Glenn Loury is an exceptional scholar, with important work in income inequality, public finance, discrimination, game theory, natural resource economics and other areas. He is also African American, a rarity in economics. While race has neither defined nor limited Loury’s scholarship, there is no question that it has influenced his path. His doctoral dissertation examined the dynamics of income inequality and argued that “continued racial economic disparities … reflect the social and economic consequences of historical inequity.” His model of income distribution included “social capital,” a notion that skills and earning potential are highly dependent on family and community background. “An individual’s social origin,” he wrote in 1976, “has an obvious and important effect on the amount of resources which are ultimately invested in his development.” That background, in turn, is shaped by history, which—in the United States—includes the enduring legacy of slavery and segregation. Income distribution is thus determined in part by factors with long residual impact well beyond individual ef- fort and innate ability. “The eradication of racial income differences [therefore requires] compensatory efforts,” wrote Loury, “within both the educational sphere and the world of work.” It was a powerful argument, and his skill in making it led to positions at Northwestern, then at the University of Michigan and, in 1982, at Harvard, its first African American economist with tenure. After a decade, Loury moved to Boston University, and since 2005, he has held a chair at Brown University in economics and social sciences. His research over these years has deepened within economics, earning him honors and wide recogni- tion in the field; it has also broadened far outside economics. That divergence was predictable, suggests Nobel laureate Robert Solow, his MIT thesis adviser. “It was clear to me [in the mid-‘70s] that he would be an outstanding economic theorist. But I think it was equally clear to both of us that there would be enormous pressures on him, as an eminent black in a highly technical, uniformly white field, to spend energy on other roles.” Indeed, Loury writes and speaks widely on topics as diverse as spirituality, U.S. incarceration, slavery repara- tions and self-censorship in political discourse. Despite this passionate participation in ongoing social debates, Solow observes, he continues “to produce cool analytical economics.” In the following interview, Loury covers a mere sliver of his wide-ranging scholarship.
JUNE 2013 12 PHOTOGRAPH BY PETER TENZER JUNE 2013 The Region
Region: You’re best known, of course, and benefits of acquiring human capital the way. Also things like, what do the for your work on income distribution, are marketable, traded commodities. In- peer groups hold in esteem? What do racial inequality and discrimination, so deed, many of these are not “commodi- people derive social benefits from ac- I’ll want to focus much of our conversa- ties” at all. Some of these external effects, complishing? tion on that research. But I hope we can I argued at that time, come about as a In short, I felt that the Beckerian char- also cover your research on why Pigou- consequence of the preexisting social re- acterization of employment discrimina- vian taxes alone can’t deal efficiently with lationships between people within fami- tion as merely an impediment in the externalities, on game theory and on ex- lies, social groups of various kinds, iden- marketplace because some people have a haustible resources. And I’d be remiss tity groups and racial “communities.” (I taste for discrimination was a somewhat as a Fed employee if I didn’t ask about put that word in inverted commas be- limited framework, on both the supply rotating savings and credit associations. cause I don’t mean only a geographically and demand side of the labor market. extended space. I mean a set of social On the demand side (employers, say), Loury: OK, this is going to be fun. networks.) those tastes don’t just come out of the air. My idea was that these networks They need to be accounted for in some SOCIAL CAPITAL AND EMPLOYMENT mediate the spillovers from the human way, so they’re really a product of their DISCRIMINATION capital investment one individual makes history, which in the United States in- onto the costs and benefits of similar in- cludes a history of slavery. Likewise, on Region: I suspect we won’t get to all that vestments of other individuals within the the supply side, the nature of the social material, but let’s begin with your re- same network. And that effect was not networks in which people are embedded search on labor market discrimination well-represented in the classical Becke- that influence their costs and benefits and social capital, if we could. rian framework. It was not only Becker, from human capital acquisition also de- Eminent economists before you— of course, who wrote about human capi- pend on history, identity, geography and Gary Becker and Ken Arrow, for ex- tal; it was [Theodore] Schultz, [Jacob] so forth. ample—had studied employment dis- Mincer and others as well. This school In the United States, race has a very crimination, of course. Becker, I believe, of thought simply posited—and I mean particular valence in that history. It’s not considered discrimination based on this not as criticism, but as observa- the same as gender or sexual orientation. employer tastes; Arrow based his theory tion—that, in effect, these human capital I’m not saying that racial discrimina- on the impact of limited information re- investments affecting their productivity tion is better; I’m not saying it’s worse. garding worker productivity. were based on inputs that people could I’m just saying that race is different from In your dissertation, you proposed a buy at a price if the returns justified their some of these other variables, in the con- new approach that focused on the im- acquisition. text of American history. portance of “social capital”—the term What I was after in my dissertation When European immigrant groups you used for family and community was to explain why it is that the African were fighting over the bottom rungs of background—for skill acquisition and Americans might lag behind, in an ex- the ladder with the black American mi- future earnings potential. Could you tended way, even after the equal oppor- grant groups coming into U.S. industrial describe that approach and what it sug- tunity regime of the Civil Rights bill was cities in the early part of the 20th cen- gested about economic policy to alleviate put into place. I was trying to say, “That’s tury, that was a historically specific kind racial discrimination in the workplace not enough. Equal opportunity of that of contestation. I just thought that an and improve income distribution? And, sort, while welcome and long overdue, abstract specification of an employer’s specifically, what it implied for policies is not enough to remedy the long-term disutility from hiring blacks, as Becker to ensure equality of opportunity. inequality problem.” had argued in his influential bookThe You could get stuck with the rem- Economics of Discrimination, didn’t get Loury: My principal point of departure nants of history because people are em- to the core of what was going on. when writing that dissertation in 1975 bedded in social networks, the nature of That’s the demand side of the la- and 1976, building on the work of Gary which reflects to some degree the effects bor market. On the supply side, I also Becker, was to “socialize” the human of past discrimination. Some commu- thought that standard theory—human capital investment decision. That is, I nities, because of their historical treat- capital theory—didn’t capture the full wanted to take explicit recognition of the ment, are impoverished with respect to impact of discrimination because one fact that the acquisition of human capital the human development resources that consequence of discrimination was to occurred in a social context. people must have access to if they are deprive individuals in the maltreated The insight there was that not all of to succeed in the labor market. I speak group of an opportunity fully to develop these external influences on the costs here not only of material resources, by their human potential.
