Rethinking the cost of discrimination: economists discuss how racial issues impact the corporate line.

We live in a world fraught with competition among races, religions and ethnicities over both real and perceived access to goods, services and resources. Whether the drama is played out in Somalia, South Africa or South Central Los Angeles, there is mounting tension among those who have traditionally held economic power and those who - once locked out - say they are ready to claim their fair share of the pie. In the United States, perhaps no area of public policy debate symbolizes that struggle more than the battle over affirmative action.

W.E.B. Du Bois said the 20th century's struggle would be that of the color line. Today, as we move toward the 21st century, America's struggle has broadened to include gender and ethnic conflicts over the allocation of jobs, education and business opportunities. During the past quarter century, the most important component in "leveling the playing field" and providing equal access to those opportunities has been affirmative action. As BLACK ENTERPRISE Board of Economists (BEBE) member Emmett J. Rice loosely defines it, affirmative action is the public- and private-sector process of encouraging qualified African-Americans to take positions in fields or areas from which they've been excluded or are underrepresented.

Of course, political conservatives view it quite differently. They contend that affirmative action is impossible to implement without quotas. Thus, they claim that affirmative action and quotas, along with the notion of "workplace diversity," are synonymous. Worst of all, they say, these practices undermine the American economy and productivity by forcing companies to hire less competent personnel. They also argue that government and private industry are burdened by high cost of compliance with antidiscrimination laws.

When the BEBE gathered last fall in Washington, D.C., concern over where African-Americans are economically versus where they should be dominated the deliberations. During the two-day session chaired by BE publisher Earl G. Graves the board discussed the gradual acceleration of the U.S. economy and its impact on the 1994 economic outlook for African-Americans. The board also debated, at times sharply, the accusation made by conservative writers in Forbes magazine that affirmative action was a process that harmed all Americans' both financially and personally.

Papers were presented at the meeting by board members Andrew F. Brimmer, president of Brimmer & Co., a Washington, D.C.-based economic and financial consulting firm; Gerald Jaynes, professor of economics and Afro-American studies at Yale University; and guest economist Cecilia A. Conrad, assistant professor of economics at Barnard College. Margaret C. Simms, director of research for the Joint Center for Political and Economic Studies; Emmett J. Rice, a former governor of the Federal Reserve Board; Courtney N. Blackman, an international economic consultant; Edward D. Irons, dean of the Clark Atlanta University School of Business; and David H. Swinton, dean of the Jackson State University School of Business, discussed the papers.

The True Cost Of Affirmative Action

As deliberations began, Graves said that too often mainstream media pundits perpetuate the argument that America pays too great a price to live up to its constitutional guarantees of equality of access and opportunity for all citizens. Yet, these observers have no plan for how African-Americans who are regularly denied these guarantees - which white Americans take as a birthright - can possibly catch up and achieve economic equality.

African-Americans have little choice but to support affirmative action - despite political and social pressure to do otherwise - and to educate their fellow citizens that it does not take anything away from them. This past September, the Wall Street Journal reported that a review of Equal Employment Opportunity Commission (EEOC) records showed that during the last recession blacks were the only group to suffer a net job loss, while Hispanics, Asians and, yes, whites gained. (See "Gee, Blacks Really Did Lose More Jobs," In The News, December 1993.)

Contrary to conservative critiques, black workers are still the last hired and first fired. "To the degree that equal employment opportunity laws are enforced and efforts to achieve workforce diversity are genuine," Graves says, "affirmative action continues to be America's most potent weapon against persistent and pervasive discrimination."

The BEBE deliverations focused on a feature article in Forbes magazine (February 15, 1993), "When Quotas Replace Merit, Everybody Suffers," by Peter Brimelow and Leslie Spencer. The article claimed that the 1964 Civil Rights Act has been transformed by the civil rights lobby and its allies "into a pervasive quota system," whose impact upon the private and public sector has "already depressed GNP by a staggering four percentage points."

The BEBE found Brimelow's and Spencer's arguments flawed on several counts. Board members said the Forbes writers assume that qualified white male workers are being displaced by incompetent minorities and women. This assumption infers that white males are more productive workers than minorities and women.

There is simply no conclusive empirical evidence to support either of these claims, say the BEBE members, Brimelow and Spencer rely primarily on anecdotes of white employers "forced" by affirmative action to hire unqualified members of the "protected classes" over preferred, white male candidates. But, BEBE members say, there is also plenty of anecdotal and empirical evidence of another common hiring practice: Qualified women and minorities are routinely being passed over for jobs and promotions in favor of inexperienced or less qualified members of the original protected class - white males.

Jackson State's Swinton takes issue with the anecdotal nature of anti-affirmative action articles. "I have never found a company that just hired blacks to displace whites without regard to their qualifications."

