Ghetto Economics


This paper was originally presented at Monmouth College, Monmouth, Illinois, 21 May, 1970. It was subsequently published in RELIGION AND SOCIETY, edited by Angus MacDonald.

The conventional view of the Black Ghetto is of an area populated by the underemployed and the unemployed with residents excluded from jobs by white labor unions, exploited by grasping landlords and greedy grocers, oppressed by white policemen, and with schools controlled and operated by a hostile or inert bureaucracy unresponsive to black needs. The stereotype includes a disproportionate dependency on welfare with female headed households and with poor health caused by inadequate public health services.

The fact and fancy mixed together in this standard view are causing major confusions in public policy, misdirection in private efforts, and much slower movement in economic and social progress than is attainable.

First, let us get a few facts straight. Let us begin with the questions, "Do black people pay more for housing than they would if they were not black?" and "Are blacks being victimized by grasping landlords?"

There are two ways of looking at these questions. Implicit in these two ways is the possibility that there are opposite answers to these two questions, although a no or yes to either of these questions would seem to require the same answer to the other. Let us look at the latter question first, "Are blacks being victimized by grasping landlords?"

A yes answer to the latter question would imply that landlords in ghetto neighborhoods do not compete with each other for tenants, that they are in collusion to maintain high rents, that they earn above competitive rates of return on the investment in their properties, that they somehow have the power to shut out would be providers of housing who also would like to earn "high" rents on their investment, and that vacancy rates in ghettos run well above the usual city averages.

A very extensive study of rentals and quality of housing was undertaken by Professor Richard Muth of Washington University to test the proposition that ghetto rentals are higher than would be expected in a competitive housing market. He developed a set of tools for predicting rentals in terms of location and quality of housing. He then tested the predictions against actual rentals. He found that actual rentals paid were the predicted rentals whether one was observing black neighborhoods or white neighborhoods.

Evidently, ghetto rents are no higher than one would expect given their location in relation to employment centers and given the quality of housing provided. The farther a neighborhood is from employment centers and the higher the cost of transportation, the lower the rents paid. Also, the poorer the quality of housing in terms of age, condition, and plumbing facilities, the lower the rental, other things equal.

The only areas whose rentals were above predicted levels were transition areas. Incidentally, transition area rentals were above predicted levels whether the area was in transition from white to black or from black to white. (In the transition areas, well-to-do blacks are bidding property away from poor whites and well-to-do whites are bidding the property away from poor blacks.)

This is sufficient evidence to close the case of the grasping landlord for lack of a villain.

However, we have other evidence bearing on the same question. If ghetto property is so profitable, we would expect the owners of such property to extract their rents and guard their buildings zealously. What we find, however, is that such properties yield so little return that they frequently are not worth keeping. In New York City, ownership of property sufficient to house more than 250,000 people has simply been abandoned in the last three years. The replacement cost of apartments being abandoned annually amounts to one billion dollars. No one appears to collect the rents due on these properties, much less to supply heat, maintain the plumbing, repair broken windows, doors, etc. Even the tenants have fled some of these buildings and left them to the ravages of vandals and wanderers. Others remain and complain to city agencies about the lack of heat in the winter, lack of water in broken down plumbing, and the necessity for hauling water in buckets from their neighbors' homes. Many of those who complained about their rentals now wish they had a grasping landlord to repair broken down plumbing and provide heat and water.

"But," replies the knowledgeable exponent of the grasping landlord thesis, "New York City is a special case. Landlords are under rent control and are prevented from charging unconscionable rents. That is why they are abandoning their buildings."

To this, we can only answer, "True! Rent control is causing hardship for tenants who would like to have heat in their homes."

However, in Detroit, there is no rent control. Yet, buildings are being abandoned at the rate of ten a week. City officials estimate that there are 1000 abandoned buildings in the central city. Where are the grasping landlords who make fantastic profits out of ghetto housing? Why have they abandoned their properties? Maybe they have grown so rich that they are all sitting on the beaches of Caribbean islands basking in the warm sunshine while lighting their cigars with $50 bills. Or is that just too improbable for even the most naive to swallow?