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African Americans might lag behind, in an extended way, even after the Civil Rights bill. Equal opportunity of that sort, while welcome and long overdue, is not enough to remedy long-term inequality. People are embedded in social networks, which reflect the effects of past discrimination.
Region: What does that imply for policy ent variables on the right-hand side of group accountable for the fact that they to alleviate employment discrimination such a wage regression. have bad family structure? Is a failure based on race, in particular? Well, many of those right-hand-side to complete high school, or a history of variables are determined within the involvement in a drug-selling gang that Loury: Well, I’m not sure, in terms of very system of social interactions that led to a criminal record, part of what the what particular bill should Congress one wants to understand if one is to analyst should control for when explain- pass. But in terms of how to think about effectively explain large and persistent ing the racial wage gap—so that the un- policy, maybe the first thing it would earnings differences between groups. controlled gap is no longer taken as an say is, if I do see those deficits on the That is, on the average, schooling, work indication of the extent of unfair treat- supply side, which I do, then do a prop- experience, family structure or abil- ment of the group? er accounting. ity (as measured by paper and pencil Well, one answer for this question By that I mean, suppose I have a re- tests) may differ between racial groups, is, “Yes, that was their decision.” They gression equation with wages on the and those differences may help to ex- could have invested in human capital left-hand side and a number of explana- plain a group disparity in earnings. But and they didn’t. Employer tastes don’t tory variables—like schooling, work those differences may to some extent explain that individual decision. So as experience, mental ability, family struc- be a consequence of the same structure far as that analyst is concerned, the ob- ture, region, occupation and so forth— of social relations that led to employ- served racial disparity would not be a on the right-hand side. These variables ers having the discriminatory attitudes reflection of social exclusion and mis- might account for variation among in- they may have in the work place toward treatment based on race. dividuals in wages, and thus one should the members of different groups. control for them if the earnings of dif- So, the question arises: Should an an- Region: They simply chose not to com- ferent racial or ethnic groups are to be alyst who is trying to measure the extent plete high school, or go to college, for compared. One could put many differ- of “economic discrimination” hold the example.
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Chetty and colleagues are finding lower social mobility in cities with more ethnic diversity. One imagines that the mechanism probably involves things like the lower provision of local public goods in more diverse cities. But it’s a big, com- plex general equilibrium system, right? I’m simply saying it’s complicated, and I’m not sure it’s wise to leap too quickly to policy conclusions, although that’s what the press wants to do. Still, I find this work to be very provocative and interesting.