The Board also found fault with the author's statistical analysis. Brimelow and Spencer exagerate the costs of affirmative action by misusing or selectively ignoring relevant studies. They make no attempt to balance those costs against the economic benefits of antidiscrimination efforts. They dismiss the existence of current discrimination and its considerable economic costs. Finally, they paint merit-driven hiring and the pursuit of diversity as mutually exclusive concepts, presuming that all efforts to battle employment discrimination require the use of quotas.

Conrad, a Barnard professor specializing in regulatory issues, agrees with Brimelow and Spencer on one point: Too little serious research has been done on affirmative action's economic costs and benefits. Unfortunately, she adds, this death of research lends unwarranted credibility to the Forbes article.

Conrad challenges the direct, indirect and equal opportunity regulation costs estimated by the writers. "Brimelow and Spencer stack the deck against affirmative action," she contends, "by overstating the costs of compliance, by double counting what they label the indirect costs of quotas, and by citing only the academic studies and statistical evidence which support their point of view."

Conrad took a closer look at how the authors arrived at the direct costs of regulatory compliance to the private sector - estimated by Brimelow and Spencer to be a whopping $6 billion. She points out that the Forbes writers based their conclusions on numbers supplied by the St. Louis-base Center for the Study of American Business (CSAB) at Washington University. The CSAB figures that for every dollar spent on regulatory enforcement, another $20 is spent on compliance costs by the private sector.

According to Conrad, the Forbes analysis is faulty in ways that hois the authors by their own statistical petards. For one thing, she says, the authors mix data by quoting studies that are not solely focused on compliance with equal opportunity rules. Instead, the data include compliance costs for the laboratory and clinical testing of new products, for product redesign and for the installation of pollution control devices.

In addition, she points out that a 1992 CSAB report sets the total compliance costs, which is predominantly paperwork, at $20 billion annually. If the paperwork required by equal opportunity rules is proportional to the EEOC's share of the federal budget - which is 3%, according to Brimelow's and Spencer's estimate - then the actual cost of affirmative action compliance is less than $1 billion annually. When administrative costs are added to that figure, costs of compliance for all groups served by affirmative action total $1.6 billion, considerably less than the Forbes estimate of $6 billion.

"Brimelow and Spencer would have us believe that prior to affirmative action, jobs were allocated purely on the basis of merit," Conrad adds. However, "studies suggest that having family and friends already employed at a company might be as good a predictor of employment as performance on a standardized test."

The Forbes analysis also discounts contemporary racial discrimination, as evidenced most recently by a Wall Street Journal study. Despite Brimelow's and Spencer's claims, there is no evidence that market competition - in the absence of affirmative-action regulations - will eliminate discrimination. Even conservative economist Gary Becker - the 1992 Nobel laureate who wrote the seminal work, The Economics of Discrimination, in 1957 - admits that discrimination exists.

Yale's Jaynes says there is little evidence that white male workers are more productive than their minority and female counterparts. However, he observes, since the 1980s, several empirical, unflawed discrimination analysis experiments have been conducted. The most effective used identically matched and coached pairs of young minority and white male job applicants to investigate discriminating against blacks and Hispanics in Boston, Chicago, Los Angeles, Atlanta and the District of Columbia.

The result: Although they applied for the same positions and used identical resumes and interviewing techniques, white applicants moved further along in the interview process and were more likely to be offered a job than either blacks or Hispanics. The study's conclusion: "Employment practices provide strong evidence that a major factor in the under representation of minorities in higher-and lower-status occupations is discrimination."

BEBE members say that the persistence of discrimination probably does far more harm to America's economic productivity than does enforcement of affirmative action initiatives. Anti-affirmative-action activists seem oblivious about how racial bias hurts America's GDP. As BEBE member Andrew F. Brimmer noted in a recent Economic Perspectives column (see "The Economic Cost Of Discrimination," November 1993), racial bias - primarily through the denial of equitable educational and employment opportunities to blacks - deprived the American economy of about $215 billion in 1991. This amount was equal to roughly 3.8% of GDP, or just under the 4% that Forber claims is lost to affirmative action and quotas.

As for claims that affirmative action has proven ineffective because it has not eliminated poverty in the black community, the BEBE members contend that affirmative action was never meant to be the ultimate solution to that problem. Also, anti-discrimination policies were never set up to benefit blacks exclusively. As indicated by the Wall Street Journal study of EEOC figures, white women, Hispanics, Asians, the handicapped and other "disadvantaged" groups have achieved significant gains as a result of civil rights legislation.

Goals And Time-tables

Vs. Quotas

Yale's Jaynes says that since the '60s, an increasing majority of Americans of all ethnic backgrounds have endorsed the ideal of equal employment opportunity as a fundamental value of the American creed. However, this ideal is not possible in a society where employers are allowed to discriminate. Consequently, says Jaynes, the public and the federal government have rejected the idea that an individual's right to free association - the core of conservative opposition to mandating that employers hire minorities and women - "has neither a moral or a public policy priority over the goal of achieving a society where all citizens are entitled to equal life chances."

