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Racism Impoverishes the Whole Economy

Discrimination hurts just about everyone, not only its direct victims.

New research shows that while the immediate targets of racism are unquestionably hurt the most, discrimination inflicts a staggering cost on the entire economy, reducing the wealth and income of millions of people, including many who do not customarily view themselves as victims.

The pernicious effects of discrimination on the wages and educational attainment of its direct targets are being freshly documented in inventive ways by scholarship. From the lost wages of African-Americans because of President Woodrow Wilson’s segregation of the Civil Service, to the losses suffered by Black and Hispanic students because of California’s ban on affirmative action, to the scarcity of Black girls in higher-level high school math courses, the scope of the toll continues to grow.

But farther-reaching effects of systemic racism may be less well understood. Economists are increasingly considering the cost of racially based misallocation of talent to everyone in the economy.

My own research demonstrates, for example, how hate-related violence can reduce the level and long-term growth of the U.S. economy. Using patents as a proxy for invention and innovation, I calculated how many were never issued because of the violence — riots, lynchings and Jim Crow laws — to which African Americans were subjected between 1870 and 1940.

The loss was considerable: The patents that African-Americans could have been expected to receive, given equal opportunity, would have roughly equaled the total for a medium-size European country during that time.

Those enormous creative losses can be expected to have had a direct effect on business investment and therefore on total economic activity and growth.

Other economists are beginning to estimate harm to the economy caused by racism in broad ways.

An important principle suggests that the person who can produce a product or service at a lower opportunity cost than his or her peers has a comparative advantage in that activity. Recent research calculates the effects of the discriminatory practice of placing highly skilled African-American workers, who might have flourished as, say, doctors, into lower-skilled occupations where they had no comparative advantage. Such practices 50 years ago — which linger, to a lesser extent, today — have cost the economy up to 40 percent of aggregate productivity and output today.

Similarly, other research estimates that aggregate economic output would have been $16 trillion higher since 2000 if racial gaps had been closed. To put that total in context, the gross domestic product of the United States in 2019 was $21.4 trillion. The researchers estimate that economic activity could be $5 trillion higher over the next five years if equal opportunity is achieved.

Right now, if more women and African-Americans were participating in the technical innovation that leads to patents, the economist Yanyan Yang and I calculate that G.D.P. per capita could be 0.6 to 4.4 percent higher. That is, it would be between $58,841 to $61,064 per person compared with $58,490 per person in 2019.

This entire line of research suggests that organizations — companies, laboratories, colleges and universities — are leaving colossal sums of money on the table by not maximizing talent and living standards for all Americans.

I have thought and written a lot about remedies. Here are a few ideas aimed at addressing discrimination in the innovation economy. First, we need more training in science, technology, engineering and mathematics (STEM), like the extensive and highly successful program once sponsored by Bell Labs to encourage participation in these fields by women and underrepresented minorities

STEM fields should not be the sole target, however, because the innovation economy encompasses more than this narrow set of subjects. Two of the last three people I’ve talked to at tech firms have a B.A. in international relations and a Ph.D. in political science. Clearly, problem-solving skills matter, but these skills are not unique to the STEM majors.

Second, there is substantial evidence of systemic racism in education, which needs to be addressed. Research shows that professors are less likely to respond to email inquiries about graduate study from Black, Hispanic and female students than from people who are discernibly white and male. A system of incentives — and penalties — could hold those responsible accountable at every level of the education and training process.

At the invention stage, such as at corporate, government and university labs, my research shows that mixed-gender teams are more prolific than those whose members are all female or male. And a large body of literature has documented the positive effects of diversity in teams. Managers at each level should be held responsible for being good stewards of the resources of their companies and promoting diverse teams and behavior and, therefore, better outcomes.

When invention is commercialized and companies sell shares to the public, the wealth gaps are stark. Seven of the world’s 10 richest people on the Forbes list are associated with tech companies that commercialize inventions. Jeff Bezos, Bill Gates, Mark Zuckerberg and Elon Musk are in the top five. None among the top 10 (or 50) is Black.

The statistics for venture capital funding are striking. In 2014, less than 1 percent of venture capital funding went to businesses founded by African-American women, and in 2015, only 2 percent of all venture capitalists were African-American.

A number of worthwhile recommendations have been made to address the lack of diversity at the commercialization stage of innovation. These include:

Enhancing mentoring opportunities through programs such as those of the Small Business Administration.

Seeking and recruiting founders to invest in places like Atlanta, and not exclusively in Silicon Valley.

Addressing systemic racism at every level of management and within venture capital firms.

Diversifying corporate boards so that senior leadership will be held accountable for diversity and workplace climate. (California has done this with women on the boards of public companies.)

The Kapor Center, a think tank that promotes participation by underrepresented minorities in tech fields and education, has proposed noteworthy remedies at many stages, including at the pre-college level.

The social compact most societies have with their governments is that standards of living will rise continually and that each successive generation will be better off than preceding ones. We are robbing countless people of higher standards of living and well-being when we allow racial discrimination to flourish from generation to generation.

Lisa D. Cook, a professor of economics at Michigan State University, is a member of the Biden-Harris transition team.

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