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William “Sandy” Darity Jr. interview: “If you think something’s the right thing to do, then you pursue it.”

His recent focus has been on reparations for African Americans, but his scholarship spans decades and ranges from imperialism to psychology, from “price-specie flow” to rational expectations

June 3, 2019


Douglas Clement Managing Editor (former)
William “Sandy” Darity Jr. interview: “If you think something’s the right thing to do, then you pursue it.”
William Darity, Jr.
William Darity Jr.Justin Cook/Minneapolis Fed

Reparations for African Americans are in the news these days as presidential candidates consider whether and how to support such initiatives. Pundits weigh in. Writers opine. Politicians test waters. The debate is far from new, obviously. Union General William Sherman promised 40 acres (and later, the mule) to former slaves in January 1865, a debt never paid.

No economist has addressed the issue with the persistence and power that Duke University’s William Darity Jr. has. For nearly three decades, “Sandy” Darity has written papers and given presentations discussing the rationale and design of reparations policy. Next year, he will publish a book dedicated to the question, co-authored with his wife, Kirsten Mullen.

He wasn’t always a proponent. Asked to write an introductory essay for a 1990 volume of papers on reparations, he told the editor he might not bring a favorable contribution. But after careful study, he changed his view and has been a forceful advocate ever since.

Darity’s scholarship goes well beyond this single topic, of course, and it’s difficult to peg him as an “economic historian,” a “development economist,” or a “monetary theorist,” though he is all three. One of his first articles developed a theory of imperialism by extending the arguments of Polish economists Michal Kalecki and Rosa Luxemburg. Another early paper re-examined David Hume’s theory of “price-specie flow” in light of decreasing costs, a topic relevant to trade theory. A book in 1988 examined the role of commercial banks in the international debt crisis. A 2001 article discussed the early history of rational expectations. A 2014 paper analyzed the long-term psychological impact of stalking.

But by far the greatest part of his research is devoted to inequality—its extent, variety, causes, and effects—often in the context of race. This interview reflects that focus, with discussions of labor market discrimination, skin shade, slavery, and the racial wealth gap, and policies to address it.

Darity’s scholarship is respected but also controversial, and he seems comfortable with that. He takes intellectual risks that many scholars won’t, speaking at forums and contributing to publications that academics shy away from. That may reflect his background. He was exposed to risk and discrimination early on, growing up in Lebanon and Egypt, where his father, a professor of public health, worked for the World Health Organization, and afterward in North Carolina during the Jim Crow era.

Another reason to speak his mind: pursuit of justice. “I still think the odds are long,” he said about reparations. “But the older I’ve gotten, my position is, if you think something’s the right thing to do, then you pursue it.”

Interview conducted March 6, 2019.

Discrimination in labor markets

Region: In a 1998 review article with Patrick Mason on discrimination in employment, you documented significant and continued job discrimination in the United States, though there have been periods of decline for both women and black males.

At that time, you noted that neoclassical theory of competition predicts that discrimination will diminish over time, and you called for alternative theories that could better account for its persistence.

Two questions: 20 years hence, has there been progress in reducing discrimination in labor markets? And have economists come up with better theories to explain persistent discrimination?

Darity: Those are great questions. Just yesterday, I had a conversation with a reporter in Houston who was trying to unpackage why there was evidence of a widening racial gap in wages.

Region: Widening?

Darity: Yes, a widening racial gap. She said that Texas, in particular, had displayed the greatest increase in the gap. She was puzzled because, she said, “Actually we have evidence that educational levels have converged somewhat, so there wasn’t any obvious explanation for this.”

To the extent that we think America has a competitive economy, that doesn’t appear to be sufficient to eliminate discriminatory wage penalties.

I said, “Well, perhaps the degree of labor market discrimination has intensified, particularly in the climate that’s associated with the Trump presidency.” That was entirely speculative on my part, but she was intrigued by that response. I think that the period in which we have evidence of racial wage penalties actually falling is within the decade after the passage of the Civil Rights Act. It’s relatively flat after that with some mild variation, and now apparently there may be an uptick. This suggests to me that, to the extent that we think America has a competitive economy, that doesn’t appear to be sufficient to eliminate discriminatory wage penalties.