Loury: Right. But another way to look at “EQUALITY OF OPPORTUNITY” Loury: I just saw Raj Chetty give a lecture it is that the racially segregated social PROJECT at Brown—literally, two weeks ago—on networks in which they were located re- this very paper. Of course, by now it has flected a history of deprivation of oppor- Region: Let me ask you about another been widely discussed in the press. I have tunity and access for people belonging piece of research, not your own. I’m sure not, I must say, gone through their pa- to their racial group. And that history you’re aware of the Harvard/Berkeley per carefully, though I think I will with fostered a pattern of behavior, attitudes, “Equality of Opportunity” project. my students in a graduate seminar I’m values and practices, extending across teaching this semester. generations, which are now being re- Loury: Raj Chetty and his colleagues. So, of course, I won’t want to com- flected in what we see on the supply ment on whether or not I think they side of the present day labor market, Region: Exactly. They’ve just published got it right. But these are not neophytes. but which should still be thought of as an NBER paper on “The Geography of These are serious people, so I think it’s a legacy of historical racial discrimina- Intergenerational Mobility in the United certainly possible for me to take at face tion, if properly understood. States.”1 value much of what they’re saying. And I Or at least in terms of policy, it They found that greater “social capital” thought Raj gave a very convincing pre- should be a part of what society un- was second highest among the five factors sentation. derstands to be the consequences of best correlated geographically with higher unfair treatment, not what society un- income mobility. The other top factors Region: Does their concept of social derstands to be the result of the fact were areas with less residential segrega- capital align with yours? I think they use that these people don’t know how to get tion, less income inequality, better pri- Robert Putnam’s measure. themselves ready for the labor market. mary schools and greater family stability. That’s the spirit of what I was trying to What are your general thoughts on Loury: Right, it is Putnam’s concept, and get at in 1976. these empirical findings? Putnam, a very distinguished political
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scientist, has been observing variations these mothers were in an area where across U.S. cities in various measures of there was a higher local out-of-wedlock One of our key insights is that trust. You know, “Do I know my neigh- birth rate, then their children were less bor?” and the like. He looked at trust likely to experience movement from the under sightedness (again, overt within as well as across racial groups and bottom to the top of the income hierar- discrimination in favor of a found it to be negatively associated with chy. This was true even among kids who particular group), the very act ethnic diversity at the city level, so that in were born and raised in intact families. places where you had a relatively larger So, they were arguing that there was of boosting people’s access to presence of minority groups, you tended an environmental effect that operates slots—that is, putting a thumb to find lower measured levels of trust. across a metropolitan area, even for fam- on the scale in their favor at the Chetty and colleagues are finding ilies that were not specifically implicated lower social mobility in cities with more in this particular behavior (i.e., out-of- point where they compete for ethnic diversity. One imagines that the wedlock childbearing). That’s all very in- positions—implies a subsidy mechanism probably involves things teresting. It really makes you think. to their acquisition of skills. If like the lower provision of local public a later intervention is properly goods in more diverse cities; the qual- AFFIRMATIVE ACTION POLICIES ity of the schools kids attend may vary anticipated, then an earlier inversely with ethnic diversity measures Region: You’ve written numerous papers intervention may not be neces- across metropolitan areas and things of on affirmative action over the years, and this kind. It is difficult to interpret some several recently with Roland Fryer. In a sary; it may be redundant. of these findings, since I’m not sure 2013 Journal of Political Economy piece, how one is supposed to think about re- “Valuing Diversity,” the two of you con- gional variation in something like social sider policy interventions to improve mobility, given that people are moving opportunities for the disadvantaged and That is, one needs to consider whether around. you look, specifically, at dimensions of you intervene with affirmative action at Nevertheless, they make an effort visibility and timing. So, whether affir- the point where the person is making in their study to deal with selection ef- mative action policies are “sighted” or an investment in human capital or at fects. These questions came up in Raj’s “blind” and whether they intervene be- the point where people—having made seminar presentation. But it’s a big, fore or after worker productivity is basi- their human capital investments: higher complex general equilibrium system, cally established. education and the like—are competing right? The regions are all interconnect- for access to opportunities. If you are ed with each other. Loury: Precisely. trying to boost the status of a disadvan- They’ve tried, certainly. For example, taged group, at which stage, early or late, they measured the location where the Region: Can you briefly describe your should you intervene? kids were when they were 14 to 17 years results and, particularly, the major The other way in which we thought old, so then even if they move around lat- difference in timing of intervention it useful to distinguish between policies, er, they’ve still got the local effect identi- if policy is “blind” versus “sighted”? in a very broad-based sense, was, as you fied at the formative period of their lives. I was surprised by your finding that mentioned, whether they’re “blind” or I’m not sure this is adequate, though. to be efficient under sighted affirma- “sighted.” You’ve got two or three leaps here. This tive action, policy should focus on job “Sighted” affirmative action policies is not the typical sneering economist slots and not skills acquisition. are those where the policymaker is quite who wants to just dismiss everything. prepared to overtly favor some popula- I’m simply saying that it’s complicated, Loury: That is a very well-informed ques- tion group—say, African Americans in and I’m not sure that it’s wise to leap too tion. Thank you. You laid it out exactly. the United States. So, if you’re interest- quickly to policy conclusions from the So, I could only repeat what you just ed in boosting the presence of African work of Chetty et al., although I know said, which is that we see two different Americans in college, for example, are that’s what the press wants to do. dimensions along which you might use- you prepared to have different admis- Still, I find this work to bevery provoc- fully differentiate affirmative action poli- sion standards for the African American ative and interesting. For family struc- cies. One is the stage in the process of applicant and the non-African American ture, for example, they looked at part of developing a productive worker where applicant? If so, then your policy would the sample where the mothers didn’t have the policymaker intervenes—either be what we call “sighted.” If not, then any children out of wedlock, and still, if early or late in the cycle of development. your policy would be “blind.”