Few of those who believe in the principal of equal opportunity endorse the elimination of merit as an important consideration when it comes to hiring and promotions. Yet arguments against affirmative action rely on the presumption that businesses that set goals and timetables for achieving workforce diversity are hiring by the numbers, with no regard for whether the candidates chosen can do the job.

Clark Atlanta's Irons says this position would be considered untenable in any other area of business management. Few companies meet sales or other objectives without setting measurable goals, establishing timetables and implementing strategic plans for meeting them. "You cannot run an organization successfully without goals; human resources is no exception," Irons observes. "The only time we hear that goal-setting is bad for business is when it comes to bringing more minorities and women into the workforce." Then, Irons adds, "goals and timetables become quotas. Americans have been sold a bill of goods that says it is bad to set goals for integrating minorities - blacks in particular - into the labor force."

The bottom line, for BEBE members, is that if equal opportunity is a worthwhile objective, as most Americans believe, it will require the setting of measurable goals and the investment of time, money and energy to meet them. David Swinton of Jackson State adds: "This means structured outreach, recruitment and training efforts."

The 1994 Economic Outlook

The aggravatingly slow economic recovery has not done much to ease tensions surrounding the continuing debate over discrimination and affirmative action. Will economic growth pick up speed in 1994?

Andrew Brimmer says there is only one answer to that question: No. "The American economy - once again - is moving sideways," he observes, "and there is little likelihood of a significant pickup over the next year."

But don't call Dr. Kevorkian yet. Brimmer's pessimism is relative and stems from the fact that, historically, U.S. economic growth in post-recessionary periods has been heartier than the current recovery. This being said, Brimmer projects a 3% growth rate in 1994, three-tenths of a percent higher than the projection made by the National Association of Business Economists.

Brimmer says the economy's problems stem from continued weakness within its interlocked mainsprings. The three key cogs are domestic consumer spending, government spending and international trade. Domestically, housing and new car sales were up through year end, Brimmer says, and businesses spent more for equipment, such as computers and related systems. But overall construction spending is still shrinking, and widespread corporate downsizing has not ebbed because lowered productivity and weak aggregate demand stifles hiring.

The result: In 1994, Brimmer projects 35 GDP growth. The spine of this gain should be growth in nonresidential fixed investment and housing. A higher growth rate was possible, according to Brimmer, but the Clinton plan to raise taxes and reduce expenditures to cut the federal deficit squelched that prospect.

Of course, weak growth curtails sizable job creation. Brimmer says that in order to reduce the unemployment rate by 1%, real GDP needs to grow by 3.5%. In 1994, he projects that the overall jobless rate will be 6.6%, compared with a projected 6.9% for 1993. The pyrrhic benefit is that high unemployment, coupled with excess industrial capacity, will contribute to lower inflation. In 1994, consumer prices are projected to grow by 3% and producer prices to increase by 2.2%.

Slow Growth's Impact On Black America

In 1994, Brimmer, a former Federal Reserve governor, says slow economic expansion will ensure that the number of African-Americans entering the labor force will grow faster than the rise in the black share of employment and income. Last year, the total U.S. civilian labor force was 128.1 million, and the black proportion represented 14.1 million, or 11%. The same year, black employment averaged 12.2 million, or 10.22% of the total 119.20 million.

Brimmer says that if blacks had employment parity - where their share of total employment equaled their share of the civilian labor force - an additional 930,000 blacks would have been employed. In 1993, Brimmer says, blacks were 2.25 times more likely to be unemployed than whites.

In 1994, the black civilian labor force is projected to grow to 14.5 million, or 11.1% of the total. He expects African-American employment to reach 12.5 million, or 10.3% - leaving a job deficit of 949,000. Yet, when the economy grows, even slowly, blacks gain jobs. In 1994, black unemployment should shrink to 13.2%, while total unemployment decreases to 6.6% for all workers and 5.7% for whites.

Of course, African-American money income grows with black employment. Thus, the black share of total money income would be larger if blacks were employed in numbers equal to their share of the civilian labor force. Last year, black income was projected to be $315.4 billion, or 7.76% of the U.S. total of $4.06 trillion. Parity income for blacks would have been $447.1 billion - meaning an income deficit of $131.7 billion. In 1994, total U.S. money income is projected to be $4.28 trillion. The black share may rise to $335.6 billion, or 7.84% of total money income, while projected parity income will be $475 billion. The projected income deficit for African-Americans in 1994: $139.4 billion.

As Brimmer's numbers suggest, achieving income parity is closely tied with employment parity for African-Americans. And to date, the most effective way to regulate access to equal employment opportunities has been affirmative action efforts.