Economic Growth: The Central Issue

The slowing economic growth rate in the United States and Great Britain. Inflation. Discontent with taxes and government spending. Saving and investment. Transfer-payment programs. The need for fiscal and monetary stability.

Let me start by saying that I think statements about the economic problems of certain groups too often ignore the heterogeneity within those groups. It is important to recognize that as large a group in the population as blacks contains members with widely divergent and sometimes mutually exclusive or contradictory economic interests. But I will often refer to blacks or other groups in the population according to their statistical averages in relation to the general population average, so I apologize for not always correcting that. It is a theme that I think gets short shrift in most discussions of economic problems of specific groups.

The U.S. problems are similar to those suffered by much of the advanced world, but they are more extreme

Let us begin with a background of what has happened in the 1970s and the reasons for some dramatic changes in public attitudes with respect to things like government spending, taxes, and a wide variety of so-called "social" programs.

In the last several decades the United States has experienced a sharp slowdown in economic growth. Since the early 1970s there has been virtually no real economic growth after taxes and inflation, and no gain in the standard of living for a very large number of American families. The problems are similar to those suffered by much of the advanced world, but they are more extreme. This period, in fact, has brought the worst economic performance for such a large proportion of the population since the depression.

To take a slightly longer historical perspective, over the last century or so the United States has managed to increase the average standard of living of its population approximately 2 percentage points per year after adjusting for inflation. That may seem like a cold statistic to those who are not used to the vagaries of compound interest. But at 2 percentage points a year, we have managed to transform ourselves into one of the wealthiest societies on earth. Growing at only 1 percentage point less per year, approximately, the United Kingdom managed to transform itself in that same period -- a matter of two and a half or three generations -from the wealthiest society on earth at the end of the last century to a relatively poor member of the Common Market. So there is good reason to be frightened at the fact that in the last seven or eight years we have seen our rate of economic growth cut almost in half. I will not belabor you with discussion of what economists think they do or do not know about the reasons for our slowing economic growth. Perhaps the most important reason is the sharp retardation of the rate of capital accumulation in the economy, the rate of capital growth per worker, which was about 2.5 percent or more per year through the 1970s and has been at zero since then, especially when one includes government saving and investment of government capital. But there are many other reasons.

Many people view the government no longer as primarily an assister of the average person or of the downtrodden, but increasingly as a primary antagonist to their economic well-being

In any case, the decline of economic growth is the overwhelming reason for the tax revolt, for people's discontent with government spending. Government spending obviously is the reason for high and rising taxes, even if those taxes currently do not fully cover all government outlays. There is a large and growing number of people which believes that, either directly or indirectly, large budgetary deficits are primary contributors to the inflation of the last dozen years. Many people view the government no longer as primarily an assister of the average person or of the downtrodden, but increasingly as a primary antagonist to their economic wellbeing. For this reason we see, across a much wider spectrum of the population, greater concern to slow government spending.

In the current economic scenario, the primary problems are high and persistent inflation and very sluggish real economic growth. Despite a myriad of other more micro problems, these two problems, it seems to me, dominate our recent history. They are obviously overlaid against the backdrop of cyclical fluctuations in employment and unemployment which again disproportionately affect blacks, a point I will return to in a moment.

Black workers, even more than the rest of the working population, have an enormous direct stake in economic growth, in higher productivity

The first substantive point is obvious: black workers, even more than the rest of the working population, have an enormous direct stake in economic growth, in higher productivity. We do not have a perfect command of what will trigger higher productivity; we have some ideas. We also have some ideas about what has triggered the decline. But there is probably no greater problem confronting the potential improvement of the economic situation of black Americans than restoring as rapidly as possible the historic rate of real economic growth in the United States. That will not be possible instantaneously.

Blacks have a special stake in real economic growth for two reasons in particular. Not only will they share in those real income gains, but in a growing economy the possibility of movement -- rapid movement, earnings mobility within the income distribution -- is much greater than in a stagnant economy. Not just real gains, but the rate at which it will be possible to promote people will be greater in an economy growing at the U.S. historical rate than in one growing at the recent rate. The flip side -- the effects of continued sluggish growth -- will be to sharpen potential conflicts among different groups in the population: not just blacks versus whites or other racial groups, but young versus old, as young workers become more and more frustrated at sluggish real income gains and slow rates of promotion relative to those who are currently middle-aged or older. Such antagonisms will unquestionably worsen in a stagnant economy.

