National Data | The High Cost of Diversity—Due To Go Up Under Obama

On August 14, 2008 the U. S. Census Bureau announced that that “non-Hispanic single-race whites” would be less than 50% of the U.S. population by 2042.

Neither Barack Obama nor (needless to say) John McCain touched upon this point. Most press commentaries did not go beyond the obvious. A typical analysis observed that “by the middle of this century, the United States will be a distinctly greyer country.” [America`s whites will become minority by 2042, says census bureau, By David Usborne, Independent, August 15, 2008]

The New York Times played down the racial angle, noting that “Most people who describe their origin or heritage as Hispanic or Latino also identify themselves as white. In fact, says the Times, the number of citizens who identify as white will increase by a stunning 80 million by 2042, and their percentage of the population will drop only slightly, from 79 percent to 74 percent. [A Nation of None and All of the Above, By Sam Roberts, August 16, 2008]

Well, as the saying goes, “color is only skin deep.

In fact, this demographic shift will have a profound effect on all aspects of American life—not the least of which will be the economic drag associated with this transformation.

The economic burden falls hardest on non-Hispanic whites who, as a group, are disadvantaged by policies aimed at increasing diversity. It is increasingly clear—especially at a time when minorities are bearing the brunt of sub-prime mortgage defaults—that the putative beneficiaries of diversity-based programs are also hurt. Indeed, the unintended consequences of race-based preferences may be one of the stories never told.

Peter Brimelow, writing with co-author Leslie Spencer several years ago in Forbes, calculated the cumulative affirmative action cost to the U.S. economy at $225 billion, or four percent of GDP for the year 1991.  In other words, had the funds spent to enforce and comply with affirmative action programs since their inception been put to other, more productive uses, GDP would have been four percent higher in 1991. [When quotas replace merit, everybody suffers, Forbes, February 15, 1993]

If Brimelow`s four percent figure is accurate (and to my knowledge no one has ever challenged it), then the cost of affirmative action programs would currently be about $540 billion.

But fifteen years have passed since Brimelow made his calculation. Even if the same programs were in place, their impact would be larger today because they have been in existence longer. The economic cost of affirmative action compounds annually, as the growth path of the economy increasingly diverges from its potential.

Bottom line: The misallocation that cost 4 percent of that GDP in 1991 could easily cost 8 percent GDP today (2007). That implies a $1.1 trillion economic loss from affirmative action programs—a whopping $3,667 taken from every man, woman, and child in the country.

In a study recent published by the National Policy Institute, I estimated the cost and benefits of affirmative action programs by race:  

Affirmative Action Costs and Benefits by Race, 2007

($ billions except per family)

 

Costs

Benefits

Net Costs (-)

/Benefits

Net costs (-)

/Benefits per 4-person family

White

$1,408.1

$96.8

-$1,311.3

-$24,165

Black

$26.9

$186.1

$159.2

$17,589

Hispanic

$30.5

$210.9

$180.4

$18,284

Asian

$134.5

$6.2

-$128.3

-$40,002

Total-all races

$1,600.0

$500.0

-$1,100.0

-$14,400

Note: Net costs of affirmative action programs estimated at 8% of GDP ($1.1 trillion in 2007.) Costs allocated by income shares, benefits by the share of welfare benefits accruing to each racial group. Source: Edwin S. Rubenstein,  The Economic Costs of racial and Cultural Diversity,  NPI, October 2008 (PDF)

The biggest losers are Asians, who lose an estimated $40,000 per family. This amount reflects the taxes, compliance costs, and—most importantly—the loss of income associated with being on the wrong side of the affirmative action playing field.

White families lose about half as much as their Asian counterparts, while Hispanics benefit even more than blacks.

Proponents of race based preferences claim that the benefits of such programs outweigh their costs. Ending, or at least reducing, discrimination in hiring and pay practices is surely a benefit worth paying for.

Yet many economists believe discrimination is rare or non-existent in a capitalist economy such as ours.

Gary Becker, a 1992 Nobel laureate, exposed the flawed rationale behind affirmative action programs in The Economics of Discrimination (1957.) In a free market, Becker argued, there is an inexorable tendency for everyone to be paid the marginal value of his or her labor. This means that ultimately, you are likely to be paid something like what your work is worth. If you are in an unpopular group—a racial minority, for example— employers may pay you less. But that means they will make more money off you. Because you will be such a profitable hire, other employers will demand your services, and your wages will be bid up. Employers who pay minority workers less than their “marginal product” will lose those workers to competitors.

(Similarly, economists were skeptical that mortgage lenders would discriminate against credit-worthy, and therefore potentially profitable, minorities. But bipartisan pressure from government forced the mortgage lenders to extend credit to marginal minorities anyway—with the disastrous results we now see.)

This process can be forestalled only by monopoly or government intervention—both of which occurred, for example, in South Africa under apartheid. And in the U.S. it is occurring under affirmative action.

The welfare/affirmative lobby does not like to hear this. But the evidence clearly supports Becker. As Brimelow and Spencer wrote:

” `Once adjustments are made for factors like age, education and experience, 70% to 85% of the observed differences in income and employment between the various groups in America disappears,` says economist Howard R. Bloch of George Mason University. `That`s been shown by studies dating back to the mid-1960s. And you can`t even be sure that the residual gap is due to discrimination. It could be due to factors we haven`t controlled for.`”

Harvard economist Richard B. Freeman found blacks and whites with the same backgrounds and education had achieved wage parity by 1969, well before quotas had America in their grip. “By the late 1970s,” Freeman wrote, “young black male college graduates attained rough income parity with young white graduates.”

For female black college graduates, the gap more than vanishes. Joseph Conti reports in Profiles of a New Black Vanguard that “black college-educated females currently earn 125 percent of what white college educated females earn.” [Ralph R. Reiland, Affirmative Action or Equal Opportunity?, Regulation, Vol. 18, no. 3, 1995.]

All of which shows the fallacy underlying affirmative action in the American labor market.

The programs may even be counter-productive. Since the onset of affirmative action in the 1960s, the employment-population ratio for black workers has deteriorated relative to that of whites and Hispanics. This could reflect the over-representation of blacks in manufacturing and other declining sectors of the economy. But the affirmative action programs themselves, by increasing the threat of lawsuits brought by employees in protected groups, could be a factor.

Case in point: the 1991 Civil Rights Act. The legislation significantly expanded the rights of plaintiffs in discrimination complaints to the EEOC and in federal civil court. In particular, the Act made it easier to use statistical evidence, however flawed and misleading, to “prove” discriminatory intent even when no discriminatory intent is evident on the part of the employer.

To avoid the threat of lawsuits, many U.S. employers have hired illegal immigrants in place of minorities—many of who may be willing to work for the same wage. That employers take such risks, including hiring people who can barely speak English, suggests that the true cost of hiring protected groups may be huge. I reported in my NPI paper that some have put the “implicit tax” of hiring workers protected under the Civil Rights Act, at $25,000 per worker.

There was a brief moment after the Republicans won control of Congress in 1994 when it looked like they just might do something about Affirmative Action. (California voters had just rejected quotas by voting overwhelmingly for Proposition 209). But, led by House Speaker Newt Gingrich, they blinked. And George W. Bush actually favored quotas.

Under President Obama, Affirmative Action is likely to be further entrenched. Next time, Republicans will have to be braver—if there is a next time.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.