Unbound (part 2)

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Heather Boushey’s detailed discussion of how inequality constricts our economy begins with how it obstructs the development and utilization of human capital.

Learning and human capital

Economists use the term “human capital” to refer to the investments we make in people rather than machinery and other material means of production. In particular, it refers to the education and training of our labor force. Gary Becker pioneered the use of the term in his book of that name in the 1960s.

The importance of human capital raises the question of how opportunities to acquire relevant knowledge and skills are distributed in the population. When Americans think of the United States as a “land of opportunity,” they usually assume that inequality in rewards is a good thing, as long as everybody gets an equal chance to compete for them. I think that’s a big part of the appeal of competitive sports, where many can play but some win more than others.

In the case of economic competition, however, the winners take their rewards home and share them with their families. Parents want to give their children the best chances in life they can, and high-income parents are in a much better position to do so. As a result, great inequalities of results translate into inequalities of opportunity as well. Boushey reports on the substantial body of research connecting economic inequality with differences in early life experiences and later life achievement.

According to David J. Barker’s “fetal origins hypothesis” and related research by others, the inequalities are already present in the womb. Prenatal experiences like poor nutrition affect birth weight, future health, and educational achievement. After they are born, children differ greatly in access to quality child care and early childhood education. Although almost every American child gets some sort of schooling, low-income families have less access to well-funded schools and higher education. We do not know how much talent is underdeveloped and wasted in the process, but since the United States is one of the most economically unequal countries in the world, it must be substantial.

Economic inequality also affects children in more subtle ways. “The psychology literature shows that economic hardship is associated with parental emotional distress and conflict, as well as harsh parenting and behavioral problems for children.”

Society cannot control every factor that connects parental success or failure with children’s opportunity. Genetic differences may well play some role. But many public programs do show positive effects on children’s achievements, such as Supplemental Nutrition Assistance, the Earned Income Tax Credit, early childhood education, and school finance reforms to better fund schools in poor neighborhoods. Much more can be done, since the United States lags behind most wealthy countries in many policy areas, especially quality child care and early childhood education.

Skills, talent, and innovation

The development of human capital is a long process, and early child development is only the beginning. Even if a family raises a talented child, social and economic inequalities often obstruct that individual’s ability to contribute to a thriving economy.

The book features the work of Raj Chetty, who studied how the relationship between aptitude and achievement was complicated by inequalities in income, gender and race. Chetty was especially interested in achievements in innovation, which he studied by comparing the number of patents held by different groups. He used children’s test scores as indicators of aptitudes. As expected, high-aptitude groups went on to hold more patents. Within the high-aptitude groups, however, far more patents were held by subjects who were white, male, or came from higher-income families.

Based on their findings, Chetty and his colleagues decry the number of “lost Einsteins” in the United States—the smart kids who aren’t lucky enough to have been born into rich families and never get to make the most of their talent, skills, and hard work. They say the economic effects are shockingly high: “If women, minorities, and children from lower-income families were to invent at the same rate as white men from high-income (top-quintile) families, the total number of inventors in the economy would quadruple.”

Boushey discusses the “obstacles to entrepreneurship” that keep disadvantaged groups from contributing more to economic innovation. These groups do not have as much access to the contacts and financing they need to launch their enterprises. For example, surveys by the US Census Bureau found that “minority-owned businesses pay higher interest rates on loans, are more likely to be denied credit, and are less likely to apply for loans due to concerns that their applications will be denied.” Such differences remain even when comparing people with similar credentials.

Discrimination in the workplace is also a factor. When researchers sent fictitious resumes to employers advertising for talent, “a white-sounding name provided an advantage equivalent to eight additional years of experience.” Companies that move away from discrimination and toward gender and racial diversity may find the effort worthwhile. Some research has found that such diversity is positively correlated with financial returns. Boushey concludes, “Innovation thrives on diversity.” I think that could be both because diverse companies tap into a wider pool of talent, and because the interplay of ideas among people of different backgrounds stimulates creativity.

These findings call into question the old idea mentioned in the previous post, that deliberate increases in equality can only be achieved at the cost of reduced efficiency and lower aggregate income. That makes sense only if one assumes a state of perfectly free and fair competition, where the best talent automatically rises to the top and the economy already runs at peak efficiency. From that perspective, why would you refuse to hire and promote a talented black woman, knowing she might go to work for your competitor instead? The short answer is that your competitor is probably just as prejudiced and won’t hire her either! Orthodox economics embodies a rather rosy view of free markets, usually presented as the objective, scientific, value-free way of looking at things. The orthodox view is useful as a simplified and idealized model to serve as a point of departure, but it is not an adequate description of the real world, with all of its conflicts and power structures. If taken too seriously, it is a formula for economic complacency. It fails to provide the bold, imaginative vision we need to meet the economic challenges of the 21st-century global economy.


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