Region: Does that point to a problem with economic theory?

Darity: I think so. Because in economics, labor market discrimination is anchored on two kinds of arguments. One is the Becker taste for discrimination framework. The other is the statistical theory of discrimination. Neither one of them really provides a story that suggests that discrimination is sustainable in the presence of employers who prefer profits to prejudice.

With respect to the statistical theory of discrimination, if employers are correct in believing that one group on average has lower productivity than the other then, really, it’s not a theory of discrimination. Human capital theory provides the explanation. If they’re incorrect in that belief, one would think that over some period of time, employers would learn. Some would experiment with using the ostensibly “less-productive” workers because they can pay them less. They might discover that they’re just as productive. So the information might spread about that, and other employers would also hire them.

Region: Or the others would die off, in a Darwinian struggle. They would be less profitable than those who did experiment and learn.

Darity: Yes, because those who experimented could pay lower wages for the same quality of work. Absolutely.

Stratification economics

Region: To provide a better explanation for discrimination in labor markets, I believe, you developed “stratification economics.” In 2005, you delivered a lecture on the theory. In a 2017 chapter with Hamilton, Mason, and others, you elaborated on it and concluded with a dramatic challenge: “It calls for a rewrite of the rules of economic analysis.”

In a nutshell, if you can, what is stratification economics, and why does it call for a rewrite? Or, rather, how must the rules be rewritten?

Darity: Stratification economics is an approach that emphasizes relative position rather than absolute position. What’s relevant to relative position are two considerations: one, a person’s perception of how the social group or groups to which they belong have standing vis-à-vis other groups that could be conceived of as being rival groups.

Now, it’s an interesting issue as to who constitutes groups that are viewed as rivalrous or oppositional in some sense. But the first thing that individuals value is a superior position for the groups with which they identify. The second thing that they value is a superior position relative to other members of their own group.

Region: So, within group, as well as across groups.

Darity: Yes. There are two sets of comparisons that are going on: an across-group comparison and a within-group comparison. This kind of frame as the cornerstone for the analysis comes out of, in part, the old work of Thorstein Veblen and also out of research on happiness. The latter increasingly shows that people have a greater degree of happiness if they think that they’re better off than whoever constitutes their comparison group rather than simply being better off; so it’s comparative position that comes into play.

There are two sets of comparisons that are going on: an across-group comparison and a within-group comparison. This kind of frame as the cornerstone for the analysis comes out of, in part, the old work of Thorstein Veblen and also out of research on happiness.

Conventional economics doesn’t start with an analysis that’s anchored on relative position, as opposed to absolute position; so I think that’s the fundamental shift in stratification economics. But also important to stratification economics is the notion that people have group affiliations or group identifications. People feel like they’re part of a team. There can be varying degrees of attachment but, in some sense, people think of themselves as being part of a team, and they want their team to win. That’s somewhat different from conventional economics.

Region: You’ve also done work at an international level, with Ashwini Deshpande, looking in a variety of nations at intragroup disparities—variation within different groups as well as among them.

Darity: We were thinking that there are multiple ways to decompose measures of inequality. Some people have decomposed them on the basis of spatial variations. Others have performed the decomposition on the basis of occupational variations. We were thinking that you could just as well perform such a decomposition by making use of intergroup differences, whatever the salient groups are within a particular society.

It could be ethnic differences, it could be caste, it could be—in the case of Ireland, for instance—religion. Or other kinds of ethnic divides are linked to religion, as in Bosnia and Herzegovina or in India, where there also is the caste divide. There are many different ways in which human beings appear to differentiate themselves. I hope it’s not something that’s fundamental to what we call human nature, but it certainly has a long and persistent history.

The importance of skin shade

Region: In addition to your work on labor market discrimination, you’ve done intriguing and disturbing research on discrimination by skin shade and also on the psychological impact of unemployment. I’d like to ask you about your 2015 paper that looks at the intersection of all three—specifically, the psychological costs of unemployment for black women of different skin shades.