Our investment rate is not only low, but a larger and larger fraction of it has been going into other than real plant and equipment expenditures

It is my opinion, and I think the opinion of a large number of people, that the prerequisite for restoring a healthy real rate of economic growth -- on the order of 2 percentage points per year per employed worker -- is a stable, moderate rate of inflation, not high and fluctuating inflation. That will require a much more gradual rate of expansion of the money supply, one that is much more predictable over a long period of time. I think that will also require a restructuring of incentives to save and invest, to generate new capital, to add or to equip our workers with not only more capital but with new and newer technology capital. Our own saving rate is at a recent historic low and has been for some time. And our investment rate is not only low relative to the advanced economies of Western Europe and Japan -- about two-thirds that of Western Europe, half that of Japan -- but also a larger and larger fraction of it has been going into other than real plant and equipment expenditures. And the government has been costly. But we have also experienced that investment rate at a time when our labor force is growing very rapidly, unlike that in most other countries.

For these reasons, I think that when you consider the extreme, direct stake that the working population holds in generating real economic growth back to our historic average and the stake that it has therefore in accumulating capital, you will note with alarm the tremendous erosion of incentives to save and invest, due both to inflation and to the effects of high and rising taxes on a large and growing fraction of the population. High tax rates are no longer the exclusive burden of the rich. The typical person in this room, I am sure, pays a very substantial marginal tax rate on incremental earnings when you add all the types of taxes on earnings that you face, including some of those that are due to rise on 1 January. In particular, the insidious interaction of inflation and our unindexed tax system has substantially increased the effective marginal tax rate on productive investment income. This is the infamous "bracket creep" -- and it not only hurts us individually, but it harms the economy in the process.

It is about time Federal Reserve policy became a primary focus of concern of black leaders

The second stake that blacks and other minorities in particular have in real economic growth is not just future wage gains. The fact historically has been that in some ways Americans tend to be generous people regardless of economic circumstances. Yet I think the future of programs that transfer resources to the truly needy or destitute -- those who are disadvantaged, unable to take full advantage of market opportunities, or systematically excluded from doing so for a variety of reasons including some government regulations and laws -- tends to be brightest at times when there is rapid economic progress. I do not think it was incidental that the major expansions of government transferpayment programs occurred in an era of sustained, substantial economic progress. And current disapproval of "welfare handouts" has markedly increased as our rate of economic progress has slowed, as has the improvement in standard of living for the typical American family -- the working, taxpaying family.

So my basic point, to repeat, is the enormous stake that the nonelderly general population -- and particularly those people who have not yet made it in the economic process -- has in real economic growth, and that it is going to require those people to rethink the kinds of programs they are prepared to back. People are going to have to rethink their attitudes toward what they have traditionally seen as tax breaks for the wealthy and things of that sort in order to effectively restructure the tax system and promote economic growth. It is about time Federal Reserve policy became a primary focus of concern of black leaders.

Real black incomes have risen rapidly over time, as have general incomes

In the decade from 1960 to 1970 rapid progress was made in the relative incomes of blacks versus whites, although it was differentially concentrated among younger and bettereducated blacks. There are many explanations for that, and I will not discuss those particular issues here. But if you extrapolate those gains which were generally regarded as substantial in that decade -- if we could continue those gains in the relative income of blacks -- it would not be until after the year 2000 that young blacks entering the labor force with a substantial education would be on parity with whites and it would not be until another forty years had passed that black incomes as a whole would be on parity with white incomes. Thus, even with substantial progress in absolute income gains, relative gains will not come quickly but will have to be measured over the space of decades and generations, not years or quarters.

