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The significant racial wealth gap between black and white households in the US, with black families holding less than 7 cents of the dollar compared to white families. the reasons behind this disparity, including educational attainment, unemployment, and homeownership. It also suggests potential solutions, such as reparations and policies to address wealth inequality for the entire population.
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By William Darity Jr., Darrick Hamilton, Mark Paul, Alan Aja, Anne Price, Antonio Moore, and Caterina Chiopris
Samuel DuBois Cook Center on Social Equity
Insight Center for Community Economic Development
April 2018
The racial wealth gap is large and shows no signs of closing. Recent data from the Survey of Income and Program Participation (2014) shows that black households hold less than seven cents on the dollar compared to white households.^1 The white household living near the poverty line typically has about $18,000 in wealth, while black households in similar
At the other end of America’s economic spectrum, black households constitute less than 2 percent of those in the top one percent of the nation’s wealth distribution; white households constitute more than 96 percent of the wealthiest Americans. Moreover, even among the nation’s wealthiest households, extreme differences persist on the basis of race:
The 99th percentile black family is worth a mere $1,574,000 while the 99th percentile white family is worth over 12 million dollars. This means over 870,000 white families have a net worth above 12 million dollars, while, out of the 20 million black families in America, fewer than 380,000 are even worth a single million dollars. By comparison, over 13 million of the total 85 million white families are millionaires or better (Moore and Bruenig 2017).^2
(^1) Data from the Federal Reserve Board’s Survey of Consumer Finances for 2016 indicate that the median black household has ten cents for every dollar held by the median white household, still a staggering disparity. The Survey of Consumer Finances oversamples households at the upper end of the income distribution while the Survey of Income and Program Participation oversamples households at the lower end of the income distribution. Regardless which data set is used, if all vehicles are removed, including the household car, the net worth calculation, the median black household has only about three cents per dollar held by the median white household (Moore and Bruenig 2017). (^2) The statistics reported here are drawn from the 2016 round of the Survey of Consumer Finances.
much of an effect on reducing the racial wealth gap. For the gap to be closed, America must undergo a vast social transformation produced by the adoption of bold national policies, policies that will forge a way forward by addressing, finally, the long-standing consequences of slavery, the Jim Crow years that followed, and ongoing racism and discrimination that exist in our society today.
Addressing racial wealth inequality will require a major redistributive effort or another major public policy intervention to build black American wealth. This could take the form of a direct race-specific initiative like a dramatic reparations program tied to compensation for the legacies of slavery and Jim Crow, and/or an initiative that addresses the perniciousness of wealth inequality for the entire American population, which could disproportionately benefit black Americans due to their exceptionally low levels of wealth. Indeed, the two strategies -- reparations for America’s record of racial injustice or the provision of the equivalent of a substantial trust fund for every wealth poor American— need not be mutually exclusive.
In what follows, we come to grips with the ten most important, widely held myths about closing the racial wealth gap.
A common-sense hypothesis ascribes disparities in wealth mainly to differences in the level of education. A college degree is associated with higher earnings and more stable employment, even in times of economic crisis (Day and Newburger, 2002; Chung, Davies, and Fitzgerald, 2010). Families with college-educated heads appear to accumulate more wealth than families with heads with lower levels of education over a lifetime. Therefore, higher education often has been touted as the “great equalizer”, as a mechanism to reduce the wealth gap between whites and blacks. According to this logic, we would expect blacks and whites with similar levels of education to display comparable levels of wealth.
Figure 1 summarizes our findings when we compare wealth levels for heads of households with the same educational attainment across racial groups. Both for blacks and whites, median household wealth increases as the head of household obtains higher levels of
Furthermore, low family wealth can have an adverse effect on the next generation’s educational attainment. Family wealth is a predictor of both college attendance and college completion (Meschede et al. 2017). Black students are more likely to take on student loans and accumulate student loan debt, and they are more likely than white students to drop-out of a university because of financial concerns. Ironically, their wealth position could deteriorate because of their intense motivation to pursue higher education (Shapiro et al 2013).