William Darity Jr.
William Darity Jr.Justin Cook/Minneapolis Fed

You find strong evidence of a “gradient on depression”—that, for example, unemployed black women of darker complexion are more likely to suffer their first onset of depression than those with lighter skin shade.

Could you tell us about this research—your findings generally? Why do you focus on women? And what is the mechanism behind “colorism,” discrimination on the basis of skin shade?

Darity: Let me start with the reason to focus on women. Our initial work in this area, before the 2015 paper that you mention, was focused primarily on labor market experiences and whether or not skin shade made a difference. We generally found that there were much more dramatic effects for men than for women in terms of labor market outcomes. Lighter-complexioned black men incurred far smaller discriminatory wage penalties than darker-complexioned black men in employment, but there was no comparable difference among black women.

When we devoted our attention more closely to the experiences of women outside the labor market, we found that there were significant effects associated with marriage market outcomes. We then did a study—I’m not sure if it’s actually published somewhere—where we discovered that relative to their family’s resources, darker-skinned women who are black get more years of schooling than lighter-complexioned women who are black.

We concluded that this may have been some type of compensating variation, because the darker-skinned black women are less likely to have income opportunities that are associated with marriage; because their odds of marrying are lower.

Then we were trying to think about whether there could be other kinds of traumas associated with the burden that you bear by being darker-skinned in America. We investigated what we could learn about people’s mental health, and so that’s how we got to the findings in the 2015 paper. Somewhat circuitous, but that was the path.

Region: What did you find about skin shade, women, unemployment, and psychological costs? And what is the mechanism behind colorism? That is, why are darker-skinned unemployed women more likely to suffer an onset of depression?

Darity: I think it’s because their life options are generally more desperate; one example is their disadvantage in the marriage market. I think they are under more stress given a bout of unemployment.

There was a point at which we were thinking that communities that are subjected to deprivations on a more sustained basis might actually develop more resilience. But that doesn’t really appear to be the case with respect to mental health. The severity of the trauma is greater, sometimes, for members of communities that are experiencing continuous deprivations.

The severity of the trauma is greater, sometimes, for members of communities that are experiencing continuous deprivations.

In another study, we found that the Great Recession had worse mental health effects on blacks than on whites, despite all of the popular discussion about economic anxiety among lower-income whites.

Now, the companion issue is, Why does colorism exist? And, of course, I think that has to be associated with the unfolding of the history of white supremacy in the United States.

Eric Williams and the slave trade

Region: Let me jump to that, in a sense, by asking about Eric Williams.

Darity: Eric Williams actually did write about colorism at one point, but most people don’t know that.

Region: I’m certainly one of them. But, thanks to you, I do know a bit about him. You’ve written several articles about his research on the relationship between the slave trade and British industrialization.

You’ve argued that his theory is a cogent explanation for British industrialization and for the eventual abolition of slavery.

Darity: He had three hypotheses, I think. The third is his hypothesis about the origins of racism. He held that racism did not produce slavery but, rather, slavery produced racism.

Region: Can you first tell us a little about him? Other than the first prime minister of Trinidad, who was he?

Darity: Well, he was an Oxford-trained historian from Trinidad, and he received what was then called an Island Scholarship after he completed his secondary school years. This was at the beginning of the 1930s. He was born in 1911, so he was probably 19 or 20 years of age when he went to Oxford, relatively young. He had been a secondary-level student at Queens Royal College off of the Savannah in Port of Spain. Clearly an outstanding student, they say he was also a pretty good soccer player, but he was extremely selfish; he would never give the ball to anybody else!

Region: What are his central theories, and why weren’t they widely accepted?

Darity: There are three prongs. The first is, as I said, his explanation for the origins of racism. The second is his argument that the slave trade and the slave plantation system were instrumental in British economic development. C.L.R. James would make the same claim about France.

Then the third argument, which for some people appears inconsistent with the second, is that when the British abolished the slave trade, it was because it was no longer of any functional value to them. On the one hand, he’s saying slavery and the slave trade helped build the British economy. Then, on the other, he’s saying it ended because it was no longer useful. That’s the key phrase: It was no longer useful, or as useful as it had been.

