Monday, January 16, 2017

Some Economics for Martin Luther King Jr. Day

On November 2, 1983, President Ronald Reagan signed the legislation establishing a federal holiday for the birthday of Martin Luther King Jr., to be celebrated each year on the third Monday in January. As the legislation that passed Congress said: "such holiday should serve as a time for Americans to reflect on the principles of racial equality and nonviolent social change espoused by Martin Luther King, Jr.." Of course, the case for racial equality stands fundamentally upon principles of justice, not economics. But here are five economics-related thoughts for the day excerpted from past posts, mostly but not entirely during the last year.

1) Inequalities of race and gender impose large economic costs on society as a whole, because one consequence of discrimination is that it hinders people in developing and using their talents. In "Equal Opportunity and Economic Growth" (August 20, 2012), I wrote:


A half-century ago, white men dominated the high-skilled occupations in the U.S. economy, while women and minority groups were often barely seen. Unless one holds the antediluvian belief that, say, 95% of all the people who are well-suited to become doctors or lawyers are white men, this situation was an obvious misallocation of social talents. Thus, one might predict that as other groups had more equal opportunities to participate, it would provide a boost to economic growth. Pete Klenow reports the results of some calculations about these connections in "The Allocation of Talent and U.S. Economic Growth," a Policy Brief for the Stanford Institute for Economic Policy Research.

Here's a table that illustrates some of the movement to greater equality of opportunity in the U.S. economy. White men are no longer 85% and more of the managers, doctors, and lawyers, as they were back in 1960. High skill occupation is defined in the table as "lawyers, doctors, engineers, scientists, architects, mathematicians and executives/managers." The share of white men working in these fields is up by about one-fourth. But the share of white women working in these occupations has more than tripled; of black men, more than quadrupled; of black women, more than octupled.

Moreover, wage gaps for those working in the same occupations have diminished as well. "Over the same time frame, wage gaps within occupations narrowed. Whereas working white women earned 58% less on average than white men in the same occupations in 1960, by 2008 they earned 26% less. Black men earned 38% less than white men in the typical occupation in 1960, but had closed the gap to 15% by 2008. For black women the gap fell from 88% in 1960 to 31% in 2008."

Much can be said about the causes behind these changes, but here, I want to focus on the effect on economic growth. For the purposes of developing a back-of-the-envelope estimate, Klenow builds up a model with some of these assumptions: "Each person possesses general ability (common to
all occupations) and ability specific to each occupation (and independent across occupations). All groups (men, women, blacks, whites) have the same distribution of abilities. Each young person knows how much discrimination they would face in any occupation, and the resulting wage they would get in each occupation. When young, people choose an occupation and decide how
much to augment their natural ability by investing in human capital specific to their chosen

With this framework, Klenow can then estimate how much of U.S. growth over the last 50 years or so can be traced to greater equality of opportunity, which encouraged many in women and minority groups who had the underlying ability to view it as worthwhile to make a greater investment in human capital.

"How much of overall growth in income per worker between 1960 and 2008 in the U.S. can be explained by women and African Americans investing more in human capital and working more in high-skill occupations? Our answer is 15% to 20% ... White men arguably lost around 5% of their earnings, as a result, because they moved into lower skilled occupations than they otherwise would have. But their losses were swamped by the income gains reaped by women and blacks."

At least to me, it is remarkable to consider that 1/6 or 1/5 of total U.S. growth in income per worker may be due to greater economic opportunity. In short, reducing discriminatory barriers isn't just about justice and fairness to individuals; it's also about a stronger U.S. economy that makes better use of the underlying talents of all its members.


2) An "audit study" of housing discrimination involves finding pairs of people, giving them similar characteristics (job history, income, married/unmarried, parents/not parents) and sending them off to buy or rent a place to live. In "Audit Studies and Housing Discrimination" (September 21, 2016), I wrote in part:

Cityscape magazine, published by the US Department of Housing and Urban Development three times per year, has a nine-paper symposium on "Housing Discrimination Today" in the third issue of 2015. The lead article by Sun Jung Oh and John Yinger asks: "What Have We Learned From Paired Testing in Housing Markets?" (17: 3, pp. 15-59). ...

There have been four large national-level paired testing studies of housing discrimination in the US in the last 40 years. "The largest paired-testing studies in the United States are the Housing Market Practices Survey (HMPS) in 1977 and the three Housing Discrimination Studies (HDS1989, HDS2000, and HDS2012) sponsored by the U.S. Department of Housing and Urban Development (HUD)." Each of the studies were spread over several dozen cities. The first three involved about 3,000-4,000 tests; the 2012 study involved more than 8,000 tests. The appendix also lists another 21 studies done in recent decades.