There are, of course, tenants whose landlords do not live up to their rental agreements (and landlords whose tenants do live up to their agreements) in every section of the country. We can always find ghetto tenants who have problems in dealing with landlords, but these problems are not peculiar to the ghetto. What does seem to be peculiar to the ghetto is a disproportionate number of tenants who do not live up to their agreements with landlords. Property is mistreated more frequently by ghetto tenants than by non-ghetto tenants, if we can judge by the cost of maintaining cleanliness and providing repairs of ghetto properties. The incidence of sheer vandalism and of property destruction is extremely high in ghetto areas—which is probably as much or more a consequence of the activities of others than of the residents of the vandalized properties. To this extent, ghetto residents who are good tenants nevertheless find their rents high because of the high cost of maintenance caused by others in their neighborhoods. And in many cases, tenants cannot be found willing to pay the rents which would cover the cost of maintaining properties under these difficult conditions even with the maintenance provided being held to minimum levels.

It is true that in the properties still being held by ghetto landlords, the level of maintenance is below the average level for most properties. What must be recognized is that ghetto landlords provide that maintenance level for which residents are willing to pay. Since well maintained properties do not command a sufficient premium over poorly maintained properties in the ghetto rental market to provide any incentive for high maintenance levels, ghetto properties tend to be poorly maintained. This is reflected in the lower rental levels found in ghetto areas—rental levels which are associated with substandard dwellings. In many cases, the rentals offered for such properties are so low that landlords find that even the minimal costs associated with low levels of maintenance are not covered by the rentals offered. In these cases, then, buildings are abandoned (and, in New York, offered as donations to the city).

Many kinds of evidence point to the fact that ghetto residents are not being over-charged for the rent of the dwellings they occupy. However, it may still be true that blacks pay more for their housing than they would if they were not black.

They certainly do not pay more for the housing they presently occupy than they would if they were not black. However, they might prefer living in other locations than in the ghetto, locations where rents are cheaper than in the ghetto—cheaper because these locations are farther from employment centers with higher costs for transportation to daily jobs or because there is less vandalism than in those areas causing the cost of maintenance to be high. Because they feel they would not be allowed to rent these dwellings as a consequence of being black, they remain in the ghetto, angry at a world which they feel forces them to live where they would rather not.

All of this is pure supposition. We have no evidence bearing on this point other than the fact that dwellings occupied by whites in the past have been rented to blacks, indicating that green power is fairly effective. In the city of Chicago, approximately 50 dwellings a day shift from white occupancy to black occupancy. These sketchy bits of evidence provide no support for the thesis that blacks pay more because they are black, but neither does it destroy the thesis so completely as the grasping landlord thesis can be destroyed.

Let us turn to the case of the greedy grocer and let us see what evidence there is on this point. First, let us recognize that the cost of operating stores in ghetto areas is higher than the cost of operation in suburban areas. First, security and insurance costs are much higher in ghetto areas than in suburban and small town locations. Secondly, the cost of what is euphemistically known as "inventory shrinkage" is higher in ghetto areas than in other locations. Finally, clerical costs are higher in ghetto areas because the average purchase is smaller and total annual sales per clerk are lower in ghetto than in nonghetto areas.

Now what are the facts on what blacks pay and what whites pay? The data available are very mixed on this point.

First, we know from household panel data obtained in Chicago that each chain charged the same prices in whatever area it operated in the city. Prices are not higher in ghetto chain stores than in the same chain's stores in other areas.

Second, 80% of black purchases are made outside the area in which they reside. The evidence indicates that blacks search more extensively for quality and price than do whites.