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Under a “blind” policy, a policy- tion [whether the most efficient way for cable in terms of intuitions that you find maker still wants to boost the status of a monopolist to exercise his monopoly in other areas of economics. some target beneficiary group, but does power is to raise the price for his input, So, I have said two things really. First, not want to engage in overt differential or to integrate forward by acquiring that our conclusion depends on people treatment. Such a policymaker would, downstream manufacturers]. The solu- having the farsightedness to anticipate therefore, need to look for indirect ways tion to this classic problem is that one the consequences of the fact that they’re of accomplishing his aims—by, say, sub- wants any necessary distortion to be as going to be favored at the slot competi- sidizing for everyone those activities that close to the end of the chain-linked pro- tion stage, and that this is an implicit are determined in advance to dispropor- cess of production as possible. That’s the subsidy of their investments. And, sec- tionately favor the target population. insight. ond, that writers in the industrial orga- That’s a very broad way of describing Another example comes from public nization and public finance literatures the framework of analysis that we de- finance. Diamond and Mirrlees, in their have established results similar to ours. velop in this paper. One of our key in- classic optimal taxation papers in a 1971 Because of that, I was not at all surprised sights is that under sightedness (again, AER,2 proved that, under certain tech- by our finding. overt discrimination in favor of a par- nical conditions,3 if the government can ticular group), the very act of boosting tax final commodities and/or intermedi- TRANSITION FROM FORMAL people’s access to slots—that is, putting ate inputs, and if the government seeks SEGREGATION a thumb on the scale in their favor at to raise a given amount of revenue with the point where they compete for posi- the least distortion to social surplus, Region: Let me ask about another piece of tions—implies a subsidy to their acqui- then the efficient tax system involves recent work, this with [Samuel] Bowles sition of skills. no distortion in production. So, no tax and [Rajiv] Sethi. You consider racial Many people have the intuition that on intermediate inputs; tax instead the and ethnic discrimination in many so- an affirmative action policy is not fa- final commodities. This is called the “ef- cieties—from the United States to South voring skill investment when putting ficient public production” result in the Africa to South Korea—and develop a a thumb on the scale favoring some public finance literature spawned by model to analyze factors that affect the group in the competition for positions. Diamond and Mirrlees. evolution of income distribution during But, in fact, it is, at least implicitly. This This is similar to the result in my JPE transition from overt discrimination to is the insight, if you will, because it im- paper on affirmative action with Fryer: equal opportunity. plies that if a later intervention is prop- The distortion (in our case, preferences You found, I believe, that the course erly anticipated, then an earlier inter- for a disadvantaged group) should take of evolution depends crucially upon vention may not be necessary; it may place “downstream,” at the point of com- three factors: the degree of segregation be redundant. Indeed, that’s what we petition for final positions, rather than in social interaction post-transition, the show in the paper. “upstream,” at the point where people are society’s demographic composition and, Now, this result—that we find quite in- investing in their own productivity. third, timing of integration relative to teresting—requires the assumption I just So, those are two examples of similar demographic trends. referred to: that when making their deci- economic contexts where similar re- Can you describe those findings a bit sions about how to invest in the develop- sults have been found. Now, you’d think more deeply? ment of their skills, people be farsighted that for affirmative action it might be enough to anticipate the consequences of different, that, well, it’s always better to Loury: I love being invited to describe their being favored at the point of slots go early. this problem because it goes back to my allocation. That assumption will not be dissertation. Most dissertations don’t plausible in every case (youngsters can Region: Pre-K—as early as that, perhaps? have 35-to-40-year legs! You know what be unnervingly short-sighted ...). I’m saying? In fact, two papers grew Still, given this necessary assump- Loury: Sure, Pre-K is something people out of my thesis. One was published in tion—that individuals subject to future are advocating these days. And, indeed, Econometrica in 1981, “Intergenerational affirmative action policies anticipate this there may be other reasons, not in our Transfers and the Distribution of Earn- accurately—then our result is of a piece model, having to do with cycles of de- ings.” This other was published in a con- with other intuitions that come out of velopment and so forth, which would ference volume in 1977 under the title “A applied microeconomics. explain why early intervention of a dif- Dynamic Theory of Racial Income Dif- For example, in the area of industrial ferent kind is warranted. ferences.” Both are still being cited and, I organization, there has been a classic But if it’s purely in the framework of must admit, I’m quite proud of that. problem with respect to vertical integra- our model, I think our finding is expli- What I was unable to do in my orig-
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The overriding idea here is that social discrimination and economic discrimination are complements in terms of holding a group back. In a world where there is some economic discrimination, the existence of social discrimination can amplify and perpetuate [its] effects.