Overall, the findings from the 2012 study find ongoing discrimination against blacks in rental and sales markets for housing. For Hispanics, there appears to be discrimination in rental markets, but not in sales markets. Here's a chart summarizing a number of findings, which also gives a sense of the kind of information collected in these studies.

However, the extent of housing discrimination in 2012 has diminished from previous national-level studies. Oh and Yinger write (citations omitted): "In 1977, Black homeseekers were frequently denied access to advertised units that were available to equally qualified White homeseekers. For instance, one in three Black renters and one in every five Black homebuyers were told that there were no homes available in 1977. In 2012, however, minority renters or homebuyers who called to inquire about advertised homes or apartments were rarely denied appointments that their White counterparts were able to make.

3) Many of the communities that suffer the most from crime are also the communities where the law-abiding and the law-breakers both experience a heavy law enforcement presence, and where large numbers of young men end up being incarcerated. Here are some slices of my discussion from "Inequalities of Crime Victimization and Criminal Justice" (May 20, 2016):

And law-abiding people in some communities, many of them predominantly low-income and African-American, can end up facing an emotionally crucifying choice. One one side, crime rates in their community are high, which is a terrible and sometimes tragic and fatal burden on everyday life. On the other side, they are watching a large share of their community, mainly men, becoming involved with the criminal justice system through fines, probation, fines, or incarceration. Although those who are convicted of crimes are the ones who officially bear the costs, in fact the costs when someone needs to pay fines, or can't earn much or any income, or can only be visited by making a trip to a correctional facility are also shared with families, mothers, and children. Magnus Lofstrom and Steven Raphael explore these questions of "Crime, the Criminal Justice System, and Socioeconomic Inequality" in the Spring 2016 issue of the Journal of Economic Perspectives. ...

It's well-known that rates of violent and property crime have fallen substantially in the US in the last 25 years or so. What is less well-recognized is that the biggest reductions in crime have happened in the often predominantly low-income and African-American communities that were most plagued by crime. Loftrom and Raphael look at crime rates across cities with lower and higher rates of poverty in 1990 and 2008:
"However, the inequality between cities with the highest and lower poverty rates narrows considerably over this 18-year period. Here we observe a narrowing of both the ratio of crime rates as well as the absolute difference. Expressed as a ratio, the 1990 violent crime rate among the cities in the top poverty decile was 15.8 times the rate for the cities in the lowest poverty decile. By 2008, the ratio falls to 11.9. When expressed in levels, in 1990 the violent crime rate in the cities in the upper decile for poverty rates exceeds the violent crime rate in cities in the lowest decile for poverty rates by 1,860 incidents per 100,000. By 2008, the absolute difference in violent crime rates shrinks to 941 per 100,000. We see comparable narrowing in the differences between poorer and less-poor cities in property crime rates. ... "
It remains true that one of the common penalties for being poor in the United States is that you are more likely to live in a neighborhood with a much higher crime rate. But as overall rates of crime have fallen, the inequality of greater vulnerability to crime has diminished.

On the other side of the crime-and-punishment ledger, low-income and African-American men are more likely to end up in the criminal justice system. Lofstrom and Raphael give sources and studies for the statistics: "[N]nearly one-third of black males born in 2001 will serve prison time at some point in their lives. The comparable figure for Hispanic men is 17 percent ... [F]or African-American men born between 1965 and 1969, 20.5 percent had been to prison by 1999. The comparable figures were 30.2 percent for black men without a college degree and approximately 59 percent for black men without a high school degree."

I'm not someone who sympathizes with or romanticizes those who commit crimes. But economics is about tradeoffs, and imposing costs on those who commit crimes has tradeoffs for the rest of society, too. For example, the cost to taxpayers is on the order of $350 billion per year, which in 2010 broke down as "$113 billion on police, $81 billion on corrections, $76 billion in expenditure by various federal agencies, and $84 billion devoted to combating drug trafficking." The question of whether those costs should be higher or lower, or reallocated between these categories, is a worthy one for economists. ...  Lofstrom and Raphael conclude:

"Many of the same low-income predominantly African American communities have disproportionately experienced both the welcome reduction in inequality for crime victims and the less-welcome rise in inequality due to changes in criminal justice sanctioning. While it is tempting to consider whether these two changes in inequality can be weighed and balanced against each other, it seems to us that this temptation should be resisted on both theoretical and practical grounds. On theoretical grounds, the case for reducing inequality of any type is always rooted in claims about fairness and justice. In some situations, several different claims about inequality can be combined into a single scale—for example, when such claims can be monetized or measured in terms of income. But the inequality of the suffering of crime victims is fundamentally different from the inequality of disproportionate criminal justice sanctioning, and cannot be compared on the same scale. In practical terms, while higher rates of incarceration and other criminal justice sanctions may have had some effect in reducing crime back in the 1970s and through the 1980s, there is little evidence to believe that the higher rates have caused the reduction in crime in the last two decades. Thus, it is reasonable to pursue multiple policy goals, both seeking additional reductions in crime and in the continuing inequality of crime victimization and simultaneously seeking to reduce inequality of criminal justice sanctioning. If such policies are carried out sensibly, both kinds of inequality can be reduced without a meaningful tradeoff arising between them."

