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Businessweek Archives

Bias Still Blocks Black Progress

Economic Trends


Why lawmakers should take heed

There's no gainsaying the wide socio-economic gulf that still separates blacks and whites in America, and particularly the entrenched poverty and crime that afflict urban ghettos. There is also no denying the substantial progress made by a significant minority of blacks in recent decades, and the rise of a vibrant, successful black middle class.

Looking at this picture, many Americans have concluded that racial discrimination in hiring is no longer a major problem in the U.S. Rather than stressing affirmative-action programs and anti-bias statutes, they say, public policy should now focus on enabling blacks to move ahead by providing better education, job training, tax benefits, and entrepreneurial incentives.

It's a strong argument, and such steps are clearly desirable. But several recent studies suggest that racism is far more prevalent in American life than advocates of a public policy shift realize.

In a survey of 3,000 companies in four major U.S. cities with sizable black populations, economist Harry J. Holzer of Michigan State University found that small businesses were far less likely to hire blacks than larger companies. Among companies with fewer than 50 employees, blacks held only 13% of jobs requiring less than a college degree. In companies with more than 500 employees, blacks held 26% of such jobs.

Even after considering a number of factors (such as site location and the lack of formal hiring procedures) that tend to limit employment of blacks by small businesses, Holzer finds that job discrimination appears to be "much more pervasive in smaller establishments than larger ones."

Perhaps more troubling are the implications of a recent National Bureau of Economic Research study by economists Alberto Alesina, Reza Baqir, and William Easterly. Analyzing Census Bureau data for U.S. cities in the early 1990s, the researchers looked at how ethnic diversity affected local spending on productive public goods, such as education, roads, and sewers.

The findings were revealing. Other things being equal, more racially or ethnically diverse cities--in most cases, with a white majority and black minority--spent less of their budgets and less per capita on education, roads, libraries, sewers, trash removal, and even welfare than cities with more homogenous populations. This was true even though state and federal transfers augmented local outlays on welfare and education.

The researchers conclude that majority white voters (or any ethnic or racial majority) tend to spend less on public goods when a sizable fraction of their taxes are used to provide public goods shared with other racial or ethnic groups.

Such studies suggest that solving the nation's problems of race and poverty will not be easy. Small business accounts for over half of U.S. employment and much of recent job creation. Devolution of welfare and other federal programs to local control could result in even lower public investment in hard-pressed areas--investment essential to ensuring black and minority progress.BY GENE KORETZReturn to top


Credit the low-inflation expansion

Has speculative exuberance invaded credit markets? Looking at bond-yield spreads, you might think so. While the spread between high-grade corporate bonds and super-safe U.S. Treasuries has hardly changed over the past year--or the past decade--the spread between high- and low-grade corporates has narrowed appreciably.

Such spreads tend to widen as a recession nears, as the double whammy of rising rates and a weakening economy raises the risk of business failures. The fact that they are so narrow now, says economist Ram Bhagavatula of Citibank, is a direct result of the current low-inflation, strong-growth environment. The Fed's preemptive attacks on inflation earlier in the cycle have reduced the chances of a sharp recession-inducing round of tightening anytime soon. And low inflation makes it easier for companies to avoid inventory excesses.

Thus, reduced risks of policy-induced recessions and production excesses have lowered the chances of default by weaker companies and the interest premiums on their bonds. Even when a downturn finally occurs, says Bhagavatula, it could prove to be more muted than in the past--resulting in a less dramatic widening of credit spreads.BY GENE KORETZReturn to top

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