inal “Dynamic Theory” paper was to functions for human capital acquisition cause they were behind due to the dis- provide a satisfactory formalization of that had these things as their arguments. crimination. But now that there’s equal the process by which racial segregation I didn’t explain where they came from. opportunity, you’ve got a difference limits the economic opportunities of Now, the internal family thing is kind equation, a dynamic system. There will the members of a disadvantaged racial of plausible, and you can tell a story about be some mobility; it may not be perfect group. that. It could be that higher-income mobility, but there will be some. And There is an ad hoc character to my households have access to certain goods then, let me ask a question in the most argument in that paper. I said then, in that make it easier for their kid to get ef- generous way: Suppose we take time to effect: OK, let’s contrast two worlds: one fective education. Something like that. infinity. Does the disadvantaged group where an individual’s cost of getting hu- I also had a story about the commu- ever catch up? man capital depends only on his family nity background effects, which had to do What I was able to show was that, background and the other where an in- with peer group influences and whatnot. if the only influence of the past on the dividual’s cost of getting human capital But I didn’t try to model that at all. I just current and future prospects of group depended on his family background and said it was there. members was that their parents had low- his community background. And then I asked, What will evolve er incomes, then eventually they would Family background was proxied by if it’s only family background, and you catch up. (There were some technical the parents’ earnings, and community have a group that is behind (on aver- conditions involving diminishing re- background was proxied by the average age) because of a history of discrimi- turns across generations to the benefit of earnings of the racial group to which the nation against them, but now you have higher parental income and so forth.) individual belonged. I just slapped that equal opportunity for the individual On the other hand, I exhibited a nu- specification down on the page and gave members of that group going forward? merical example in the context of my no account of how these effects might So then, yes, initially those families are model where, if it was not just the par- be derived. That is, I simply posited cost going to be disproportionately poor be- ents’ income but also the community
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group income which adversely affected group will be greater, the greater is the de- you can put down a very plausible model the cost of acquiring human capital for gree of in-group bias in the random pro- in which this social segregation parame- members of the disadvantaged group, cess of network construction. Segregation ter exhibits a kind of threshold influence then you wouldn’t necessarily catch up, bias is modeled by supposing that the on the dynamics of what happens after even in the longest of long runs. chance of a randomly selected member transition. The result was interesting and, if I of any person’s network being from that For segregation below the threshold, may say so, important. But the technique person’s own group is greater than that historically inherited group inequal- by which it was demonstrated was not group’s share of the society’s population. ity eventually withers away in the face very satisfactory by the standards of a of current and ongoing group equal- modern economic theorist. Still, it was a Region: Certainly seems a realistic way to ity of opportunity. But for segregation creative way to pose what many people model bias in one direction or another. above the threshold, the historical in- considered to be a critical question. heritance of group inequality might Loury: In the limit, a perfectly segregated endure forever, notwithstanding the Region: And that work from your dis- society would have the property that ev- permanent abandonment of racially sertation was the starting point for Sethi eryone’s network consists only of mem- discriminatory practice in labor (and and Bowles. bers of that person’s own group, and vice other) markets. versa. So, to capture the extent of this Moreover, the threshold above which Loury: Right. Rajiv Sethi and Sam own-group bias in network formation, social segregation implies permanent Bowles went back to my “Dynamic Sethi and Bowles set a “segregation” pa- economic inequality between racial Theory” paper and said: Well, let’s try rameter to zero for perfect integration groups depends on the relative size of the to make explicit how the community and to one for perfect segregation. The groups. That’s how demography and seg- income effects that Loury talked about parameter captures the range between regation interact with each other. might actually work. They offered a for- perfect integration and perfect segre- mal but very simple story about that, gation, then, in terms of a probability- Region: That interaction would account which was to posit that all individuals weighting on how a person’s network is for the potential post-transition differ- have certain other individuals to whom constructed. ences in, say, Bangor, Maine, and Balti- they are connected or with whom they more, Maryland—as mentioned in your are affiliated. This, they argued, consti- Region: Now, in your joint paper with paper—since their black-white ratios are tutes an individual’s network, and the Bowles and Sethi, you do this analysis so different. average earnings of a person’s network post-transition from formal segregation affect the cost to that person of acquir- to a society in which segregation is no Loury: Exactly, though anything I’d say ing human capital. longer legally permitted, but does persist along those lines would be speculative Then they suggested the following informally. because I have not done any careful em- model of network formation, through pirical investigation of those cases. which the impact of racial segregation Loury: Yes. Post whatever it was that I’m happy about this paper with Sam could be made explicit: Absent any racial caused the groups to be unequal in the Bowles and Rajiv Sethi because, in a way, segregation, with (say) blacks and whites first place. it completes in a rather satisfying fash- in the society, the chance that a random- ion a project that I began almost 40 years ly selected person in anyone’s network is Region: Apartheid or … ago. And it does it by formalizing this a black or a white equals the proportions idea that too much social segregation of blacks or whites in that society. Loury: Yes, apartheid or Jim Crow or can get in the way of a natural recovery Thus, with no racial segregation of whatever. And, given this simple depic- from a history of discrimination against networks in this sense, even if a group tion of the social segregation process, groups. The overriding idea here is that started out behind because of past dis- we’re just saying, all right, now you’ve got social discrimination and economic dis- crimination, the young people in that a level playing field going forward, but crimination are complements to each group would not be adversely affected by you’ve got initial conditions and you’ve other in terms of holding a group back. having less beneficial social networks be- got intergenerational overhang. Let’s see In a world where there is some eco- cause every individual’s network would where the thing goes. nomic discrimination, the existence of be formed as a result of the same random Rajiv and Sam conjectured in their social discrimination can amplify and process. earlier paper, and we show in our joint perpetuate the effects of that economic In contrast, the relative burden of be- paper, now published in the Journal of discrimination. That’s how all of this is longing to any historically disadvantaged European Economics Association, that relevant to this idea of “transition.”
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I have the impression, or even the belief, that an increase on the premium on skills is a big part of [rising inequality] and that the college-high school wage gap has increased as a result. I also can’t help but think that globaliza- tion and the ability to market services across borders and create these very high returns for people with specialized skills plays a part.