Region: Did he also argue that the slave trade resulted in the underdevelopment of Africa?

Darity: That was not a Williams’ hypothesis. That was Walter Rodney’s. Early in my career, I tried to integrate the positions of C.L.R. James and his book The Black Jacobins, Eric Williams’ position on capitalism and slavery, and Walter Rodney’s argument in How Europe Underdeveloped Africa. I wanted to integrate the work of these three scholars into a singular vision of the unfolding of ... I wonder how Walt Rostow, of all people to mention, would put it? How It All Began, I like that phrase. Perhaps, “How the modern world began,” in some sense. All three were Caribbean scholars. Rodney was from Guyana. And James, like Williams, was from Trinidad.

When I was an undergraduate, someone was passing Williams’ book around. It certainly was not offered in any of the classes that I took. Somebody was passing Walter Rodney’s book around too. I read them, and I was really intrigued. When I became a Ph.D. student, I decided I would try to do some work that would extend their work.

Region: You gave Williams’ argument a credence it didn’t gain in his own lifetime, winning over previous critics like Stanley Lebergott.

Darity: There was a strange animus that lot of economic historians had toward Williams’ theories.

Region: Using the small ratios argument, for example.

Darity: Yes, that was one of the ways in which they tried to subvert the second hypothesis [slave trade aiding British industrialization]. And there was a lot of criticism of Williams’ view that abolition of the slave trade took place for strategic and economic, or functional, reasons. In contrast with the functional argument, the historian Seymour Drescher, for example, argued that the older school of thought, the argument that abolition was a consequence of increased humanitarian sentiment in England, was the valid explanation.

I think that the critical piece of the story that determines which way the argument goes is what occurred in the context of the Haitian revolution. The fact that the British tried, albeit unsuccessfully, to capture the jewel of the sugar islands, Saint-Domingue [French colonial name for Haiti], tells me that abolition came out of a perceived functionality rather than humanitarian sentiment. If true humanitarian sentiment governed what British officialdom did, they would not have tried to take control of Saint-Domingue after the French had been defeated.

Female-headed households

Region: Let’s shift the focus, if we could, to your work on female-headed households.

You’ve pointed out that U.S. households are increasingly headed by women. This is disproportionately so for African American women. And it’s a matter of concern because female-headed households are poorer than others.

William Darity Jr.
William Darity Jr.Justin Cook/Minneapolis Fed

Darity: Yes.

Region: In your 2018 article with Terry-Ann Craigie and Sam Myers Jr., you use variation among states in sentencing reform to analyze the role that male marriageability plays in female-headed families.

Why has this affected female headship for blacks, but not for whites?

Darity: Because whites are not encountering a decline in the availability of marriageable males. So, to the extent that marriages are disproportionately intraracial …

Region: Which your paper assumes.

Darity: Yes. It is a reasonable assumption. Even though there has been some growth in cross-racial marriages, the predominant pattern is still that marriages are intraracial. So white women, to the extent that white men would be their partners, are not experiencing a shortage of marriageable males.

We refer to assortative mating: People have a tendency to marry someone who has class, social, and often racial characteristics that are similar to their own. To the extent that that’s the case, then the relevant marriage pool for most black women is other black men.

One of the earlier arguments in this discussion of female-headed households was the claim that incentives or inducements associated with the [previous] welfare system prompted so-called family disorganization of the black family.

Region: The idea that because welfare payments were made only to families without fathers present, the system encouraged men to leave.

Darity: Right. That was the argument.

Region: That was Daniel Moynihan’s position, wasn’t it?

Darity: Daniel Moynihan was one of the proponents. I think that belief, to a large extent, underlies the rationale for welfare reform. Actually, very early in my own research career, working with Sam Myers Jr., we presented what we thought was some fairly persuasive evidence that that effect was not that strong.

That opened up the door for the question of, well, if we observe this phenomenon of significant growth in female headship among black families, what’s causing it?