Black unemployment tends to be two to three times as sensitive to the overall change in unemployment as that for whites, age group by age group and sex by sex and experience by experience class as you go down the list. The experience of the last few years in attempting to fine-tune the economy has not been a tremendous success and has often destabilized a reasonably stable economy. This means that blacks are going to have to rethink their historic support of substantial expansions of government spending in various ways, and to adopt a more rational long-term view of their stake in monetary stability.

A framework of monetary and fiscal stability is, in the long run, unquestionably in the best interests of blacks

One last point: we must realize that stabilizing the share of government spending in gross national product, perhaps by slowing the rate of growth of some transfer-payment programs, is economically imperative. We need to be thinking about programs to stabilize the share of government spending in GNP, to gradually get the budget deficit under control, to get the Treasury out of credit markets, and perhaps to make it easier for the Federal Reserve to adopt a more stable rate of monetary expansion. Such goals cannot be achieved overnight.

We need a commitment from the new administration that will have to last for a long period of time. It will require painful decisions, including eliminating some programs or slowing the growth of some program that, in the short run, may disproportionately benefit blacks or minorities in general or the lower-income groups in the population. And that is going to be a painful choice. It is going to be painful for politicians. It is going to be painful for the populace in deciding what to support. So what we need, in my opinion, is a new consensus or a new educational effort to try and convince people that a slowdown in the rate of inflation is a prerequisite to healthy, long-running, economic growth. A framework of monetary and fiscal responsibility is, in the long run, unquestionably in the best interests of blacks, particularly nonelderly blacks, and the real absolute and relative income gains of blacks will certainly be primarily affected by inflation and the rate of real economic growth -- although certainly the situation is also affected by some of the micro phenomena that Walter Williams was speaking about.

For these reasons, I think it is naive to hope that all of our economic problems will be substantially righted in the course of one administration. What we do have a right to expect is a new beginning, a turnaround of a variety of programs, and a new course of action that is really steered by a compass, a general and steady overall philosophy rather than a weathervane spinning around and changing policies every few months. We have to really think through these long-run versus short-run issues. The bad decisions are not going to go away.


Bernard E. Anderson: "A Partial Dissent: Fiddling with the Economy Is Not Enough"

When I think about the agenda for blacks in the 1980s, it seems to me that we are talking about two things: Where is the American economy going during this period of time? And what are the implications of these trends for improvement in the relative economic status of blacks? I think we have to discuss those two things, and I do not think that our two speakers addressed those issues to the degree that I would prefer.

Thirty-seven percent of black young people today who are under the age of eighteen live in female-headed households that are poor

We have to look at some very disturbing facts. First, there is a widening gap between middle-income blacks and those in the lower-income positions, especially those who live in poverty areas of our central cities and southern rural areas. Looking at the evidence, you see that the labor-force participation of blacks who live in the low-income poverty areas of cities declined. In these communities there is a very disturbing increase in the number of female heads of households who are poor -- an argument I think best developed by William J. Wilson, professor of sociology at the University of Chicago, and most identified with his work. I agree with Professor Wilson that this is a major problem that blacks and black leaders will have to deal with during the 1980s. Thirtyseven percent of black young people today who are under the age of eighteen live in poor female-headed households. That has very disturbing implications for improvement in the position of blacks during the 1980s.

A labor-market twist in our economy has been most injurious to black people

Two requirements for improving the economic status of blacks obviously are, first, balanced and orderly economic growth; second, we still will need some way to assure equal opportunity for blacks to participate fully in the American economy. Michael Boskin argued very well, I think, that economic growth contributes to a narrowing of the income differential between blacks and others. There are reasons for that which we can go into later, but I am in substantial agreement with that notion. A comment made by the late President Kennedy says that "A rising tide lifts all boats." That's true, but let us not forget that a rising tide does not do a thing for shipwrecks at the bottom of the sea.

Economic growth alone, no matter how balanced it is, is not going to help those people who are not participating in the economy and who do not have any hope of participating in the economy. I do not see economic growth alone as doing anything specifically to help the underclass. We have to draw attention, I believe, to recent changes in the structure of the economy that have been harmful to the expansion of economic opportunity for low-income and highly dependent blacks. There is a labor-market twist in our economy that has been most injurious to poor black people. Let me give an example.