While accusations of police brutality are often the flashpoint for public protests over the criminal justice system, my own suspicion is that some of the anger and despair focused on the police is because they are the visible front line of the criminal justice system. It would be interesting to watch the dynamics if protests of similar intensity were aimed at legislators who pass a cavalcade of seemingly small fines, which when imposed by judges add up to an insuperable burden for low-income families. Or if the protests were aimed at legislators, judges, and parole boards who make decisions about length of incarceration. Or if the protests were aimed at prisons and correctional officers. My own preference for the criminal justice system (for example, here and here) would be to rebalance the nation's criminal justice spending, with more going to police and less coming in fines, and the offsetting funding to come from reducing the sky-high levels of US incarceration. The broad idea is to spend more on tamping down the chance that crime will occur or escalate in the first place, while spending less on years of severe punishments after the crime has already happened.

4) There is a popular movement toward "ban-the-box," which prohibits employers from including a question on their application forms that asks if you have a criminal history. The hope behind such a rule is that it will improve educational opportunities for African-Americans, who are statistically more likely to have a criminal history. But several empirical studies suggest that it has the opposite effect, as I explained in "How Ban the Box Reduces Job Opportunities for African-Americans" (September 16, 2016): 


The study is called "Ban the Box, Criminal Records, and Statistical Discrimination: A Field Experiment," by Amanda Agan and Sonja Starr (Princeton University International Relations Section, Working Paper #5998, July 2016). ... As Agan and Starr write at the start of the paper (citations omitted):
In an effort to reduce barriers to employment for people with criminal records, more than
100 jurisdictions and 23 states have passed “Ban-the-Box” (BTB) policies. Although the details vary, these policies all prohibit employers from asking about criminal history on the initial job application and in job interviews; employers may still conduct criminal background checks, but only at or near the end of the employment process. Most BTB policies apply to public employers only, but seven states (including New Jersey) and a number of cities (including New York City) have now also extended these restrictions to private employers. These laws seek to increase employment opportunities for people with criminal records. They are often also presented as a strategy for reducing unemployment among black men, who in recent years have faced unemployment rates approximately double the national average ... 
Agan and Starr carried out an experiment. They sent out about 15,000 fictitious online job applications to entry-level positions in New Jersey and New York city, both before and after the "ban-the-box" policy went into effect. The resumes were set up in pairs, so that they were largely the same resume except for a difference in race; in particular, out of each pair, one job applicant could be identified as white and one as black. In addition, some of the pairs of hypothetical applicants checked "the box" early on, while others did not; some had a high school diploma, or a GED high-equivalency, or neither; some had a gap in their job history, while others did not.

The study found that whites with the same credentials are more likely to get a call-back than blacks: as they write, "white applicants overall received about 23% more callbacks compared to similar black applicants." Before "ban-the-box" went into effect, admitting to a criminal record definitely made it harder to be hired: that is, "among employers that asked about criminal convictions in the pre-period, the effect of having a felony conviction is also significant and large: applicants without a felony
conviction are 62% ... more likely to be called back than those with a conviction, averaged across races ..."

However, when ban-the-box (BTB) was enacted, the black-white gap in the chances of being called back got larger, not smaller. "Our estimates of BTB’s effects on callback rates imply that BTB substantially increases racial disparities in employer callbacks. We find that BTB expands the black-white gap by about 4 percentage points, multiplying the gap at affected businesses by a factor of about six. In our main specification, before BTB, white applicants to BTB-affected employers received 7% more callbacks than similar black applicants, but after BTB this gap grew to 45% ..."

The authors suggest that what economists call "statistical discrimination" is a possible explanation for these findings. ... Consider an employer who is both mildly biased against blacks, but also would strongly prefer not to hire someone who has a criminal record. If that employer has information on whether someone has a criminal record, they will continue to be biased against blacks. But if this employer is banned from collecting information on criminal record, they will tend to act on the statistical knowledge that blacks are more likely to have a criminal record than whites. As a result, blacks without a criminal record will have a lower chance of a job callback, and whites with a criminal record will have a higher chance of a job callback. ...

