Economic Issues



Legal Barriers to
Black Economic Gains:
Employment and

Conflicting goals. Legal handicaps that reinforce disadvantage. Discrimination in the minimum wage law; teenage unemployment. Labor unions in South Africa and the United States. Urban renewal.

For many people, the ideas that I am going to talk about break in a very substantial way with conventional wisdom. I believe that all too often the problems that minorities face in the United States are looked at in terms of good and evil, collective conspiracies, and racial discrimination. Such approaches to minority problems ignore the fact that men probably are evil everywhere, but we find different outcomes in different places. The preference hypothesis -- the hypothesis that says that blacks are disadvantaged because people do not like them -- ignores the difference between what people want to do and what they can do, as implied by the declining incomes and rising prices that we face. The collective conspiracy hypothesis ignores the fact of conflicting goals among men -- that is, the pursuit of one man's goal may be inconsistent with the pursuit of another man's goal.

Can you say that racism exists everywhere in the United States but it does not exist in Washington, DC?

Instead of looking at these past theories of black disadvantage, we need to look more into the rules of the game. We must ask questions about our country's legal structure in order to see if that legal structure aggravates and reinforces our handicaps. Let me cite a few rules that handicap people who are disadvantaged, reinforcing their disadvantages.

Consider the area of operating taxis. The opportunity to operate taxicabs does not require a huge financial investment. It does not require a college education. So one would say it is an area that disadvantaged people could get into, one in which they could become owner-operators and have the probability of making $15,000, $18,000 a year in income. But as you go around the cities of the United States you do not see many blacks owning and operating taxis. Why? It turns out that to own and operate a taxi in New York City you have to buy a license -- they call it a medallion -- which costs $65,000. In Boston a similar license costs around $50,000; in Chicago, $40,000; in my city of Philadelphia, $33,000. And in Philadelphia, for example, only about 11 of the 600 taxis (and a mere 600 is a side issue in and of itself) are owned by blacks.

If you went to Washington, DC, however, you would see that 80 percent of the taxis are owned by blacks. How do you explain this? Can you say that racism exists everywhere in the United States but it does not exist in Washington, DC? I doubt whether that hypothesis would hold water. Or can you say that maybe blacks are lazy in the other cities and they are ambitious in our nation's capitol? That would not hold water either. It turns out that to own and operate a taxi in Washington, DC, the license costs less than $100.

What is the effect of having license laws like those in New York and the other cities I mentioned? Requiring $65,000 for a license tends to discriminate against people who do not have $65,000. And those people who do not have $65,000 or cannot get bank credit for $65,000 tend to be poor people. So such a licensing law would discriminate against poor people -- and all of the empirical evidence tends to substantiate this.

Again, these black men did not need special programs -"affirmative action " -- they needed government to get off their backs

In another area of laws that handicap minorities, one incident typifies the effects of regulating the trucking industry through licensing. A man named Jim Ward of Omaha, Nebraska, bid the lowest price on a contract to ship household goods of air force personnel. But this black man was not awarded the contract. Because he did not have Interstate Commerce Commission authority to move goods across state lines, the contract was awarded to another man who, in fact, bid $80,000 more than Jim Ward for the project. Jim Ward did not need any "equal opportunity" program; he did not need Small Business Administration loans. What he needed was to have government get off his back.

There are many other cases I could cite. For example, when the governor in 1970 won the election in Illinois, the Teamsters and the American Trucking Association were instrumental in his victory. How did he pay these people off? He paid them off by having state troopers erect barricades around Illinois. The purpose? To arrest truckers who did not have licenses. The first day of this crackdown they arrested fifty-seven truckers for operating without the proper authority; of these fifty-seven, forty-three were black men.

What does this say? It says that somebody valued their services, because they were hauling someone's goods in their trucks. These men were earning an honest living, but the state wanted to stop them from making that honest living at the request of incumbents who did not want competition. Again, these black men did not need special programs"affirmative action" -- they needed government to get off their backs.

The minimum wage law systematically discriminates against the most disadvantaged members of the labor force

There are many of these laws which systematically handicap minorities. One that I have paid a lot of attention to is the minimum wage law. This law, which is looked at in our country in the same vein as motherhood and apple pie and the flag, systematically discriminates against the most disadvantaged members of the labor force. It discriminates in the following way.

The minimum wage right now is $3.10 an hour, and it is due to go up to $3.36 an hour on 1 January 1981. The $3.10 an hour understates the full compensation that an employer has to make to the employee, because he is also liable for such mandated fringe benefits as social security, accident insurance, and various other things that the government might require of him. But, for argument's sake, let us look at the $3.10 an hour. Its effect is to discriminate against the employment of any worker who cannot produce $3.10-anhour's worth of goods and services. Who are these people who might be characterized as low-skilled individuals who cannot produce $3.10-worth of goods and services an hour? They tend to be, by and large in America, young people, teenagers. They have low productivity because they lack experience, maturity, and other attributes of adult workers.

