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Bad Economics: Lack of Diversity Limits Clear View

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Early last year, I spoke with a frequently quoted economist who exuded near-certainty that the American economy was on the verge of a dramatic expansion. He expressed this sentiment using the sort of metaphor that tends to delight practitioners of his trade, both for its simplicity and the implication that economics is no less a science than physics: The economy is like a rubber ball, he said. It had hit the ground hard on the way down, so it had to bounce back equally hard.

The economy is unfortunately not a rubber ball. I was then spending a lot of time on the road, chronicling the experiences of previously middle-class Americans who had slipped into poverty. They had lost jobs, houses, cars and retirement savings. Even those who were less affected were nursing considerable wounds. Many had lost hours at work or equity in their homes. Anxiety was widespread, making people inclined to hold on to their dollars -– an inclination that was itself reinforcing decline by depriving the economy of spending. Businesses were in no mood to hire, cognizant that their customers were hunkered down -– a major problem in an economy in which consumer spending makes up about 70 percent of all activity.

"Where are ordinary people going to get the money to spend to sustain a vigorous recovery?" I asked. This question brought admonition from the economist. He accused me of spending too much time listening to the stories of people who "got screwed," while erroneously assuming that their experiences represented the big picture. "Most Americans didn't get screwed," he said, adding that the vast majority had deferred spending during the worst of the downturn and were now eager for the accouterments of modern life: home furnishings, restaurant meals, cars. This spending from the "non-screwed" would be enough to power a muscular recovery, generating millions of jobs.

I have recalled this conversation frequently in the months since, as the "recovery summer" touted by the Obama administration gave way to a desultory fall, then a stagnant winter, a sullen spring and now the moment at hand, with the unemployment rate stuck above 9 percent and layoffs resuming. Talk of powerful recovery has succumbed to concerns that we may be in for another recession, or at least a long, unpleasant slog through lean times.

I thought particularly of that conversation late last month, as the Pew Research Center released a startling report that found that the disparity in wealth between African-American and Latino households and their white counterparts had grown wider than at any time since the government began keeping track a quarter-century ago. The data in that report bears repeating: Between 2005 and 2009, median African-American households -– those right in the middle –- saw their net worth decline by 53 percent, falling from $12,124 to $5,677. Median Hispanic households saw an even sharper drop, from $18,359 to $6,325 -– a 66 percent plunge. Meanwhile, median white households saw their net worth fall from $134,992 to $113, 149, a 16 percent drop.

Net worth refers to assets –- everything from cars and homes to savings accounts and stock portfolios –- minus debt. So, in simplest terms, the report offered evidence that a key racial divide –- the wealth gap separating white households from minority households –- had widened considerably during the Great Recession. In 2004, white American households boasted net worth equal to 11 times the African-American value. By 2009, white households held 19 times as much wealth as black households.

The cause of this widening gap is not hard to divine. Homes have fallen in value, and particularly in states in which Hispanics are counted in large numbers, such as Florida, California and Arizona. The unemployment rate among African Americans has climbed from 7.9 percent at the beginning of 2007 to 16.2 percent in June, sending large numbers of black Americans into delinquency on mortgages, credit cards and car payments.

Among African-American men, the picture looks even worse, with the unemployment rate reaching 17.9 percent in June, more than double the 8.2 percent recorded at the end of 2006, according to Labor Department data. The jobless rate among African-American men 55 and older has climbed from 5.1 percent at the end of 2007 to 11.9 percent last year. Even among college-educated African Americans, the unemployment rate has more than doubled from 3 percent at the end of 2007 to 6.5 percent in June.

Lest one be tempted to slap a "minority" label on these dispiriting numbers and dismiss them as a sideline to the broader economy, black and Hispanic households together comprise 28 percent of the American population.

In other words, great numbers of Americans have indeed gotten screwed. And anyone who missed that essentially missed what was wrong with the American economy writ large.

DISCONNECTED REALITIES

The economist whose words still echo in my head merely used colorful language to express the same sort of mentality that has been pervasive within his profession before, during and after the Great Recession: the sense that most of the American population was in decent shape and ready to resume spending.

This sort of view is increasingly difficult to maintain as soon as one leaves the confines of data sets and theoretical models and begins mixing with human beings in any number of American communities: at food banks, where people who were not long ago buying homes with granite counters now stand in line for donated bags of beans; at the unemployment office, where crowds congregate in an effort to keep meager checks coming; in suburban subdivisions, where unkempt lawns and empty driveways speak to the millions of homes relinquished to foreclosure.