4 SOURCES OF RISING INEQUALITY ous studies are showing about the de- paper, “The Economics of Superstars,” composition of inequality trends across offered a profound insight. If you can Region: I’d like to ask you about rising different explanatory factors. manage, and manage better than this U.S. income inequality—a very promi- I have the impression, or even the be- guy over here, so now you’re managing nent issue these days, for obvious rea- lief, that an increase on the premium on over $500 billion worth of stuff instead sons. Many theories are put forth as to skills is a big part of it and that the col- of $500 million, you know, that’s going to the causes of rising inequality over recent lege-high school wage gap has increased imply a convex function measuring the decades—since you wrote your disserta- as a result. I do believe that skill-biased linkage between financial rewards and tion, actually—from broad structural technical change is a real thing. managerial aptitude. changes like technological change and I also can’t help but think that global- a transformed international economy to ization and the ability to market services Region: And Rosen’s theory doesn’t just those perhaps more amenable to policy across borders and create these very high apply to managers, of course—it applies intervention. returns for people with specialized skills to “stars” of all sorts: athletes, singers, What are your general thoughts on plays a part. actors ... the factors behind rising U.S. inequality? I don’t know what share of increased inequality is being driven by the finan- Loury: Right, it does! And it illustrates Loury: Well, you know, I’m not in as good cial sector, but I know it’s going to be a the beauty of the economics of the Chi- a position as are some of my colleagues quantitatively measurable effect. I don’t cago school. I was trained at MIT but to address this. Larry Katz and Claudia know how much is due to excessive ex- I have always found there to be an ele- Goldin at Harvard have looked a lot at ecutive compensation. I tend to think gance in Rosen’s and Becker’s pioneering skill-biased technology change. David that that gets overstated. contributions to labor economics. One Autor at MIT as well could give you a de- On the other hand, I also tend to reads those papers and one thinks—you tailed accounting of what all these vari- think that Sherwin Rosen’s 1981 AER know—this is Economics. .
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They have them at Princeton, the Uni- versity of Michigan and other major uni- Others are doing very good economics in [the] area [of crime]. There versities. So it was a real honor to have are interesting lines of investigation. I would not disparage this line been invited. When I got the invitation, I of work at all, not at all. However, sometimes I think these economic said “Oh, well, that’s cool” because there were only a few other economists I could issues and effects are of second-order magnitude, relative to the first- find at that time who had done the Tan- order issues, which are basically value questions. ner Lectures. My dissertation adviser, I didn’t think economics by itself reached broadly enough or deeply Robert Solow, was one. Jeffrey Sachs, Amartya Sen and Thomas Schelling were enough to allow me to cover the terrain I wanted to cover, which is, others. I felt this was pretty good com- What has happened to my country here? How did we get to be a pany to be in, so I took the assignment nation of jailers? very seriously and wanted to challenge myself by choosing my topic judiciously. My first instinct was, OK, I’ll go to my corpus of work on affirmative action, and I’ll find a way of saying something What’s the difference between eco- I send around this or that paper, and that philosophers could appreciate out of nomics and mathematics? I mean, it’s they’ll say, “Why don’t we get some data that. But the more I thought about it, the not all about, you know, “proving hard and try to look at this?” less I liked that idea. I mean, it was too stuff.” Some of it is just about getting the But this work comes out of a very easy for me [laughs]. right curves, seeing the right trade-offs, specific origin. I would have never been And I had been disturbed in a general modeling the right margins and seeing writing about crime if I hadn’t been in- way about the rising numbers of Ameri- implicit markets where no explicit mar- vited to give the Tanner Lectures on Hu- cans in jail, particularly African Ameri- kets exist—stuff like that. That I think is man Values at Stanford, which I deliv- cans. I’d been teaching undergraduates very characteristic of the Chicago style, ered in 2007. about race and inequality. I would teach and I’ve always admired it. It was a great honor to have been in- some ethnography and urban sociology, vited. I had somewhat of a reputation and the crime issue and rising prison numbers would always come up. CRIME, INCARCERATION AND among some political theorists and phi- So, I decided I was going to give lec- INEQUALITY losophers because I had been doing this public intellectual work, and I had been tures on “Race, Incarceration and Amer- Region: I’m curious about your work writing the occasional essay about repa- ican Values.” That’s the title that we came on crime, prisons and racial inequality. rations for slavery, for example. Different up with. I had two lectures to give and it You’re a public intellectual. You’ve done things like that. was a wonderful experience, just a won- a lot of scholarship that’s not strictly eco- And when I got to Boston University derful, wonderful experience. A great nomics, and much of this has focused on in 1991 and became a university profes- triumph, and well—I got fired up while incarceration and inequality. sor there a few years later, I could teach preparing for it. outside the economics department. I was Preparing took nine months to do. I Loury: Recently, that’s true. invited to do a lot of different collabora- instituted a course at Brown to help me tive, interdisciplinary teaching. get ready, which I taught in the fall of Region: Perhaps I’m ignorant about this, I started teaching with a philosopher 2006; I gave these lectures in the spring of but you don’t seem to approach it as an and a political theorist—courses on 2007. So, my course on punishment had economist. I’ve wondered if there’s a spe- Adam Smith, Karl Marx, John Maynard a ton of books from a variety of scholars. cific reason for that. Obviously, Becker Keynes, Joseph Schumpeter. You know, Like Michel Foucault, you know? “Disci- and many others have researched the reading classics in political economy. So I pline and Punish”—man, it makes your economics of crime. Why not you? was known to some of these people. And head hurt trying to read that stuff. when the committee out of Stanford was It was mostly sociology and criminolo- Loury: The stuff I’ve been writing about deciding who they were going to have to gy because, what else would it be? Not that crime—which you are quite right to be the Tanner lecturer, they asked me. there isn’t any economics in it, but I wasn’t say is not economics—in fact, I’ve been The Tanner Lectures, created by a going to limit myself to the economics lit- mildly chastised from time to time by foundation in Utah, are very distin- erature to be able to engage in this question some colleagues in economics when guished lectures in political philosophy. for what were basically lectures in ethics.