I should note that this was somewhat in line with work by somebody I frequently don’t agree with: William Julius Wilson, who, in conjunction with Kathryn Neckerman, introduced this concept of the male marriageability ratio.

If we observe this phenomenon of significant growth in female headship among black families, what’s causing it?

We made use of it. We put empirical flesh on the bones of the idea and then proceeded to demonstrate that toward the end of the 1980s, there seemed to be a significant effect of the availability of marriageable males on patterns of family formation.

Then, most recently, with Terry-Ann Craigie, we extended and updated those findings in the context of mass incarceration and sentencing reforms.

The racial wealth gap

Region: Let’s move to the racial wealth gap. Much of economic thought has focused on income inequality. You’ve focused on wealth inequality, an area of relative neglect, and you have documented a large and persistent racial wealth gap.

Would you describe the extent of the gap and discuss its source?

Darity: Yes, but first let me add one thing. I think there’s a reason for the comparative neglect of wealth in economics. I think it’s because the study of economic inequality has been left in the hands of the labor economists. Labor economists, of course, are going to focus on what happens in labor markets: jobs and wages as sources of income. But unless one takes the narrow view that the source of wealth is personal savings behavior, then there’s not much of a role for labor markets per se in understanding wealth.

Some labor economists have focused on wealth, but it really was a push from sociologists more than economists that propelled the most recent examination of wealth inequality and, especially, wealth inequality by race.

Region: Would you describe the extent of the gap?

Darity: The racial wealth gap is customarily measured at the median for households to bypass the problems that are created by large outliers. At the median, when we’re taking the middle households, the most recent data from the Survey of Consumer Finances (SCF) for 2016, I believe, places the white household median at $171,000 and the black household median at $17,600. So, essentially, at the median, blacks have 1 cent in wealth to every 10 cents held by whites. [The SCF 2016] probably has the most conservative estimate of the gap. If, for example, you use the Survey of Income and Program Participation from 2014, which I believe is the most recent year that it’s been taken, the ratio is closer to 1 cent for blacks per 13 cents for whites at the median.

In work that our research group has done for the National Asset Scorecard for Communities of Color, we attempted to get data about individual metropolitan areas throughout the United States, where it might be possible to look at the wealth position of very specific national origin groups. All of our cities have much lower estimates of black median wealth than the national statistics.

The number of cities that we’ve studied is substantial but hardly comprehensive. It’s been Boston, Los Angeles, Washington, D.C., Miami, Tulsa, and Baltimore.

Region: I paid particular attention to the data from Boston, perhaps because I’m from there. It’s hard to believe—

Darity: That stunning estimate?

Region: Yes. $8!

Darity: That’s what we found. $8 is the median [wealth of black households in Boston]. In Miami, it’s $11. I’m not sure how the national statistics get as high as $17 thousand; it’s not really consistent with what we’re finding.

So I’m just not sure. There’s something odd. We consistently found, across all of these cities, much, much lower estimates of median black household wealth than you see in the national data.

Factors behind the racial wealth gap

Region: What are the sources and mechanisms of that enormous gap?

I’m absolutely convinced that the primary factor determining household wealth is the transmission of resources across generations.

Darity: I’m absolutely convinced that the primary factor determining household wealth is the transmission of resources across generations.

The conventional view of how you accumulate wealth is through fastidious and deliberate acts of personal saving. I would argue that the capacity to engage in some significant amount of personal saving is really contingent on already having a significant endowment, an endowment that’s independent of what you generate through your own labor.

That being the case, I think that there’s actually some superb research that’s recently come out that supports the importance of what I’d like to call intergenerational transmission effects, rather than intergenerational transfers. I think these effects go beyond inheritances and gifts. I think it includes the sheer economic security that young people can experience being in homes where there is this cushion of wealth. It provides a lack of stress and a greater sense of what your possibilities are in life.

So I like to call it intergenerational transmission effects, and there’s some excellent recent research that has been done on this. The sociologists Pfeffer and Killewald have done very, very powerful work on the relationship between grandparents’ and parents’ wealth and the wealth of the youngest generation when it’s of adult age. The connection or the correspondence between which households have higher levels of wealth across three generations is pretty strong.