Another commonly held misconception is that black families have a cultural predisposition to under-value education (Loury 1985, Ogbu 1978). Black parents are alleged to invest insufficiently in their children’s education. However, the best evidence indicates that black families, controlling for household type and socioeconomic status, tend to be more supportive than white families of their children’s education through direct financial support.
educational attainment, and/or parental occupational status, black youth also get more years of schooling and acquire more credentials than white youth whose parents have a similar status (Mason 1997, Mangino 2010).
While education does not appear to be the great equalizer, it could be argued, alternatively, that hard work can close the wealth gap. Since blacks face a higher unemployment rate than whites at every level of education (Jones and Schmitt, 2014), the difference in wealth ultimately could be due to the difference in employment status. If that were the case, we would observe similar levels of wealth for blacks and whites with similar employment statuses.
But Figure 2 contradicts such an expectation. As one would expect, the median household wealth is higher for employed families than for unemployed families in both races. However,
white households with an employed head have more than ten times higher wealth than
Figure 2: Median Household Net Worth by Race and Employment Status
Source: Authors’ calculations, SIPP, 2014.
In addition, higher levels of household income are not associated with significant reductions in the racial wealth gap. Figure 3 shows how black families have much lower wealth than white families even when they have comparable earnings. In particular, black households in
poorest white families have on average $15,000 - $18,000 in net worth. Even belonging to the highest quintile does not make black families as wealthy as whites: their median wealth is approximately half of that of white families in the same income quintile.
stated what he thought to be obvious (and uncontroversial): “[d]ifferences in homeownership rates remain the prime driver of the nation’s racial wealth gap.” Desmond is far from alone in perpetuating this misperception. A 2015 report from the think tank
substantially reduce the racial wealth gap,” while the Institute on Assets and Social Policy at Brandeis University wrote an entire report on how interest deductions for home-owners “drive” the racial wealth gap. After all, the typical household, regardless of race, holds most of its wealth in home equity. Since black families own homes at substantially lower rates
than their white counterparts, the argument has it that if blacks only achieved rates of home ownership similar to whites, the racial wealth gap would be eliminated.
The word “drive” suggests a causal link between homeownership/home equity and intergenerational wealth. However, a major flaw in this reasoning is that, by definition,
“homeownership drives wealth” is equivalent to saying that “wealth drives wealth.”
share of their asset portfolio in homeownership than whites, since a home is the largest (usually) non-depreciating major asset held by most American households, regardless of race. Nonetheless, in the aggregate, whites have considerably more resources than
Furthermore, empirically, the evidence simply does not support the claim that the racial homeownership gap explains the racial wealth gap. Figure 4 shows median household
narrow somewhat among those who own a home, a six-figure wealth differential remains. Clearly increased homeownership is far from sufficient to close the racial wealth gap.
stored, and these pathways and assets will vary across context, including geographic location. Nonetheless, a major underlying difference in homeownership rates is an initial difference in endowments.
Broad-based homeownership in the United States as a means to achieve economic security was brought about through public policy reforms, starting with New Deal legislation. The New Deal created relatively sound long-term mortgage markets and down payment capital finance. It also reduced down payment requirements for homeownership. This transformed the housing landscape, allowing many working-class households to move from the rental lifestyle to obtaining a piece of the American dream - owning a home.
Yet the path to homeownership has been riddled with entrenched racism, as the Federal Housing Administration (FHA) systematically refused loan applications to black families through the policy of redlining.^5 Richard Rothstein (2017) has made the following observation in a recent book on the racialized character of post-World War II social mobility policies:
that was employed in the mid-twentieth century to enforce residential racial segregation. There were many specific government actions that prevented African Americans and whites from living among one another, and I categorize them as unconstitutional... For example, many African American World War II veterans did not apply for government-guaranteed mortgages for suburban purchases because they knew the Veterans Administration would reject them on account of their race, so applications were pointless. Those veterans then did not gain wealth from home equity appreciation as did white veterans, and their descendants could not inherit that wealth as did white veterans’ descendants. Further, the racialized history of housing policy in the U.S., including residential segregation, redlining, and discriminatory credit practices, have exacerbated inequality in wealth and homeownership rates and have also contributed to the rate of return on the asset itself. Part of the persistent
(^5) For an extensive discussion on the development of racialized housing policies see Richard Rothstein (2017).
wealth-gap across homeownership status may be explained by the fact that a home is one of the only assets in which the race of the owner affects the rate of return.
