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?
Noted for June 20, 2013
2 hours ago