Then there’s the work of two economists who are with the Fed, Feiveson and Sabelhaus. Their work shows that at least 26 percent of the net worth of a person in the current generation is determined by their parents’ wealth. At least 26 percent. And that’s their lower bound.

Region: And the mechanisms are not just direct transfers, but also opportunity, education, lack of stress.

Darity: Yes. And if your family’s wealthy enough, you come out of college or university without any educational debt. That can be a springboard to making it easier for you to accumulate your own level of wealth.


Region: You’ve been a powerful and tireless proponent of reparations. In a 2003 article with Dania Frank, you went through rationale, eligibility, methods, effects, financing, and magnitude for effective reparations for African Americans. Another piece in 2010 applied lessons from international trade to reparations to argue that programs must be carefully designed to be effective, not harmful. Just last week, I believe, you gave a speech in Chicago about reparations, and you’re increasingly cited and interviewed on the issue.

As you know better than anyone, reparations have suddenly become almost a cause célèbre. Several Democratic presidential candidates have voiced their support in specific or broad terms.

Darity: They’re actually using the word. That alone is pretty astonishing.

Region: This is five years after Ta-Nahesi Coates’ essay breathed new life into it, but you’ve been making the case for decades. What have been the sources of resistance to the idea, and is it economically viable?

I still think the odds are long. But the older I’ve gotten, my position is, if you think something’s the right thing to do, then you pursue it.

Darity: What’s interesting, actually, is that I didn’t believe in reparations at the beginning of my entry into these conversations.

I was skeptical, not because I thought it was morally inappropriate. I just didn’t think it was feasible; I didn’t think it was politically feasible. I still think the odds are long. But the older I’ve gotten, my position is, if you think something’s the right thing to do, then you pursue it. In retrospect, if folks had not decided to fight against slavery in 1819 because it looked like slavery would last forever, the abolition movement really would not have actually taken off.

I feel the same way about reparations, that even if the odds are long, this is something that should be done. In the beginning of the 1990s, I was asked to write an introduction for a book edited by Richard America that he called The Wealth of Races. It was primarily a compendium of chapters where economists were estimating what the reparations bill should be. I said to Richard, “Well, I don’t know that I’m the right person to write this because I’m fairly skeptical about this.”

He said, “Write the introduction that you want to write. I want you to do it, regardless of what you conclude.” And so I started reading these papers and, the more I read, the more I was convinced that even if this was going to be hard to accomplish, that it needed to be on the agenda as a potential national public policy. So, I think it’s from the early 1990s, I have been working on different dimensions or aspects of the reparations issue.

So, do I think it’s politically feasible?

Region: Economically. After all, you’re not a political scientist.

Darity: Oh, economically feasible! So you’re really asking a question about financing?

Region: I think so, yes, which, admittedly, is political in part.

Darity: I have a couple of responses to that. First, the feasibility is contingent on your estimate of the magnitude of it. I mean, I’m very sympathetic, actually, to the MMTers [proponents of modern monetary theory]. And so, as a consequence, I think that the fundamental barrier to additional government spending is the inflation risk; it’s not existing tax revenue. I would think that a reparations program to be designed sensibly, would have to be one that minimized the inflation risk in some way.

This is not the only way, but an example of how one might do it is to ensure that the allocation of the reparations takes more of an asset-based form so that the funds received are not immediately spent in full.

My wife, Kirsten Mullen, and I have a book coming out on reparations, called From Here to Equality: Reparations for Black Americans in the 21st Century. It will be published by the University of North Carolina Press and should be available in February 2020. In the final chapter, there’s a more extended discussion of financing options, which I cannot reveal at this time. Otherwise, I’ll be in real trouble when I go home.

Region: We don’t want that.

Darity: But let me just say that I embrace the view that you don’t have to pay as you go, that it is fine if you go and then pay. So the focus should be on whether or not a new major expenditure program would risk hyperinflation, and that’s what you really have to be concerned about. To the extent that we can manage that, then I don’t think there’s a serious issue around financing.