Black teenage unemployment rose even during times of rapid expansion in the economy

Black teenagers are even more adversely affected by the minimum wage law; not only do they share the characteristics of teenagers in general, but they bear the additional burden of the effects of past discrimination in the fraudulent schools that they attend in most of our inner-city areas, where they graduate three to five years behind the national norm.

The question is, what might be some empirical evidence of these kinds of effects of the minimum wage law? Many Americans are aware of the current unemployment rate among black teenagers. Right now, nationally, it is around 40 percent. In some cities it goes up to 60 and 70 percent. And white teenage unemployment is around 17 percent. While most Americans are familiar with these statistics, they are not familiar with their historical basis. In 1948, for example, when the Labor Department first started keeping fairly reliable employment statistics, it turned out that, for some age groups, black teenage unemployment was less than white teenage unemployment. In 1948, teenagers between sixteen and seventeen years old had an unemployment rate of 9.4 percent while that of whites in the same age group was 10.2 percent. Their labor force participation rates -- that is, the extent to which they participated in the labor market -was 108 percent that of whites.

All of this has been dramatically reversed. Where once we had this very high unemployment among teenagers and in some age groups, today we find labor-force participation rates to be around 40 percent that of whites. You surely cannot explain this dramatic reversal by saying that firms are more racially discriminatory now than they were in 1948. You cannot explain this by saying that blacks had higher education than whites in 1948. You cannot explain it by saying it is due to the economic cycle, because black teenage unemployment rose even during times of rapid expansion in the economy.

The motives of people are not very important in terms of the effects of their behavior

I think -- and considerable economic evidence suggests -that what we can blame it on is the minimum wage law, increases in the level of the minimum wage law, and increases in the extent of coverage of the minimum wage law. That is, in 1930 and 1948 the minimum wage law covered roughly 30 percent of American jobs. It now covers 92 percent. And so, back in 1948, if one were thrown out of a job as a result of the minimum wage law, there was somewhere to go where the law did not apply. The only uncovered sector that I see today -- the only sector of the economy not covered by minimum wage law -- is crime. And it seems that many individuals are, naturally, switching over to that uncovered area.

If the minimum wage law has the effects that I have suggested, we might ask why we have such a law. You begin to understand it if you go to Washington and see who are the major lobbyers for the minimum wage law. They turn out to be labor unions. And you might ask why labor unions are major supporters of the minimum wage law when their members always make more -- and many of them make two and three times more -- than the minimum wage. You begin to understand this if you recognize, as economists do, that -- for many productive activities -- most low-skilled labor is a substitute for high-skilled labor.

Let me give a quick example of this. Suppose you could build a fence using either of two productive techniques: you use three low-skilled workers, or you use one high-skilled worker. Suppose the wage is $38 a day for an individual highskilled worker and $13 a day for an individual low-skilled worker. That would mean that the low-skill technique of production will cost $39 and the high-skill will cost $38. The employer, we assume, wants to maximize profits, so he will use the least costly way of getting that fence built; he will use the high -- skilled worker. But suppose the high -- skilled worker goes in and demands $55 a day instead of his $38. The employer would quite naturally switch to the low-skill technique of producing the fence. And maybe the high-skilled worker knows this. So prior to his wage demand he might advocate a minimum wage law in the fencing industry. He would say that these people are not earning a living wage; they are downtrodden, they are exploited by the employers, so forth and so on. And if you got a minimum wage law passed of, say, $20 a day, then he could go in and demand his $55 and have a higher probability of keeping his job, depending on the elasticity of substitution of capital for labor.

I am not sure I am accurately describing the motives of labor unions when they support minimum wage laws, but the motives of people are not very important in terms of the effects of their behavior. That is, if I walk out of the hotel and a truck runs over me the driver can come out of the truck and say, "Williams, I did not mean to run over you." I am just as run over as if he meant to. The intent of his behavior had nothing to do with the effect of his behavior.

"Such laws will protect our workers against low-skilled competition"

There is some evidence that suggests that the minimum wage law may reflect evil intents of labor unions in different parts of the world. I spent two months in South Africa last year. Over there, the major supporters of the minimum wage law in South Africa -- and of equal-pay-for-equal-work laws in South Africa -- are white, racist, unions which would never have a black as a member. Their stated reason for supporting the minimum wage law is something like this: they say that job reservation laws in South Africa are no longer protecting white South Africans against low-price black South Africans. "We cannot depend on the government for support any more," they say. "What we need is to have an equal-pay-for-equal-work law and to have minimum wage laws." They call them "rate-for-job laws" over there. "And," they argue, "such laws will protect our workers against lowskilled competition."