Thanks to Catherine Rampell for pointing out to me that there's another recent empirical study of ban-the-box, different methods, but similar results. The study is "Does "Ban the Box" Help or Hurt Low-Skilled Workers? Statistical Discrimination and Employment Outcomes When Criminal Histories are Hidden," by Jennifer L. Doleac and Benjamin Hansen, published as NBER Working Paper No. 22469 (July 2016). ... Thanks to Stan Veuger for pointing out yet another recent working paper on this subject, which uses a different approach and emphasizes a different set of tradeoffs. In "No Woman No Crime: Ban the Box, Employment, and Upskilling," Daniel Shoag and Stan Veuger look at employment with a focus on the outcome of ban-the-box an employment rates of those living in high-crime neighborhoods.

5) Is it possible to draw a reasonably clear line between equality of opportunity and equality of result? Here are some excerpts from my thoughts on Equality of Opportunity and Equality of Result (June 17, 2015):


In discussions about inequality of income or wealth, it's common to hear an argument along the following lines: "I'm not much bothered by inequality of results, as long as there is fairly good equality of opportunity."

As a quick example of this distinction, consider two siblings of the same gender that grow up in the same family, attend the same schools and colleges, and get similar jobs. However, one sibling saves money for retirement, while the other does not. When the two of them reach retirement, one sibling can afford around-the-world cruises and extensive pampering of the grandchildren, while the other sibling can afford the early-bird discount diner buffet line. This inequality of after-retirement results between the two siblings doesn't seem especially bothersome, because of the earlier equality of opportunities.

However, the notion that the inequality resulting from different opportunities or discrimination can be more-or-less separated from the inequality that results from choices and effort, while appealing at an intuitive level, turns out to quite difficult in practice. Ravi Kanbur Adam Wagstaf discuss the issues in "How Useful Is Inequality of Opportunity as a Policy Construct?" in World Bank Policy Research Working Paper 6980 (July 2014). The authors have also written a recent short summary/overview of the arguments. As a starting point, they write:

In policy and political discourse, “equality of opportunity” is the new motherhood and apple pie. It is often contrasted with equality of outcomes, with the latter coming off worse. Equality of outcomes is seen variously as Utopian, as infeasible, as detrimental to incentives, and even as inequitable if outcomes are the result of differing efforts. Equality of opportunity, on the other hand, is interchangeable with phrases such as ‘leveling the playing field’, ‘giving everybody an equal start’ and ‘making the most of inherent talents.’ In its strongest form, the position is that equality of outcomes should be irrelevant to policy; what matters is equality of opportunity. ... However, attempts to quantify and apply the concept of equality of opportunity in a policy context have also revealed a host of problems of a conceptual and empirical nature, problems which may in the end even question the practical usefulness of the concept.

My sense that their argument can be divided into two parts. One problem is that it's not easy to divide up the inequalities that are observed in society into one portion based on differences in opportunity, which should be rooted in the circumstances in which people find themselves through no decision or fault of their own, and another portion based on the choices or efforts that people make. The other problem is that moral intuition in some cases suggests an aggressive role for acting against unequal opportunities, and other cases where the moral intuition is not as strong: for example, the argument for fighting race and gender discrimination in support of equality of opportunity seems considerably stronger than the argument for seeking to offset most differences in genetic talent as a way of ensuring equal opportunity. ...

The difficult bottom line here is that seeking to draw a distinction between equality of opportunity and equality of results hides a deeper question: What sources of unequal results should a society regard as acceptable or justified, and what sources of unequal results should we regard as unacceptable or unjustified? It's easy to claim that such a distinction exists, but knowing in practical terms where it can be difficult.

In a 1965 speech, President Lyndon Johnson discussed the importance of true equality of opportunity in a famous passage:
But freedom is not enough. You do not wipe away the scars of centuries by saying: Now you are free to go where you want, and do as you desire, and choose the leaders you please. You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, "you are free to compete with all the others," and still justly believe that you have been completely fair. Thus it is not enough just to open the gates of opportunity. All our citizens must have the ability to walk through those gates.Johnson's comment contains a deep truth, but the poetic phrasing about starting lines of races and walking through gates of opportunity offers a hint that practical difficulties are being sidestepped.
For example, it is straightforward to argue that children should have at least some minimum level of opportunity, a feeling which is expressed by laws requiring compulsory and taxpayer-funded schooling and public health measures like vaccinations. But beyond that minimum, the extent to which society should intervene with parents or seek to counterbalance or offset parental decisions about raising children can become quite controversial. It is straightforward to argue that racial and ethnic discrimination should be banned. But beyond the essential step of banning explicit discrimination in employment or housing or public services, the extent to which society should act to offset the results of past discrimination becomes controversial, too. ...

Overall, it seems that the distinction between equality of opportunity and equality of result can be the starting point for some minimum level of public policy to reduce certain causes of unequal outcomes. But given the analytical problem with separating why unequal results occur, the equality of opportunity/equality of result distinction is often not much help in resolving how aggressive such inequality-reducing policies should be.