Look at the change in the number of jobs by occupational categories in the eighteen largest northern cities between 1960 and 1970. There was an increase in those cities of 290,000 professional, technical, and clerical jobs and a reduction of over 700,000 in the number of craftsmen, operatives, and laborers. You will recognize that it is the second category of jobs rather than the first in which those persons such as urban minorities get a foothold in the American economy. What we see is that those very jobs that have traditionally been the ports of entry for low-income persons are declining significantly.

I looked at Philadelphia data recently and found that employment there is increasing. But it is increasing in jobs that require education, training, and opportunity that most blacks who live in North Philadelphia just do not have. Walter Williams and I grew up in Philadelphia; we know this area, and we both know that blacks who live in North Philadelphia at 16th and Columbia are not going to be helped one whit by the increase in the number of jobs for computer operators in the center city. So those who live in the periphery of this area are not benefited at all by most areas of expansion in the job market.

I don't see why the federal government should spend billions of dollars on youth unemployment simply because middle-income white youths who are "trying to find themselves" happen to be unemployed

Calling attention to the issue of minimum wage, Walter Williams looks at the world and sees that everything wrong with black youth is attributable to the minimum wage. The evidence is ambiguous. Statistical studies do not clearly indicate that the minimum wage is the single most important factor responsible for black youth unemployment. The results of these studies are significantly influenced, in fact, by the methodologies used, the data used, the time period.

The minimum wage argument does not explain why black youths are so disproportionately affected. If the minimum wage reduces employment opportunities, then why doesn't it reduce it as much for white youths as it does for black youths? The fact is that even with increases in the minimum wage there has been an increase in the employment/ population ratio for white youths while the employment/ population ratio for black youths has been going down.

Also, there are mechanisms available now in the law to permit employers to pay less than the minimum wage, and they do not take advantage of them. In short, the evidence that comes out of current population surveys does not necessarily substantiate the argument that black youths are so adversely affected by the minimum wage or that they are adversely affected disproportionately.

A subminimum wage is bad economic policy, is abominable social policy

Even if they are adversely affected, what is the appropriate policy response? I would argue that the appropriate policy response is not a subminimum wage. A subminimum wage is bad economic policy, is abominable social policy; we should not do it. If we are determined to try it, let us ask this question: If we have a subminimum wage that affects everybody, how can we be sure that black youths -- whose unemployment rate is by far the most severe -- will benefit proportionately? I do not see why the federal government should spend billions of dollars for youth unemployment simply because middle-income white youths who are "trying to find themselves" happen to be unemployed.

Consider a targeted jobs-tax credit, because you cannot target the subminimum wage

It is in fact the inner-city, black, unemployed youth who are always referred to on Capitol Hill when the youth-employment bills are passed, but when the bills are passed they do not target sufficiently on these young people. We need a mechanism that lowers the cost of hiring young blacks. And my recommendation is economic incentives to the private sector that focus on them in particular. I throw out for your consideration a targeted jobs-tax credit rather than a subminimum wage because you cannot target the subminimum wage. You only create unhealthy competition in the labor market; you create competition between low-income adults and black teenagers.

There is no way in the world to target the subminimum wage adequately. You would have to increase by several times the number of investigators in the Fair Labor Standards Administration to administer anything like that. So I would argue that this is not a viable solution.


Walter E. William: "A Culprit Is a Culprit"

I have to respond to Bernard Anderson's remarks. One thing he found quite puzzling is that, if the minimum-wage law explained so much unemployment among young black people, why is the unemployment rate of teenage blacks considerably higher than that of teenage whites?

Initially I said that the minimum-wage law discriminates against the lowest-skilled worker. Who are the lowest-skilled workers? The lowest-skilled of the teenagers. They are those kids who come from schools three to five years behind the national norm. And so if you were predicting unemployment effects of the minimum-wage law, you could confidently assume that there would be a higher number of black youths affected as opposed to white youths.