But these sorts of scenes amount to an alternate universe from the ones that professional economists typically encounter in the places where they work and reside. The economist whose words I keep replaying lives in an exclusive New York City suburb, where the conversation is more likely to center on golf games and Caribbean getaways than strategies to maintain unemployment insurance. The median annual wage of professional economists nationwide was nearly $90,000 in 2010, according to the Labor Department. In the New York metropolitan area, where so many important forecasts are minted, it exceeded $100,000.

None of this is to impugn the professional integrity of people who make good money, but the disconnect in perspective carries pitfalls: Economists who fail to venture out of their own social circles run the risk of misunderstanding the state of reality.

One economist is hardly representative of the entire profession, of course. Many experts did grasp that much of the nation was so battered by the recession that the recovery was likely to be weak -- so weak that the economy would need sustained help in excess of the $800 billion stimulus-spending bill advanced by the Obama administration in early 2009. Nobel laureates Paul Krugman and Joseph Stiglitz asserted this to anyone willing to listen. Carmen M. Reinhart and Kenneth S. Rogoff produced a prescient book, This Time Is Different, that surveyed the history of financial crises and concluded -– correctly -– that such events nearly always yield long periods of disappointing economic growth.

But in the main, professional economists have proven to be out of touch with the extent of the wounds left by the recession, which itself landed on top of a decade-long period of disappointingly lean growth and a quarter-century of stagnant wages for the majority of working people. Economists have proven particularly missing in action on the full-blown epidemic of joblessness and lost wealth that afflicts minority communities.

If white Americans had seen half their wealth vanish in the course of four years, the economics profession would surely be scrambling in an all-hands-on-deck moment, compelled by a universal imperative to figure out what had gone so wrong and quickly come up with a fix.

The fact that no such emergency has emerged speaks to many things: to enduring stereotypes about minority communities as places of dysfunction; to mythologies subscribed to by successful white Americans that the United States is a land of unlimited opportunity, with the implication that those who fail to succeed are somehow not trying hard enough. But the distinct lack of crisis mentality also speaks to an overly narrow set of experiences and ethnic identities among the people doing the inquiring.

"It's a function of who's sitting at the table," says Julianne Malveaux, an African-American economist and president of Bennett College, a historically black institution in North Carolina. "These white guys, they don't get it. They are in some insular bubble. The closest they may come to an African-American person is their driver."

In recent years, African-American representation among the ranks of professional economists has actually slipped, according to the Committee on the Status of Minority Groups in the Economics Profession at the American Economic Association. In 1995, 6.7 percent of the 17,000-plus bachelor's degrees awarded in economics were conferred upon African-American graduates, the committee found. In 2006, the last available year for data, the percentage had dropped to 6.1.

Some are skeptical that increased diversity would translate into progress in terms of the quality of the economics profession.

"You've got to be careful," says Robert I. Lerman, a white economist at American University and the Urban Institute. "Many African-American economists come from families with just as many advantages as whites. And after they get their degrees, they are in demand, and they will probably get a good salary."

Yet it seems reasonable to assume that if the field were more representative of the breadth of the American experience -- not just in terms of race, but also in terms of geography, class and culture -- our collective understanding would be more sophisticated, enabling clearer analysis and more effective policy.

Economics as practiced in the academy is supposed to be a dispassionate scientific inquiry centered on data, and not subject to the permutations of anecdotal impression. But the stories that two economists divine from the same set of data are rarely the same. Differences in the assumptions at work -- whether high unemployment will crimp consumer spending; whether declines in housing prices will make people more or less likely to invest in education -- are reflective of broader assumptions about human nature. Those assumptions are surely influenced by the life histories and values of the people doing the analysis. Even science is susceptible to the forces of identity.

"The economics profession tends to slip into theoretical models and data, and sometimes loses track of regular people," says Harry J. Holzer, a white economist at Georgetown University and the Urban Institute. "Having more minority economists might make us more aware of what's happening in those communities."

Economists may wield a common tool kit, with generally agreed-upon practices of analysis, but the subjects they choose to explore and what they consider significant would surely be altered were the inquiry conducted by a group more representative of American society.

"It's the questions that are asked, that's where diversity is going to matter,” says Glenn Loury, an African-American economist at Brown University. "Even though the approach and methods of analysis may be the same, there's a subjective element to the questions."

Loury is an expert in the economics of incarceration. He is struck by how the typical cost-benefit analyses of mass imprisonment conducted by academic economists tend to skip the impacts of large numbers of working-age men being released into predominantly minority communities -- an omission he attributes to the dearth of economists who are familiar with such neighborhoods.

The problem of limited perspective producing flawed analysis is far from unique to economics. It plagues any and all inquiry.

