forms of welfare were repealed. Food stamps, single mother payments, housing..... There's a tremendous amount of aid that goes to inner city black communities (among other communities as well). This has a very clear and logical consequence. The opportunity cost of taking on risky and unlawful behavior is tremendously lowered. In the absence of such aid, if a young man decides to engage in activity with a high chance of a bad outcome (for example going to jail), he risks his children starving, his brothers and sisters starving, and other other family members. With so much aid already provided, this type of opportunity cost doesn't exist. Moreover, it doesn't make sense for a young male to want to have children with one woman, or for a woman to only seek a one male, as that would only make sense if the female and male needed to cooperate to raise their child. This is no longer necessary with sufficient aid.

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  13. I am impressed by the Lyndon Johnson's War On Poverty program, because it seems to be an amazing anachronism.

    Right after Americans achieved amazing postwar resurgence and right after it had the highest wages and industrial production in the world, out of nowhere comes a War on Poverty! Americans during the 19th century and Great Depression had weathered far greater poverty with ease and had soared past income groups with a street beggar like Woolworth becoming a millionaire...in the 1900s. And THEN you start a War on Poverty?

    Black American social mobility was so rapid that number of black Americans below the poverty line fell from 80% to 30% in 60 years from 1900 to 1960, as per famous black economist Thomas Sowell. And then they worry about jobs for black people?

    It's like a rescue operation after an earthquake, where rescuers are called, and by the time they turn up, civilians have already rescued most of those trapped under the debris. And the rescue operation is easier, only because the civilians have sorted out the debris.

    All that aside, what do you folks think about the idea that if accumulating of savings for future generations is a means for social mobility, then the distinguished King is not entirely right in advocating that people should be made consumers one way or another?

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  14. Prateek -
    First, there weren't much of any anti-poverty programs in earlier times. Sowell's use of that fact to highlight black poverty is a little odd. What would be a more sensible response for someone finding themselves in the 1960s? To think "well, we didn't do anything before so it would be absolutely absurd to try to do anything now". The critique assumes some sort of continuity of consciousness, as if the person who "chose" not to have an anti-poverty program in 1900 is the same person who "chose" to have an anti-poverty program in 1960.

    Part of the difference was a major migration of blacks to the cities. Rural southern leaders were not inclined to provide this sort of thing in the way that city leaders concerned about it. The very act of migration plays a major role in the increase in black living standards, but it also introduced a new political dynamic that made it more likely that change would occur.

    As for that final sentence of yours, I disagree. You would be right if the way to increase savings was just to increase the savings rate. You would be wrong if the way to increase savings was to maintain or lower the savings rate and increase income.

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