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Racism Impoverishes the Whole Economy

Discrimination hurts just about everyone, not only its direct victims.

New research shows that while the immediate targets of racism are unquestionably hurt the most, discrimination inflicts a staggering cost on the entire economy, reducing the wealth and income of millions of people, including many who do not customarily view themselves as victims.

The pernicious effects of discrimination on the wages and educational attainment of its direct targets are being freshly documented in inventive ways by scholarship. From the lost wages of African-Americans because of President Woodrow Wilson’s segregation of the Civil Service, to the losses suffered by Black and Hispanic students because of California’s ban on affirmative action, to the scarcity of Black girls in higher-level high school math courses, the scope of the toll continues to grow.

But farther-reaching effects of systemic racism may be less well understood. Economists are increasingly considering the cost of racially based misallocation of talent to everyone in the economy.

My own research demonstrates, for example, how hate-related violence can reduce the level and long-term growth of the U.S. economy. Using patents as a proxy for invention and innovation, I calculated how many were never issued because of the violence — riots, lynchings and Jim Crow laws — to which African Americans were subjected between 1870 and 1940.

The loss was considerable: The patents that African-Americans could have been expected to receive, given equal opportunity, would have roughly equaled the total for a medium-size European country during that time.

Those enormous creative losses can be expected to have had a direct effect on business investment and therefore on total economic activity and growth.

Other economists are beginning to estimate harm to the economy caused by racism in broad ways.

An important principle suggests that the person who can produce a product or service at a lower opportunity cost than his or her peers has a comparative advantage in that activity. Recent research calculates the effects of the discriminatory practice of placing highly skilled African-American workers, who might have flourished as, say, doctors, into lower-skilled occupations where they had no comparative advantage. Such practices 50 years ago — which linger, to a lesser extent, today — have cost the economy up to 40 percent of aggregate productivity and output today.

Similarly, other research estimates that aggregate economic output would have been $16 trillion higher since 2000 if racial gaps had been closed. To put that total in context, the gross domestic product of the United States in 2019 was $21.4 trillion. The researchers estimate that economic activity could be $5 trillion higher over the next five years if equal opportunity is achieved.

Right now, if more women and African-Americans were participating in the technical innovation that leads to patents, the economist Yanyan Yang and I calculate that G.D.P. per capita could be 0.6 to 4.4 percent higher. That is, it would be between $58,841 to $61,064 per person compared with $58,490 per person in 2019.

This entire line of research suggests that organizations — companies, laboratories, colleges and universities — are leaving colossal sums of money on the table by not maximizing talent and living standards for all Americans.

I have thought and written a lot about remedies. Here are a few ideas aimed at addressing discrimination in the innovation economy. First, we need more training in science, technology, engineering and mathematics (STEM), like the extensive and highly successful program once sponsored by Bell Labs to encourage participation in these fields by women and underrepresented minorities

STEM fields should not be the sole target, however, because the innovation economy encompasses more than this narrow set of subjects. Two of the last three people I’ve talked to at tech firms have a B.A. in international relations and a Ph.D. in political science. Clearly, problem-solving skills matter, but these skills are not unique to the STEM majors.

Second, there is substantial evidence of systemic racism in education, which needs to be addressed. Research shows that professors are less likely to respond to email inquiries about graduate study from Black, Hispanic and female students than from people who are discernibly white and male. A system of incentives — and penalties — could hold those responsible accountable at every level of the education and training process.

At the invention stage, such as at corporate, government and university labs, my research shows that mixed-gender teams are more prolific than those whose members are all female or male. And a large body of literature has documented the positive effects of diversity in teams. Managers at each level should be held responsible for being good stewards of the resources of their companies and promoting diverse teams and behavior and, therefore, better outcomes.

When invention is commercialized and companies sell shares to the public, the wealth gaps are stark. Seven of the world’s 10 richest people on the Forbes list are associated with tech companies that commercialize inventions. Jeff Bezos, Bill Gates, Mark Zuckerberg and Elon Musk are in the top five. None among the top 10 (or 50) is Black.