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I read and thought broadly, and I com- sentences be? Should we allow felons to posed an argument that was not an eco- vote? Does it make sense to disqualify Have economists done better nomics argument. It was basically a kind them from housing subsidy and educa- of Rawlesian justice argument, at the end tional subsidy programs, Pell grants and [theory] in this area? Sure. of the day—applied, very applied. things like that after they get out? What Matt Jackson, people like So, that’s why I approached crime do you do with a juvenile? Life without that, will get Nobel Prizes for from that particular point of view. the possibility of parole as a sentence to But I also want to say that others are a juvenile offender, is that something that working out the implications doing very good economics in this area. you actually want to do? What about soli- of people’s social connec- There is a program at the NBER on the tary confinement? “Administrative segre- tivities. On the empirical side, economics of crime. I know these peo- gation,” I think that’s the sanitized term. ple. These are very good economists: I didn’t think economics by itself there have been advances and Phil Cook, Justin McCrary, Jens Ludwig. reached broadly enough or deeply much better data. And a lot of There are interesting lines of investiga- enough to allow me to cover the terrain the social economics work is tion, studies that people are doing with that I wanted to cover, which is, What applied micro approaches. Steven Levitt has happened to my country here? How being done around the world. has made his career, in part, writing ar- did we get to be a nation of jailers? ticles about this area. So, I would not disparage this line of PROGRESS IN ECONOMIC work at all, not at all. However, some- THEORY? times I think these economic issues and same time?” “Have you sold out?” effects are of second-order magnitude, Region: My next question is about prog- So there was a lot of faux radicalism in relative to the first-order issues, which ress in economics. In your 1977 article the air, a lot of posing, a lot of, “Yeah, I’m are basically value questions. that we discussed earlier, “Dynamic going to get an education and I’m going Who are we as a people? And what Theory of Racial Income Differences,” to become a scientist, but I’m going to be are we going to do with this conun- you wrote that it might “be useful to em- a critical scientist. I’m going to stand a drum, that we’ve got these undeveloped ploy a concept of ‘social capital’ [because little bit at a remove from the system. I’m individuals in our midst, in our cities? I it forces] the analyst to consider the ex- not going to just buy it all, not going to mean, these people who are bad actors. tent to which individual earnings are ac- drink the Kool-Aid.” That kind of thing. Some of the discussion about this issue counted for by social forces. … However, And in economics, there was neoclas- is just very discouraging because people for precisely this reason such analysis is sical versus radical economics. Some- are not facing up to the facts. I’m talk- unlikely to develop within the confines thing called the Union of Radical Politi- ing about discussion on the left, OK? of traditional neoclassical theory.” cal Economists really existed. I guess it I’m talking about people who are against You wrote that nearly 40 years ago. probably still exists. prisons, who think—as I do—that we are Time has passed. Was your pessimism over-incarcerated. warranted? Has economic theory made Region: Sam Bowles, your co-author But crime is a real issue, and there are any progress in this direction? now, was prominent in URPE back then. empirical questions. Does the death pen- alty deter people from committing mur- Loury: Oh, sure. You have to understand, Loury: Yes, Sam Bowles and Herb Gin- der? That’s a classical question of inference I wrote that line in 1975 or early ’76. The tis—their book had a big impact on me, from whatever the data might be. It’s a mi- ’60s were over, but not long over—the Schooling in Capitalist America. I read croeconomic and sort of analytic, quanti- ’60s effectively extended into the ’70s in that book cover to cover. And then there tative sociology, criminology-type ques- many ways. The Vietnam War, for in- was the controversy of “Bowles and Gin- tion. It’s a question that experts need to stance, was winding down, with all that tis, Marxists at Harvard, were they going answer, and it’s subtle. I want to hear what entailed. to get tenure?” All that good stuff. And, Dan McFadden or Charles Manski has to But I had grown up in Chicago. I was you know, I wasn’t a radical economist. I say, because they’re among the people who then a black kid at MIT in the graduate was a mainstream economist, but … are going to know how to best judge what program, and the question, “How are So those lines in the article were kind these robust statistical models will tell us. you relevant to being a part of the solu- of a pose to say, “I’m in the neoclassi- So, those are technical questions. tion to the struggle for our people?” was cal camp, but I’m not of it.” I didn’t re- But, there are just other things that are being asked. This kind of thing. “Can ally have any critique of neoclassical eco- going on. I mean, how long should these you be a black and an economist at the nomics, as such, and, really, that’s an ad