Third, an intensive examination of the purchases of one commodity which bulks larger in black budgets than in white budgets—rice—showed that black households paid $.096 less per pound of rice than did white households. I should say that this was a consequence of white households buying rice in a more expensive form. On a brand by brand basis, the average price paid by whites for Riceland and Sultana rice was lower than the average price paid by blacks. For all other brands, the average price paid by whites was higher than the average paid by blacks. In the case of Riceland and Sultana rice, one-third of the purchases by blacks was lower in price than the average price paid by whites. In the case of other brands, five-sixths of the purchases made by blacks was lower in price than the average price paid by whites.

To some extent, major chains are under-represented in ghetto areas relative to population and income in those areas. This, of course, is a consequence of their uniform price policies which tends to make business in high cost areas unprofitable. The question has to be asked, then, whether the independent stores which predominate in ghetto areas charge higher prices. Again, the evidence is mixed. Riceland rice is higher priced in independent stores than in chain stores, but Minute Rice is lower priced in independent stores than in chain stores in Chicago.

So far, this is the only commodity studied intensively in a study which is now going on in the Chicago area. Data from some Bureau of Labor Statistics studies is equally mixed. Two pound sacks of flour were found in a BLS study to be cheaper in ghetto areas than in other areas in the same city, while five pound sacks were found to be more expensive. I would suspect that the reason is that two pound sacks of flour sell in larger volume in ghetto areas while five pound sacks sell in larger volume in other areas, but no volume data has been provided in these studies. What is relevant to a grocer is not the price he obtains per item but the return per foot of shelf space. If a foot of shelf space devoted to two pound sacks of flour has a high volume, he can operate with a lower margin than on a foot of shelf space devoted to five pound sacks which have a very low selling volume.

The direct evidence available—what little there is—does not show ghetto prices to be high despite the high cost of operation in ghettos. If we add to this the fact that there is no rush of merchants eager to establish stores in ghetto areas, this would argue that ghetto grocery operations are not very profitable. From stray bits of evidence such as ghetto grocers who have been trying to sell their stores and finding it very difficult to do so, it would appear that such operations are unprofitable. In the Chicago area. some chains have reduced their operations in ghetto areas because they have become unprofitable as vandalism and "inventory shrinkage" have gone up. If anything, then, groceries are being underpriced to ghetto residents—not overpriced—relative to the cost of operation.

On the other hand, when we examine governmental operations in ghetto areas such as the public schools, it does appear that they are providing the wrong kinds of service and not the type to which ghetto residents would be responsive. Children are not learning what they are expected to learn—judging by scores on nationally administered examinations. Schools which have had resources lavished on the children have done no better, and frequently done worse, than the schools where the spending has been spartan, according to a study done on New York City schools. The successful schools apparently have had teachers who know how to approach ghetto children and their parents: teachers who cared and knew how to act on their concern, not great resources in personnel and equipment. The successful schools have been the ones where teachers have frequently disregarded or been permitted to disregard the lock step curricula and lesson plans normally imposed on all by supervisors and curriculum planners regardless of the nature of the student body.

In Chicago, the rebellion of some teachers and principals in ghetto schools against centrally planned curricula has reached the point where they are writing letters to newspapers, since they have been unable to make headway with their supervisors and the educational bureaucracy. Other teachers and principals simply don't care. They serve their time and do little more than try to keep order—with the consequence that the public schools have become jungles.

At this point, it would seem that radical methods are required to halt the damage being done by the school bureaucracies. One proposal, which seems to be the only available solution yet suggested that seems workable, is to provide tuition vouchers to the parents of children. Where the schools are spending, let us say, $600 per child, a tuition voucher could be given to parents for each child which could be used to pay tuition in any accredited school, public or private, which parents might choose. With schools competing for students, instead of students being forced to go to a school designated by the government and operated by the governmental school bureaucracy, they would select personnel who are successful with students and use teaching methods which are effective. The schools would be responsive to the needs of children, instead of becoming jails in which children are confined for six hours a day.