Labor unions in the United States have a different stated intention behind their support of the minimum wage law. But keep in mind that the bottom line each of us should ask is, what are the effects?

A person who supports the minimum wage law will, after the law is passed, go down and look at the workers and say, "Ah-ha, I am pleased." The workers are palpably better off. However, he does not see the victims of the minimum wage law. All he sees are the people who kept their jobs. The victims are invisible.

The same applies to our urban renewal programs. A wellintentioned person will advocate urban renewal programs because he sees a slum, and he will come back to check in a few years and say, "Ah-ha, these people are better off." The people now living in the buildings are indeed better off. But he does not see the people who were thrown out of housing, the people who had to double up. He does not see the spreading of the slums to other places.

So I would urge that in the 1980s we pay more attention to the rules of the game and its realities, and let the notion of racial discrimination play a smaller role in evaluating the problems of blacks in the United States.


Maria Lucia Johnson: "More Legal Barriers: Housing"

Rent control is the classic example of treating symptoms. The cities are dying inside. The disease is a shortage, a critical shortage of housing that is affordable to both low-income and moderate-income tenants. Unfortunately, rent control is the easiest method the cities have come across for supposedly "solving" this problem. It is treating the symptoms; it is not treating the disease. It is a short-term relief. It only compounds the disease, and unfortunately the patientswhich are the cities where most of our black population lives -- are dying or are in danger of dying from the medication that is supposed to be saving them.

Rent control is a politically expedient manner of solving a problem without dealing with the real issues or causes

Rent control has been touted as the relief and the remedy and the answer to saving low-income and moderate-income people -- the elderly, those on fixed incomes, and retired people -- from displacement from the city. Seventy percent of the District of Columbia is made up of tenants, so that's 70 percent of the potential voters. Rent control therefore is a politically expedient manner of solving a problem without dealing with the real issues or causes. It does not help poor people; it does not help black people; it does not help those on fixed incomes. Rent control helps high-income, middle-class, white Americans.

When we get to why we have rent control, I think most of us are familiar with the basic reasons. One, the postwar baby boom with its increased demand for housing. You have an increase in the number of single-family and small households. You have a drastic increase in transportation costs which makes inner-city living more attractive to suburbanites -costs of gasoline have tripled in the last two years. Added to that, inflation and high construction costs have cut down drastically on the total number of housing units being constructed in the inner cities at the very time when the demand for units has increased drastically.

Those are the basic problems. Rent control is -- or appears to be -- the easy solution. But dealing with its real impact every day, as I have for the last few years, I have observed its effects with shock. I am concerned mainly with its effects on black Americans, the poor, the retired, and the elderly.

Landlords try to convert to other uses

Instead of providing more adequate housing, under rent control you have a decrease in the housing supply, particularly in low-income and moderate-income units. According to city housing officials, between 1974 (when rent control went into effect) and 1979 the District of Columbia lost approximately 7 percent of its rental-housing stock as a direct result of rent control. This 7 percent consisted mainly of boarded-up and abandoned property.

Rent control has also caused deferred maintenance and cutbacks on services. Instead of improving their housing, rent control now has substantially decreased the quality of life of the person who occupies a rental unit. Another result, not frequently mentioned, is that deferred maintenance also cuts down on available jobs. When the landlord's operating expenses are skyrocketing and his rents are clamped in place, he has to cut costs somewhere, and the first areas usually are maintenance, repairs, and upkeep. What happens? Jobs are lost; painters are not hired; maintenance people are not hired; a new roof is not put on, and so forth.

Naturally, then, landlords try to convert to other uses. They go condo and get out of it; they go co-op, apartment hotel. If zoning permits, they convert housing property into office space. Approximately 12 percent of the rental stock in the district has been lost to condo conversion since 1970. Of that 12 percent, approximately 10 percent has been lost within the last four years.

Rent control does not apply to new units under the present law, but investors are afraid that it may come to that

In the District of Columbia, rent control has caused a drastic decrease in new construction at a time when there is the greatest need for new units. Suburbanites, attracted by the district's low rent base and lower transportation costs, come into the city and compete with low -- income residents for the same rental stock that is already dwindling. Even though rent control does not apply to new units under the present law, investors are quite naturally afraid that it may at some point come to that. The figures show a drastic change. In 1974, in the first four months of the year rent control was enacted in the district, there were 5,247 building permits issued for multifamily dwellings. In 1975 in the same fourmonth period one year after the enactment of rent control, 375 building permits were issued -- almost 5,000 less. This is just for multifamily units. And in 1976 only 220 permits were issued. Of those, almost all were subsidized section 8 housing.

Decreases in construction also spell decreases in jobs. It is estimated that for every 1,000 units that are built on the rental market, over 800 full-time workers find employment.

