Fed is taking on a racist legacy in the field of economics

Last summer, the shock of George Floyd's death and other instances of police brutality ignited a national debate about inequality. Topics like the racial wealth gap became part of everyday discourse.

But at the heart of the problem is not just the prosperity separating White Americans from minorities -- often the Black Americans whose ancestors helped build the economy through enslaved labor -- but also that the very discipline that is a key conduit for improvement remains rife with racial bias.

"My view of how economics has to inherently address structural racism starts with economics recognizing the role of institutions and power and politics in shaping economic outcomes," said Joelle Gamble, special assistant to President Joe Biden for economic policy. "We are trying to practice this differently and say 'how are we actually driving towards economic growth in a way that is helping more and more people who have been permanently left out?'"

Part of the challenge is that few Black Americans have joined the profession: Just 13 received a doctorate in economics in 2019 among the 464 awarded to U.S. citizens, according to a report published in December by the American Economic Association. Of those, four were Black women.

In a sign of the heightened focus on the issue at the highest ranks in the field, the Federal Reserve -- the nation's foremost economic institution and the largest employer of doctorate-level economists -- is hosting a conference on racism in economics on Tuesday.

Two weeks after Floyd's death, economist William Spriggs published an open letter to his peers, explaining how many economists perpetuate inequality by ignoring race, and the impact of racism, in their research. Spriggs, a professor of economics at the historically Black Howard University and the chief economist of the AFL-CIO labor federation, will participate in the Fed's Tuesday conference.

The U.S. economy's problems today are monumental. Some 22 million jobs were lost at the onset of the pandemic, and while a good amount of them have been recovered, the Black unemployment rate remains at 9.6%, almost double the White rate.

Undoing a crisis whose burden has fallen heaviest on minorities while striving for a more equal economy -- as Biden has said he wants to do -- will be challenging and will likely require new ideas.

Modern-day economics in America was founded in the Progressive Era -- a period at the turn of the 20th century that overhauled the role of government in public life, according to Thomas Leonard, an economist and historian at Princeton University. Progressive lawmakers created the administrative state we know today, including the Fed, the Department of Labor, and other institutions that shape the economy through policy and regulation.

This was a time in U.S. history, some 30 years after the end of the Civil War, when racism and eugenics were commonplace.

Many of the earliest economists, including Irving Fisher, one of the most celebrated of the profession, were staunchly racist and backers of eugenics, the theory that some races are superior to others.

"They not only founded economics as a professional, scientific discipline, they founded it as an academic discipline and they made it a politically influential discipline," Leonard said. "They kind of invented this idea of the economist as a scientific expert who advises governments, politicians, regulators, on what to do."

But Leonard says the economics profession has made a lot of progress in the past century. While outright racism might no longer be acceptable, and eugenics has been completely discredited, some say economics retains subtler, yet acute biases.

At the root of many economists' issues with the failures of modern-day economics is the profession's sometimes fervent reliance on neoclassical theory. Neoclassical economics was established by Progressive-Era economists and asserts that supply and demand are the driving forces behind things like the pricing of goods.

So when looking at something like the racial income gap -- in America, Black workers make 60% of their White counterparts' wages -- a strict adherent to neoclassical theory might blame the gap on things like disparate education or skills levels, ignoring the impact of race-based discrimination, according to Nina Banks, an associate professor of economics at Bucknell University.

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"The empirical research that demonstrates that racial and ethnic discrimination explains economic outcomes is often overlooked or dismissed within the profession," Banks said. "Even when we have a profession that is more inclusive of historically excluded groups, it's not going to resolve the problem of racial biases in economics because the problems of racial bias, those problems are really embedded within our economic theory."

Banks calls stratification economics, which explores inequality by how different groups experience things, one of the most important developments in economics in the past few decades.

Jala Abner, a research assistant at the Chicago Fed, is one of the newer entrants to the field.

"As a Black woman I always wondered why there were these differences, and can we necessarily pinpoint the intersections of someone's identity for the reason why they have lower wealth, lower income, things like that," Abner said. "Just to see that there's proof within these data sets that there's something clearly wrong. It just reaffirms that we have a lot more work to do in general, whether it's the Fed or society as a whole."

Abner graduated from Spelman University last year with a Bachelor's degree in economics. She is considering pursuing a graduate degree in the discipline and may focus her research in stratification economics.

Abner is among the few Black economists within the Federal Reserve system. The Board of Governors in Washington, which employs about 400 doctorate-level economists (the 12 reserve banks together employ another 400 or so) had just two Black PhD holders at the end of last year.

While the Biden administration has put Black women in some of the most prominent economic positions -- Cecilia Rouse heads the Council of Economic Advisers and Janelle Jones is the chief economist at the Labor Department -- the profession overall is still starkly male and White.

Other science professions do slightly better. About 4% of doctorate degrees given in science, technology, engineering and math subjects went to Black Americans, who make up about 13% of the U.S. population. About 11.7% went to minorities overall.

The Fed has been trying to alter this for the past few years. The Board has changed hiring practices so that interviewers ask job candidates a standard set of questions and evaluate them based on specific criteria. It is working with historically Black colleges and universities to recruit more of their graduates, and created a program at Howard University in 2016 where Fed economists teach students.

To try and improve the pipeline of diverse students into economics, the Fed also sends economists to high schools to give presentations about the discipline and brings students to the Board in Washington to meet with the governors.

Beyond its work to improve diversity within its own ranks, the Fed last year changed the strategy behind how it carries out monetary policy. It will now seek to limit shortfalls from maximum employment, defined as a "broad-based and inclusive goal." That means it won't raise rates preemptively to head off inflation as unemployment falls, bringing more people from marginalized communities into the workforce.