Economists Should Care About the Racial Divide

(Bloomberg View) -- When economists gather in Philadelphia this weekend for their big annual convention, the most important question shouldn't be whether a minimum wage reduces employment, whether tax cuts increase deficits, or whether immigration harms native-born workers.

It should be how to get the people in power to listen to economists.

The stereotype is that economists have an extraordinary amount of influence and status. Certainly, in the past, leaders on both sides of the political spectrum have been very willing to listen. President John F. Kennedy heeded the advice of Keynesians and enacted big tax cuts, while President Ronald Reagan did the same at the urging of supply-siders. Both Republicans and Democrats have steadily expanded the earned income tax credit, a darling of economic policy wonks. Economists were influential in crafting Obamacare, as well as President George W. Bush's attempted social security privatization.

Nowadays, though, economists' influence seems to be waning fast. President Donald Trump has espoused protectionist sentiments that fly in the face of the traditional Republican support for free trade. Evidence that immigration doesn't hurt American workers is being ignored in the administration's push for nativist restrictions. Most economists were very negative on the recent Republican tax reform, but this made little difference.

Why is the economics profession losing the ear of policy makers? One theory is that it's due to repeated failures -- over-encouragement of free trade policy that hurt American workers, complacency about financial deregulation, and inability to predict the Great Recession. But this might not be the major reason. After all, free trade was never particularly popular, and economists actually gained credibility after the Great Depression (which they also failed to predict).

An alternative theory is that identity issues -- especially racial issues -- are getting in the way of economic policy making.

Economic policy has several uses -- redistributing wealth from rich to poor, providing public goods like education and infrastructure, establishing institutions that ensure the smooth flow of economic activity, and clearing away counterproductive regulation. But there's reason to believe that broad support for these policies is difficult to achieve when racial and ethnic divisions run deep.

An influential 1999 paper by economists Alberto Alesina, Reza Baqir and William Easterly hypothesized that when cities or countries are divided along ethnic lines, public goods provision lags. In a follow-up paper with Janina Matuszeski, Alesina and Easterly found that the artificial post-colonial borders of African countries, which tossed disparate ethnic groups into the same polity, impaired the functioning of governments. Alesina has produced further studies supporting the hypothesis, and other papers generally (though not always) find a similar connection.

What does this mean in the case of the U.S.? The hypothesis is stated clearly in a quote from sociologist William Julius Wilson that appears at the beginning of Alesina et. al.'s original paper:

Many white Americans have turned against a strategy that emphasizes programs they perceive as benefiting only racial minorities…Public services became identified mainly with blacks, private services mainly with whites.

Essentially, the hypothesis is that many white Americans -- particularly Republican voters -- believe that taxation and government spending represent redistribution not from rich to poor, but from white to black. That certainly seems to describe the attitude of talk radio host Rush Limbaugh, who labeled the Affordable Care Act “a civil rights bill” and “reparations.” Political scientists Katherine Krimmel and Kelly Rader have also found a strong correlation between racist attitudes and lack of support for government spending.

Racial resentment is far from the only reason to oppose taxes and government spending. And it's certainly not true that all Republicans equate government spending and public goods with racial redistribution. But Alesina, at least, believes that this racial divide is a big reason why the U.S. has never developed a European-style welfare state.

Now, in the age of Trump, racial issues are more salient than they've been for decades. Political scientist Jason McDaniel and writer Sean McElwee have shown that racial resentment and fear of diversity were major reasons behind Trump's victory in the 2016 primaries and his surprise victory in the general election. It's easy to see Trump as a backlash against the increasing diversity of the American populace. Where once racial resentment was directed mainly at America's black population, the right-wing fringe known as the “alt-right” is now expanding the targets to include Hispanics, Asians and people from the Middle East. Some politicians have echoed this xenophobia -- for example, Iowa Representative Steve King recently declared that “we cannot restore our civilization with someone else's babies.”

In a racially charged climate like this, it's hard to get policymakers to think in purely economic terms. Economists' traditional self-styled role as relatively neutral, objective policy advisers is untenable in an age when identity trumps dollars and cents.

So what are economists to do? Instead of retreating to the ivory tower and waiting for the day when a less racialized political climate reemerges, they should consider putting their skills to work to help heal the racial divide. This is relatively uncharted territory for economists -- usually, it's the preserve of their colleagues in political science and sociology departments. But economists have very strong empirical skills, and a fresh perspective that might help political scientists and sociologists come up with new ways to attack the divisions that plague American society.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net.

To contact the editor responsible for this story: Mark Whitehouse at mwhitehouse1@bloomberg.net.

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