The administrative costs of rent control are staggering -- a minimum of $1 million a year for the district. This figure does not count the loss in tax revenue and the loss in the tax base. In addition, the fact that lenders are not willing to make loans to district landlords to build or make improvements on rent control units has caused a deterioration of the city. If you drive through different parts of the District of Columbia now, you run across whole blocks that used to be thriving neighborhoods and are now boarded up. Vandalism has occurred. The deterioration adversely affects surrounding neighborhoods.

In short, rent control has caused a serious decline in the quality of housing as well as a serious decline in the number of housing units. It has also adversely affected black investors who own a large percentage of the housing stock in the city. They are being forced into bankruptcy. They are not able to refinance their property and use that capital to invest elsewhere, which is how people make money. Nearly anybody who has made a large amount of money has used real estate as a basis. Black investors are being denied that opportunity, because the impact of rent control is such that they do not know if they will be able to carry costs until the property can be made more profitable.

One of the most interesting statistics is that, under rent control from 1972 to 1979, the maximum rent increase allowed under the law -- if you did not go through a one-year procedure costing thousands of dollars in attorneys' fees to get a hardship petition approved -- was 39.2 percent. The consumer price index during that same period of time increased 88 percent. These statistics are even grimmer when you look at certain relevant categories. Heating oil costs increased during that period 300 percent; electricity, 150 percent; natural gas, 90 percent. And sewer and water charges, 92 percent.

As a black woman, I am tired of the press saying that rent control is good for black people

There is nothing I can say further except that, as a black woman, I am tired of the press saying that rent control is good for black people. I deal with it every day. I see the adverse impact. And it is not black people who are being helped by it; it is high-income, white, middle-class America. They are not the people whom you see on TV cameras in front of district buildings demonstrating in support of rent control, however; they are the people who are behind the scenes, organizing and putting together the shows of strength. I resent being used that way, and I think there are a lot of other black Americans -- both tenants and property owners -- who feel the same way but are afraid to speak out on the issue.

Clarence M. Pendleton, Jr.: "Self-Help at Work: The Urban League in San Diego"

The industrial revolution somehow passed blacks by, and I think that if we are not careful we are in danger of letting the technological revolution pass us by. We cannot let that happen. People wonder why the Urban League might be represented in this group. I guess the best answer is that I am a supply -- side Urban Leaguer on social programs.

We cannot continue to work black strategies on white money alone

We believe that supplying the jobs and economic development is the greatest social program we can provide for black people. We ought to create long-term unsubsidized employment with training where appropriate, so we must carefully develop those sectors of the economy which have a productive future for the 1980s. We cannot continue to work black strategies on white money alone, whether government money or private dollars. We cannot expect white folks to continue to come to our rescue in job-training programs and economic development ventures, not in times of economic hardship all around.

I do not represent the Urban League; I represent an Urban League, and I am happy to be part of that movement. And many of my colleagues have begun to see some of the light. At the San Diego Urban League, we have succeeded in creating new wealth by combining with programs in the private sector those programs in economic development and employment available to us primarily from the government. We have been able to infuse probably more than $30 million a year into the San Diego economy.

We have created new wealth

It has taken us ten years to get white folks and black folks to believe that we could do it. Let me give you some specific facts. When there are brothers and sisters looking for work, we have to find the jobs. And if you do not believe that inflation has hit the street corner, you will be surprised to find out that, for those who fence stolen goods, the going price now is one-fifth—not, as it was until recently, one-third—of the value of that which is stolen.

In spite of all the economic bad news and the talk about minimum wage and subminimum wage, we have created more than 6,000 unsubsidized jobs in the private sector in the last three years. We have created new wealth. We did not ask for government money to maintain existing employment, as have Chrysler and Lockheed and General Dynamics and Boeing. And we did not get as much. We had to fight like hell with the government to get what we got. I am prepared to tell you that, when we talk about $30 million a year in the economy in San Diego County alone, we got less than a million dollars in government money. So the leverage is great.

Where does the money go? To the private sector. The private sector, which is making all this money anyway, needs to come forth with its own initiative programs that will help community-based organizations with the capability and performance to make even more money for it.

Helping black economic development is good business

Wells Fargo Bank came to us and gave us a $10 million-a-year set-aside at one point over the prime lending rate for industrial development. None of the $10 million goes to us, although we would like to have some of it. And Wells Fargo makes the money—helping black economic development is good business.

The Urban League, to give another example, has a contract of $100,000, with the local CETA as prime sponsor, to run what is called the "Philadelphia Plan." In three years' time we have produced 2,500 unsubsidized jobs in the private sector at annual salaries between $14,000 and $30,000. And over 75 percent of those jobs go to minorities and women.

The figures sound so good that I want to tell you again. Unsubsidized jobs—2,500 in the private sector for minorities and women, with the average salary between $14,000 and $30,000. It can be done.

II. Economic Issues Table of Contents Economic Growth: The Central Issue