However, we must not lay all the blame for educational failure of the ghetto schools on the doorstep of the schools. Parents whose children and whose children's teachers have been assaulted have failed to complain to the police or to support the police when they are summoned to restore order. Because ghetto residents have failed to support police attempts to keep order and protect teachers, many capable teachers who are concerned and effective with ghetto children have fled the ghetto schools and left them to the time-servers, the less capable who are unwanted in other schools, and a few capable teachers with the courage and the determination to carry on. One statistic from Chicago graphically portrays the situation. Reported assaults on teachers in Chicago schools have increased from 100 annually ten years ago to 1300 last year.

If we look at other indices for measuring black ghettos, the picture is not so dismal as in the case of the school situation. Unemployment among blacks in urban poverty areas has declined from 9% to 7% since 1967. Looking at a longer stretch of time, the proportion of nonwhite families in poverty neighborhoods (defined as the poorest one-fifth of the census tracts in 100 metropolitan areas) falling below the poverty line has declined from approximately 60% in 1947 to 33% in 1967. In the six major ghettos it has declined to 24%. The median income level of black families in these areas his risen from 50% of median white family income level in 1947 to 74% in 1968. That 74% of white median income is considerably above the national median black family income which is 63% of median white family income. Considerable progress has been made.

Despite this progress, the rise in attacks on teachers, increasing vandalism, and the increasing number of attacks on policemen and on fellow ghetto residents appears to indicate a rising level of anger and frustration. In part, this may be a result of the progress already made. Now that goals are closer and apparently attainable, goals which were once distant and seemingly unattainable, aspiration levels have risen and apathy is being discarded.

On the other hand, some of the anger and frustration may also be a consequence of increasing family disorganization manifested in such indices as the proportion of households in the ghetto without a male head. This, in part, is a consequence of the way in which welfare payments are administered in programs such as Aid to Families with Dependent Children. President Nixon has proposed the replacement of this program with a Family Assistance Plan where welfare payments will not depend on the absence of a male wage earner. This may be of some small help in halting the rise in family disorganization, although it will still remain possible for a family to increase its income by the wage earner's nominally deserting his family to make it possible for them to go on the Family Assistance Plan while he continues to earn from his job.

The most important activity for cooling the ghetto, and for curing some of the problems in education, is the family planning program. In addition, the repeal of statutory laws on abortion and a return to common law on this subject is required.

At present, birth rates in the ghetto are running 37 per 1000 per year as compared to a national average of 17 per 1000 per year. There are simply too many children in a large proportion of ghetto households to be given proper attention and support. Without parental attention and encouragement, children do not do well in school. With too many children, ghetto parents cannot provide the economic or emotional support their children require or enforce the learning of acceptable standards of behavior. Anger at their deprivation is one consequence, and disinterest in school and lack of readiness for school when they reach kindergarten or first grade is another.

Ghetto parents are interested in providing better for their children, but frustration of their attempts is one of the consequences of too many children. In one small ghetto area of Chicago, Planned Parenthood's provision of birth control information to those seeking it has reduced the birth rate from 37 per thousand to 25 per thousand. This has reduced crowding in homes and the burden on schools, enabling both to do a better job.

If there is one thing this nation does not need, it is a continuation of the population explosion. At present rates of population increase, we will have another 100 million people to house, feed, and educate in little more than thirty years. We are struggling now with the pollution problems created by a 200 million population. Increasing this by another 50% will confront us with an overwhelming task. We must reduce the present rate of population growth to a more manageable level. The place to begin is with the people who prefer having fewer children. Ghetto residents have already shown their preference for fewer children by their response to the Planned Parenthood programs now operating in a few areas. It is the same preference as that manifested in the rest of the nation which is keeping its birth rate down to a seventeen per thousand level.

The second most important step which can be taken to reduce anger and frustration in the ghetto is to avoid any further increases in the statutory minimum wage level. At present, no employer in most industries can legally pay less than $1.60 an hour to an employee (in a few cases the minimum is $1.45 and is scheduled to rise to $1.60 in 1971, and in certain kinds of farming it is $1.15 and is scheduled to rise to $1.30 in 1971). This is a requirement laid down by the Federal Fair Labor Standards Act.