The statistics for venture capital funding are striking. In 2014, less than 1 percent of venture capital funding went to businesses founded by African-American women, and in 2015, only 2 percent of all venture capitalists were African-American.

A number of worthwhile recommendations have been made to address the lack of diversity at the commercialization stage of innovation. These include:

  • Enhancing mentoring opportunities through programs such as those of the Small Business Administration.

  • Seeking and recruiting founders to invest in places like Atlanta, and not exclusively in Silicon Valley.

  • Addressing systemic racism at every level of management and within venture capital firms.

  • Diversifying corporate boards so that senior leadership will be held accountable for diversity and workplace climate. (California has done this with women on the boards of public companies.)

The Kapor Center, a think tank that promotes participation by underrepresented minorities in tech fields and education, has proposed noteworthy remedies at many stages, including at the pre-college level.

The social compact most societies have with their governments is that standards of living will rise continually and that each successive generation will be better off than preceding ones. We are robbing countless people of higher standards of living and well-being when we allow racial discrimination to flourish from generation to generation.

Lisa D. Cook, a professor of economics at Michigan State University, is a member of the Biden-Harris transition team.

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Small-Business Loans Will be Forgiven, but Don’t Ask How

When the federal government began the Paycheck Protection Program in April, one rule was clear to small-business owners bedeviled by its chaotic and messy start: If most of the loan money was used to pay employees, the debt would be forgiven.

But as the program enters its loan forgiveness phase, those owners — and their lenders — are finding out that although the principle may have been simple, its execution is anything but.

Many lenders have yet to start accepting applications from borrowers to have the loans forgiven. They are waiting to see whether Congress will pass a proposal to automatically forgive debt of less than $150,000, which make up the bulk of loans made under the program.

Square, the mobile payments company, lent Audrey Kramer $5,600 in May to pay the only employee of Sweet Treat Stop, her mobile food truck bakery. She has been ready since July to apply to have the debt wiped away, but Square hasn’t started taking applications. It sent her an email this month saying that it was “waiting to release our forgiveness application until we get more information from Congress.”

Ms. Kramer is grateful for her loan — it helped her keep paying her baker even as her sales plunged — but she’s also eager to be done with it. “We’ve been cautious and we’ve never carried any debt at all on the business,” she said.

On Thursday night, the Small Business Administration, which runs the program, released new forgiveness forms and rules for loans under $50,000. Such loans make up nearly 70 percent of the program. The new rules mean that some borrowers can still have their loans forgiven even if they cut head count or wages after taking the loan, but they will have to submit payroll documents and other records.

Lenders said the change was a start, but did not go far enough. The Consumer Bankers Association, an industry trade group, renewed its call for all loans under $150,000 to be automatically discharged.

“It’s almost a nightmare to go through the forgiveness process as it is now written,” Richard Hunt, the group’s chief executive, said. “You have millions of small businesses in crisis, some going under, and Congress is not there in their time of need.”

Lenders said they were also wary of processing applications without knowing how crucial aspects of loan forgiveness will work, like how carefully they are expected to vet borrower-provided documents like payroll records. They are waiting for details on the Trump administration’s stated plan to audit all loans over $2 million. And they are getting nervous about whether they will be paid back by the government for loans they made to businesses that have since closed or gone bankrupt.

More than 5.2 million business owners borrowed a total of $525 billion through the paycheck program, which used banks and other lenders as conduits to issue the loans. From April to August, small businesses were encouraged to borrow cash to cover eight weeks of payroll and a handful of other expenses. Once the money is spent, borrowers must apply through their bank to have their loan paid off by the government.

But business owners looking to start the loan forgiveness process have found lenders mostly unwilling to work on those applications until there is clarity from Congress, especially because of the cost and complexity of handling fairly small loans. Loan forgiveness proposals have been introduced in both the House and Senate with bipartisan backing — Treasury Secretary Steven Mnuchin said he was a supporter — and were likely to be included if Congress passed an economic relief bill, but the fate of such legislation is uncertain, with the presidential election just weeks away.