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hominem comment I’m making there. Endnotes But more substantively, you asked me, Have economists done better in this 1 Chetty, Raj, Nathaniel Hendren, Patrick area? Sure. I mean, theory is now a ma- Kline and Emmanuel Saez. 2014. “Where jor topic—Stanford’s Matt Jackson, peo- Is the Land of Opportunity? The Geography ple like that. These guys will get Nobel of Intergenerational Mobility in the United Prizes one of these days for working out States.” Working Paper 19843. National the implications of people’s social con- Bureau of Economic Research. Online at obs. nectivities. obs.rc.fas.harvard.edu/chetty/mobility_geo.pdf.rc.fas.harvard.edu/chetty/mobility_geo.pdf. On the empirical side, there’s North- 2 Diamond, Peter A., and James A. Mirrlees. western’s Charles Manski’s “reflection 1971. “Optimal Taxation and Public Produc- problem.” This is the idea that if I’m tion I: Production Efficiency.” American trying to measure the impact of a peer Economic Review 61 (1): 8-27. Diamond, Peter group on an individual, I can’t look at A., and James A. Mirrlees. 1971. “Optimal variance across data on individuals’ ob- Taxation and Public Production II: Tax servations on their peers, because indi- Rules.” American Economic Review 61 (3), viduals are choosing their peers. That’s a Part 1: 261-78. kind of intrinsic endogeneity that creates a very difficult identification problem 3 Most importantly, constant returns-to-scale for inferring the causal effect of associa- in production, so one doesn’t have to worry tion on outcome. People have worked on about how the profits of different firms get that. So I’m just saying, there have been distributed as a consequence of tax policy. advances and advances. There’s much better data. 4 Rosen, Sherwin. 1981. “The Economics of And a lot of the social economics Superstars.” American Economic Review 71 work is being done not just in the United (5): 845-58. Online at users.polisci.wisc.edu/ States, but around the world. The Pov- schatzberg/ps616/Rosen1981.p erty Action Lab, for example, does its random clinical trials in international An extended version of this interview is settings and around the questions that available online at minneapolisfed.org. have social-capital-like themes embed- ded in them. So, I don’t think that I would be at all dismissive of the profession in terms of taking seriously the kind of social effects that I was interested in, in those days. But, yes, that line was a little gratuitous. But, then, the other thing is about markets: “Will markets solve all the problems? Is laissez-faire sufficient?”
Region: And you’re not in that camp.
Loury: No, I’m certainly not saying laissez- faire is OK. Laissez-faire has its issues.
Region: Well, clearly then, that leaves much to discuss. But perhaps we should end on that note. Thank you so much— it’s been a great pleasure. —Douglas Clement March 7, 2014
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More About Glenn Loury
Current Position Member, American Philosophical Society, since 2011 Merton P. Stoltz Professor of the Social Sciences and Professor Member, Committee on Law and Justice, National Academy of Sciences, of Economics, Brown University, since 2005 since 2009 Previous Positions Recipient, Honorary Doctorate, Tuskegee University, 2008 Professor of Economics, Boston University, 1991-2005; University Invited Lecturer, Tanner Lectures on Human Values, Stanford University, Professor, 1994-2005; Founder and Director of the Institute on Race 2007; James A. Moffett ’29 Lectures in Ethics, Princeton University, 2003; and Social Division, 1997-2003 W.E.B. DuBois Lectures in African American Studies, Harvard University, 2000 Professor of Political Economy, John F. Kennedy School of Government, Recipient, John von Neumann Award, Budapest University, Hungary, 2005 Harvard University, 1984-91; Professor of Economics Fellow, American Academy of Arts and Sciences, since 2000 and Afro-American Studies, 1982-84 Member, Council of Foreign Relations, since 1999 Professor of Economics, University of Michigan, 1980-82; Associate Professor of Economics, 1979-80 Vice President, American Economic Association, 1997 Assistant Professor of Economics, Northwestern University, 1976-79 Fellow, Econometric Society, since 1994 Professional Activities Publications Advisory Committee, Center for the Study of Slavery and Justice, In addition to substantial research on applied microeconomic theory, Brown University game theory, industrial organization, natural resource economics and the economics of race and inequality, Loury is the author of Race, Incarceration Committee on the Causes and Consequences of High Rates of and American Values (MIT Press, 2008); The Anatomy of Racial Inequality Incarceration, National Research Council, National Academy of Science (Harvard University Press, 2002) and One by One, From the Inside Out: Es- Editorial Advisory Board, First Things says and Reviews on Race and Responsibility in America (Free Press, 1995), winner of the American Book Award and the Christianity Today Book Award. Editorial Board, Boston Review Education Honors Massachusetts Institute of Technology, Ph.D., economics, 1976 Inaugural speaker, Thomas Schelling Lectures, School of Public Policy, University of Maryland, 2014 Northwestern University, B.A., mathematics, 1972 President, Eastern Economics Association, 2013
For further background: econ.brown.edu/fac/glenn_loury/louryhomepage/
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