“Baby bonds” and a federal jobs guarantee

Region: You’ve also been a proponent, perhaps not for quite as long, of baby bonds and a federal jobs guarantee, often writing on these policies with Darrick Hamilton. Do you view those as complements or substitutes for reparations?

Darity: I view all three of those as complements. Baby bonds is an initiative to try to address general wealth inequality in the United States. Potentially, it could have a disproportionate benefit for blacks simply because black levels of wealth are so low. But it would not come close to eliminating the racial wealth gap. The central reason it wouldn’t is that the design of the baby bonds proposal is anchored on closing gaps at the median rather than the mean.

If we’re concerned about the reproduction of inequality across generations, then the baby bonds type of proposal would be the mechanism to correct for that.

If we’re concerned about eliminating the gap between blacks and whites with respect to wealth, then we would need a reparations program. If we’re concerned about the reproduction of inequality across generations, then the baby bonds type of proposal would be the mechanism to correct for that. In my best of all possible worlds, you’d have both.

A federal job guarantee targets income and poverty, or income poverty, by trying to guarantee every adult American employment at nonpoverty wages, with a benefits package that would be similar to the kind of package that’s held by a federal civil servant at the current time. The premise here is that we would eliminate, with the stroke of a pen, working poverty. We would also eliminate unemployment in the way in which it is defined by the Bureau of Labor Statistics. Because everyone seeking work would be able to find work.

This would significantly alter the Phillips-curve-based logic—

Region: That the Fed contemplates.

Darity: Yes, that underlies what the Fed has to do! Right. I mean, in a somewhat twisted way, you could argue that if you had a federal job guarantee, the Fed could be more aggressive in fighting inflation.

Region: Provocative advice! Well, you gave a very good synopsis of what a federal jobs guarantee would look like and do. Would you do the same for baby bonds?

Darity: Sure. Baby bonds are not really a bond. They’re really a trust account for each newborn infant. It would be different from other types of programs like seed accounts or child savings accounts because no contribution would be expected from parents, whether they’re rich or poor. The amount of the trust account would vary with the wealth position of the child’s family. It would vary on a graduated basis, so we wouldn’t have any kinds of notch effects. That’s basically the idea.

William Darity Jr.
William Darity Jr.Justin Cook/Minneapolis Fed

In most of the versions of the proposal that we’ve advanced, we’ve said the federal government is essentially providing a publicly funded trust account to every newborn child, so it’s a birthright endowment. We would guarantee a 1 percent real rate of interest until the account can be accessed by the child when they reach young adulthood. There’s some debate among us about what that young adulthood date should be.

Rational expectations theory

Region: In addition to all of this work, you’ve also produced a substantial scholarship on the history of economic thought, including rational expectations. The Minneapolis Fed has close ties to that theory, of course, so I’ve got to ask you about it. From the perspective of an economic historian, what impact do you think rational expectations has had on macro theory and monetary policy?

Darity: I think rational expectations has been mobilized to maintain a view that the macro economy self-corrects to full employment. Now, rational expectations in pure form would actually suggest that the economy could self-correct to full employment instantly. The only thing that would disturb that would be true shocks, thoroughly random events. But anything that could be anticipated in the context of thinking about the structure of how the economy actually operates would be anticipated in such a way that we would move consistently toward full employment.

Insofar as it doesn’t appear that we move consistently toward full employment, then that’s an empirical conundrum for the basic theory.

I know that you can design models that deploy rational expectations that don’t lead you to full employment, but that’s usually because you’ve introduced some kind of nonmarket clearing phenomenon. Maybe it’s the labor market, where there’s some kind of wage rigidity or something like that.

But if you had complete price flexibility and rational expectations, I presume you would always move toward full employment. To the extent that I don’t think that’s the case, and to the extent that I don’t think that the decisive factor that keeps us from reaching full employment is price inflexibilities, then I think there’s something unsatisfactory about that entire theoretical approach.

Region: Now I’m going to be in trouble when I go home. But, seriously, thank you very much for sharing your time and your insights.