The result of this minimum wage requirement is that 32% of black teenagers in six major ghettos who would like to have jobs and have actively sought jobs are unemployed. Another 23% of black teenagers in those areas who would like to have jobs have become so discouraged by their inability to find jobs that they have given up looking for work. This group is not even counted in the labor force and shows only as a decline in what is known as the participation rate.

With more than 40% of the black teenagers in the six major ghettos who would like to have jobs being unable to find work, it is no wonder that they are angry and frustrated. It is no wonder that they have rioted, burned their neighborhoods, assaulted the teachers they once had (a major portion of the assaults on teachers is by students that formerly attended their schools), and have reacted against such symbols of authority as policemen who try to prevent them from vandalizing and stealing.

You may well ask, "What evidence do you have that the minimum wage is the cause of unemployment among black teenagers? Perhaps discrimination against blacks is the cause of their unemployment and we could reduce their unemployment levels by eliminating, or at least reducing, discrimination. If the minimum wage is the cause of unemployment among teenagers, then there should be as much unemployment among white teenagers as there is among black teenagers."

It is true that reported unemployment among white teenagers is only 12% nationwide as aginst 24% nationwide among black teenagers and that the participation rate of white teenagers in the labor force is higher than the participation rate of black teenagers. However, this is something that has occurred only since the minimum wage was jacked up to its present level.

In 1940, the unemployment rate among black teenagers was about the same as the unemployment rate among white teenagers. The black teenage participation rate in the labor force was much higher than the white teenage participation rate. By the late 1940s, this was still true. In 1950, a $.75 an hour minimum wage was established. The black teenage participation rate then dropped relative to the white participation rate and black teenage unemployment jumped to levels 20% higher than white teenage unemployment. In 1956, the minimum wage was raised to $1.00 and the same thing happened again to relative unemployment rates. In 1961, the minimum was raised to $1.15 and in 1963 to $1.25. Again the same thing happened. In 1967 the minimum was raised to $1.40 and in 1968 to $1.60. Again the same thing happened.

White teenagers have been affected by the rise in the minimum. In good times, the unemployment rate among white teenagers used to run around 7 to 8%. Now, it runs around 11 to 12%. But black teenage unemployment rates which also used to run around 8% in good times now runs around 24%. The black teenage participation rate, which formerly far outran the white rate, sank toward the white level beginning in 1950. It finally dropped below it when the minimum wage was raised to $1.15 in September 1961, despite the fact that the white teenage participation rate has also dropped each time the minimum wage was raised, with a few exceptions, and is now considerably below what it was in the early 1950s.

If it is discrimination that is causing the high level of black teenage unemployment, then we have to argue that anti-black feeling leaped to a higher level each time the legal minimum wage was increased—hardly a sensible conclusion. Other evidence indicates that discrimination has been decreasing, not increasing. The unemployment rate among black adults has been declining—and it has declined much more rapidly than the unemployment rate among white adults. Median real income of Negro families increased 60% in the last ten years while white increased 30%.

Of course, you may then ask, "Why do increases in the minimum wage affect black teenagers much more adversely than white teenagers and, apparently, has had little or no adverse effect on adult employment?" First, the wage rate paid most adult workers is in excess of the increased minima which have been set from time to time. Adult workers are more productive, more responsible, require less costly supervision and training than teenagers and are, as a consequence, worth enough to employers that competition among employers for their services has driven their wage to levels well above the minimum wage rates. Teenagers are not so skilled, responsible, or productive as adults. Many of them are not worth as much as the minima that have been set and therefore have not been able to find employment.

Second, the average skill and average educational level of black teenagers is less than that of white teenagers. In the ghettos in the six cities of Chicago, New York, Los Angeles, Detroit, Atlanta, and Houston, the average black had 10.8 years of education as compared to an average of 12.3 years of education for the average white. The average black ghetto teenager is a very expensive worker to train and supervise. If he is also very costly in terms of the wage he must be paid, then he will not be hired. The average white teenager is less costly to train and supervise and, at a given wage requirement, is a preferred employee for this reason. If the black teenager were allowed to work for a lower wage, employers would then find it worth the expenses of training and supervision to hire him.