Ed Sterling, the president of Flagler Bank in West Palm Beach, Fla., said lenders had been “waiting on the edge of our seats” for legislative action. The process for reviewing a loan-forgiveness application will take his bank about three times as long as it took to actually originate the loan, he said.

The S.B.A. has been slow to act on loan forgiveness applications that lenders have sent in. The agency began accepting the forms on Aug. 10. By late September, it had received 96,000, but had not yet approved or denied a single application, William Manger, the agency’s chief of staff, said at a House subcommittee hearing. By law, the agency has 90 days to respond after it receives an application. An S.B.A. representative said the agency sent its first approvals and loan payments to banks on Oct 2.

Lynn Ozer, a banker at who specializes in small-business lending, said borrowers she worked with at Fulton Bank in Lancaster, Pa., were “panicked” at the prospect of their forgivable loans becoming debts if they made mistakes on their paperwork. “We can’t help our borrowers if we ourselves don’t understand the guidance,” Ms. Ozer said.

Trapped in the middle are business owners like Léa Kujala, a co-owner of Northwest Treatment, a counseling center near Portland, Ore. Ms. Kujala got a $34,000 loan in April, which helped her and her business partner retain their three employees when their revenue nose-dived.

Now, Ms. Kujala would like to get the loan paid off, but her lender, U.S. Bank, has not yet opened its forgiveness portal to her. Ms. Kujala — who estimates that she has already spent five hours gathering records and preparing her application — is so concerned about the loan’s many rules and potential tripwires that she is keeping all of the money she got in a reserve account, just in case her loan isn’t forgiven. (She drained her business’s savings to make payroll, and will pay that back if her loan is discharged.)

“We’re super nervous about the fact that we don’t know what’s going to happen,” she said. And the loan was only a temporary salve: With her revenue still down at least 30 percent, Ms. Kujala is preparing to lay off one of her employees.

A U.S. Bank spokesman said the bank was sending out invitations in stages to its forgiveness portal. After the bank was contacted for this article, a representative told Ms. Kujala that she would get an invitation soon.

Most borrowers — and their lenders — can afford to wait before seeking loan forgiveness. The CARES Act, which created the P.P.P., initially set repayments on any remaining debt to begin six months after a loan was disbursed, but Congress later revised the law to give borrowers as long as 16 months to apply for forgiveness. For most borrowers, that means the issue won’t become urgent until mid-2021.

But there, too, the law has a gray area. More than four million borrowers — a majority — have loans that were made before the rules changed. To scrupulously follow the law, lenders would need to formally modify those loans and get each borrower’s signature on the changes. That’s a “momentous task,” said Brad Bolton, the chief executive of Community Spirit Bank in Red Bay, Ala. The S.B.A. has not yet responded to banks’ requests for clarification on the matter — and payments for the program’s earliest borrowers are scheduled to come due this month.

Most lenders, especially the biggest ones, have decided to take the risk and simply postpone all payments, said Tony Wilkinson, the chief executive of the National Association of Government Guaranteed Lenders, a trade group. “Because it’s a benefit to the borrower, they’re doing it unilaterally, because who is going to object?” he said.

Glenn Sandler, an accountant in Melbourne, Fla., has around 200 clients with P.P.P. loans, averaging around $40,000 each. He’s advising all of them to sit tight and wait for what he believes will be legislative fixes to the forgiveness process. “Hopefully, Congress will get off their butts,” he said.

Mr. Sandler thinks automatic forgiveness for small loans is likely, in part because the alternative — trying to collect payments from small businesses struggling to stay afloat — is untenable.

“They’re broke,” he said of the mom-and-pop ventures that he works with. “There’s a lot of people who won’t be able to pay it back. So, what, they’re going to go into collections with them? There’s no sense in that.”

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