Years ago, after the riots in Los Angeles that followed the videotaped beating of Rodney King by city police, I spoke with an African-American metro editor at the Los Angeles Times who expressed frustration over her failed attempts to get higher powers at the paper to clue in to what she and others viewed as rampant institutional racism within the city’s police department. She had conveyed to senior editors that many black writers and editors in the newsroom felt that a serious investigation of the force was imperative, yet the predominantly white higher-ups generally dismissed reports of such trouble as universal in any big city. Their own encounters with the LAPD were not cause for concern.

In the run-up to the Great Recession and after, editors and writers at major American newspapers were skeptical even as signs of enduring economic damage mounted. They noted that business class cabins on cross-county flights were still full, and reservations were still hard to secure at high-end eateries in Manhattan and Beverly Hills.

Journalists and economists alike were not spending enough time with a broad enough cross-section of American reality.

We were not encountering enough people like Dolores Victor.

THE UNRAVELING

Four years ago, Victor, an African-American woman, was still a successful plaintiff's attorney in a San Francisco suburb with her own practice. She worked out of her apartment, using a virtual office that connected incoming calls to her home and allowed her access to conference rooms as needed. As recently as 2007, she earned more than $100,000.

Victor, 52, lived modestly, owing to a childhood characterized by poverty, which has given her a lifelong reluctance to take on long-term debt. She rented an 850-square-foot apartment, even when she had the funds to buy a home. She drove an aging sport utility vehicle, rather than upgrade. When she went out to eat, she tended to frequent inexpensive chains like Red Lobster and Chili's. Her wardrobe was culled from Macy's and J.C. Penney.

By 2008, as the economy sunk deeper into recession, Victor's income plummeted. Last year she earned $16,000. This year, she has so far brought in $3,500.

She and her husband divorced last year, a development she pins largely on financial strife.

"We couldn't keep up," she says. "It created a lot of problems and a lot of arguments."

She has run through her savings, which once reached $35,000. She saw her car repossessed when she could no longer keep up with the monthly payments. She recently filed for bankruptcy, yet that process does not expunge the roughly $90,000 in debt she carries from attending law school. She recently applied for food stamps.

"I spent all this money to go to law school and make a life for myself, and I'm about to be evicted in two weeks," she says. "I have no money in the bank, and I don't know where the hell I'm going to go with me and my two cats."

There are winners and losers in any large economy, people who get screwed and people who escape that fate. But what is perhaps most remarkable about Victor's experience is how entirely unremarkable it is.

More than one-third of African-American households -- some 35 percent -- showed a net worth that was zero or negative in 2009, as compared to 29 percent four years earlier, according to the Pew report.

Victor did not cash in on the real estate bubble, borrowing against an exotic mortgage for a flat-screen television or the travel adventure of a lifetime. She did not suddenly lose her willingness to work or develop a yearning for public assistance. She invested in education, built a business and put savings away, yet the economy turned toxic and she lost everything.

Stories like hers, and the implications of the aggregate numbers, go far beyond issues of fairness, touching on the basic functioning of the broader economy. How can the economy prosper if so many people are simply unable to participate? How can businesses rack up sales enough to justify hiring if so many people are effectively dispossessed and unable to buy? Yet in the dominant economic conversation -- the one that focuses on gross domestic product and labor productivity and shareholder value -- this element too often goes missing. People like Dolores Victor tend to be treated as sociological curiosities as opposed to indicators of real economic distress.

This is not because economists and journalists and policymakers are generally callous (although, of course, some are). It is not because we are lazy, stupid or incompetent (although you will have no difficulty finding people who merit such description). Rather, our failings reflect a dearth of perspective. The experiences processed as objective reality by our collective apparatus in media, the academy and government are filtered from too few points of view, and analyzed by an elite whose understanding is too narrowly shaped.

The narrowness tends to be self-reinforcing: Minority participants feel pressure to show they belong by conforming to the operative assumptions of the majority, avoiding subjects of inquiry that risk outing themselves as different. Malveaux, the Bennett College president, recalled that as a graduate student at M.I.T., she grasped an unspoken directive for minority economists to avoid digging in to questions that touched on the racial divide, lest they be seen by their peers as something other than dispassionate social scientists.

"Work on race by African Americans tended to be discounted, or valued less highly," she says. "You're an economist. You're supposed to be objective."

Among educated, white Americans, racial diversity tends to be discussed as an idealistic aspiration, an objective grounded in notions about fairness: We need more people of color in our schools and among our executive ranks because this will create opportunities for those who have yet to enjoy enough of them. This will address the legacy of systematic racial discrimination that is part and parcel of American history.

But the most compelling reason for diversity -– in newsrooms, inside academic institutions, within government and among the ranks of practicing economists -- is that we need more sophisticated powers of observation in operation.

We need a profusion of points of view, a diverse chorus of voices opining, questioning and challenging. We need diversity for the simple reason that, without it, we don't really know what is going on.

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