Since the minimum wage makes the black teenager too expensive to be worth hiring, he is not only foreclosed from a job and frustrated for this reason, but he is also foreclosed from an opportunity to obtain a relevant education. The most important part of our economic education takes place in places other than ivy covered brick buildings labeled schools. We learn a great many of our skills in our early jobs. Since the black teenager has been foreclosed from a job by the minimum wage, he is prevented from obtaining the training which would make him a more productive worker: worth, and able to earn, far more than the minimum wage. He is doomed in adulthood by the deprivation of a job as a teenager.

Some people sneer at the jobs that would be obtainable at a $1.25 to $1.50 an hour as dead-end jobs. "What," they ask, "does a teenager learn in a job as a delivery boy, dishwasher, bootblack, stock boy, elevator operator, or messenger that equips him for a better paying job? How do skills such as these ever result in advancement in later life?" The answer is that some of the skills required to make the black teenager a more valuable worker are very rudimentary in character. He must learn to read a clock, to set an alarm, to get up on time and get to work on time, and find the transportation available for getting to work. He must learn to accept a supervisor's instructions and not to spit in the foreman's face, he must learn not to fight with fellow workers while on the job, not to engage in horse play when he is supposed to be carrying out an assigned task, not to let his attention lag when he is working around machinery, and to stick to a job for at least the full two hours between coffee breaks and meal breaks. The teenager has to be socialized. Employers are not going to provide expensive supervisors to socialize employees who are too costly to be worth the effort.

The failure to socialize black teenagers because they can't get the jobs where the effort will be expended that is required to socialize them is part of the reason that barbarism is on the rise in the black ghetto. The policeman is a last resort in socializing people. It is preferable that parents do the job. When parents fail, employers will do the job of socializing, if the teenager is not priced out of reach by minimum wage laws. But since they are, the attacks on teachers and the amount of vandalism in the black ghetto will continue to accelerate unless we repeal minimum wage laws.

This is a summary of the proposals I have put forward for ameliorating the ghetto problem:

1) Provide family planning service to those who would prefer having fewer children.

2) Repeal State abortion statutes and return to the common law on abortions.

3) Provide tuition vouchers to parents which they can use to pay tuition to any accredited school, public or private, and force schools to compete with each other for students.

4) Repeal minimum wage laws.

These actions would contribute to ameliorating the ghetto problem and improve the lot of our black citizens.

I should also add that the changes in policy I have suggested are not the whole answer to the ghetto problem although they are a major part of the answer. While we need a revolution in the attitudes of white people toward black people, part of the revolution would be produced by the enactment of these policy suggestions. A well-to-do, well educated, hard working black citizen will earn respect, however grudging, even from the red necks of Mississippi, the wool hats of Georgia, the crackers of Florida, and limousine liberals of Washington and New York.

On the other hand, our black citizens must also bear their burdens. If the high cost of ghetto life is to be reduced, they must cooperate with each other and with the police to reduce vandalism, eliminate terror in the streets and in the classroom, prepare themselves by obtaining the skills to fill the positions which will give them dignity and lead to the assumption of power instead of reacting destructively to frustration or supporting those who do. Constructive action is called for from black citizens as well as white. On this score, Black Muslims have contributed to the future of black citizens while Black Panthers have simply created road blocks to progress. Instead of attacking and alienating the police, black citizens should be constraining the hoodlums and the gangsters in their own community and supporting the efforts of their fellow citizens to save, to learn, to progress, to build. Instead of attacking the free market system and the institutions which have allowed them to do as much as they have for themselves, they should help make the economy even freer and help perfect the institutions which allow such a system to function. Prejudice dies as rationality is allowed to function, and one of the great virtues of a free market society is its encouragement and development of rationality.