If you say that there is a determinate number of jobs, that means that human wants are capable of being satisfied

The criticism of the idea of a subminimum wage law is that allowing teenagers to work for a lower wage than adults would find fathers fired and sons hired. That's a basic point I teach in economics classes, having to do with what I call the "lump of labor" fallacy. The lump of labor fallacy says that there is a determinate number of jobs and if one person gets a job, someone else of necessity must lose a job. There is no evidence to suggest that there is a determinate number of jobs in our economy or anywhere else, for that matter. Because if you say that there is a determinate number of jobs, that means that human wants are capable of being satisfied. A basic postulate of economic theory, which has proven to be most useful in practice, is that human wants are unlimited. If we had a subminimum wage law there would indeed be some substitution effects. But the overall effect would be a noticeable increase in total employment. Many hotels would decide to keep their corridors cleaner, many restaurants would hire more waiters, and maybe theaters would hire ushers again. The reason that we do not have ushers in our theaters to any significant degree, as in the past, is not because Americans wish to stumble down the aisles in the dark looking for their seats; it has something to do with higher costs. Blacks have not been able to get a lot of jobs because they have been destroyed through minimum-wage law increases. Firms in many places, in the face of higher minimum-wage laws, substitute capital for labor and automate or dispense with all but the most necessary positions. So that means that there are fewer low-skilled jobs.

The teenage unemployment problem is complex

Finally, the minimum-wage law, as Professor Anderson pointed out, is not the only cause of teenage unemployment. Collective bargaining agreements by labor unions have the same job-destroying effect.

When I was a kid in Philadelphia, my cousin and I -- back when we were twelve and thirteen -- used to pray for a snowstorm because we could go to the railroad station and ask the man for a job shoveling snow off the platform. Kids do not have those opportunities today. Why? Because the American Railroad Union is not interested in seeing a kid shovel off a platform for $10 a day when their members could get $50 or $60 a day.

So the teenage unemployment problem is a complex problem. But most of it has to do with powerful vested interests using the coercive powers of the government to rig economic gains in their favor.

Michael Boskin: "Economic Reforms Are Important"

First, I never meant to imply that economic growth alone will benefit every single person in our society, eliminate poverty completely, and so forth. The overwhelming bulk of our population, however, will benefit. Certainly, private programs will continue to play an important role in helping those who cannot make it in the marketplace even in a healthy, growing economy, for whatever reasons. We have a variety of such programs now, and the task before us is to fill in the cracks and make them more cost conscious and target effective. At times of relatively rapid economic growth, the general tax-paying public has been willing to support such programs and to see them expanded and approved. At time of slow economic progress, the general population has been less willing to part with its money for these programs.

A large and growing fraction of the general population, including blacks, is starting to accumulate assets

Secondly, a point that I made at the beginning was about the changing economic self-interests in the heterogeneity of blacks as well as in the general population. We once found it convenient -- and too often the press today still finds it convenient -- to talk about business versus labor as if citizens in the United States had a purely unidimensional economic self-interest. A large fraction of the population, however, has a stake not only in wages and employment, but also in the high and rising taxes it pays as a reflection of its after-tax income as well as in the government services it does or does not get. So it includes not just wage earners, but recipients of government services and taxpayers. They buy goods and services and have a general interest in inflation. And a large and growing fraction of the general population, including blacks, is starting to accumulate assets. People who have accumulated a substantial stake in a pension fund, housing, or some other asset can have as much at stake in the rate of return on their accumulated assets for the remainder of their working lives as in their wage increases in the balance of their lifetime incomes.

Experience and training on the job is usually a more than adequate substitute for formal education

Finally, I just add one thing to the debate about minimum wages: I would add the word "current" to the explanation that "low productivity" is why black teenagers are particularly precluded from finding jobs. Their low productivity is only current because, after all, experience and training on the job are usually more than adequate substitutes for formal education. Thus the issue is the cost of people's current wages relative to their current productivity -- not to their potential productivity three or four or five or six years later as they gather experience and training.

This is a dual problem. We are not only systematically excluding people from employment by the minimum wage. We are also systematically excluding them from the opportuinity to become increasingly valuable and valued economic producers.

Legal Barriers to Black Economic Gains:
Employment and Transportation
Table of Contents III. Education: Black Priorities