Further, the idea that homeownership creates wealth simply may put the relationship backward. Rather than homeownership creating wealth, having family wealth in the first place leads to homeownership, particularly high equity homeownership. As we discussed in the introduction, blacks have minimal initial wealth to invest in homes or pass down to their children to assist with down payments. Research by Gittleman and Wolff (2004) suggests that when black households do obtain some wealth, one of the first assets they purchase, similar to other Americans, is a house. But without sufficient wealth in the first place, households have limited means to invest in homeownership. Wealth, after all, begets more wealth.
While achieving parity in homeownership and rates of return on housing is certainly a worthwhile goal that might improve economic security, stability and fairness, it is a widely held myth that improving homeownership rates amongst black households will close the racial wealth gap.
Today, simply advocating the purchase of a new home will not overcome the existing gap produced by national policies. As illustrated above, even blacks who own their home encounter a large racial disparity in home values. If the goal truly is to eliminate the racial wealth gap, policymakers should be concerned with providing, at the very least, an initial, significant financial endowment to black young adults to invest in an asset like a new home, as well as an aggressive campaign against housing and lending discrimination, which limits the asset appreciation of the housing stock and financial products available to blacks.
From this perspective, if only black consumers would invest in their own communities, turning inward for solutions to their economic woes, rather than asking the state for a handout, they would become economically self-sufficient and eventually thrive. After all, the premise works as follows:
A group with a low profile of achievement does not have to persuade members of the dominant group to embrace policies to repair the out- group that may impose costs on the dominant group. Everything ultimately can be solved internally with the right amount of spit and polish. (Darity 2009)
Rather than creating an inclusive and just economy that does not greatly disadvantage a group solely based on their race, politicians across the aisle embraced the idea of buying and banking black. In 1968, the same year King called for a ‘bank-in,’ none other than presidential hopeful Richard Nixon came out endorsing “black capitalism”.
In his speech to the Republican National Convention, Nixon proclaimed:
Instead of government jobs, and government housing, and government welfare, let government use its tax and credit policies to enlist in this battle [against poverty] the greatest engine of progress ever developed in the history of man—American private enterprise.
Black capitalism, in Nixon’s eyes, was the solution. So while white America received ample government support through public policies to build and maintain wealth, black Americans were offered a deficient private sector strategy (Katznelson 2005). Black capitalism was a solution that would allow the government to hand over the economic “problems” of
poverty and insufficient wealth in the black community to the community itself, effectively ridding the government of responsibility (Baradaran 2017).
But black businesses and banks cannot thrive on a separate and unequal playing field. For instance, in the U.S. black banks are smaller and less profitable than similar white institutions (Baradaran 2017). This is not because the black-owned institutions lack a strong business model or viable leaders, but because of the economic situation of the communities where they operate and their own disparate levels of access to start-up and developmental finance.
For instance, since black families have minimal liquid wealth, their bank accounts tend to hold money for day-to-day and week-to-week expenses. Small and unstable deposits due to continued economic penalties forced upon black workers and households makes profitability a significant challenge for these banks. In the end, if black banks and businesses are a supposed solution to the racial wealth gap, we must address a basic math problem that arises: to close the gap, black banks and enterprises must earn a much higher rate of return than white businesses. Without this condition being met, the gap only will be perpetuated rather than ended.
What is the state of black business in the United States today? A recent report by the Association for Enterprise Opportunity indicates that 2.58 million U.S. black-owned businesses, only generate $150 billion in revenue. Unfortunately, this represents negligible ownership and control over the nation’s productive capacity (Gorman 2017).
collectively grossed $24 billion and employed 73,940 workers.^6 In contrast, Walmart, the
(^6) http://www.blackenterprise.com/lists/be-100s-2017/
measurement for corporations to better market their products. “Power” here
reality of structural, intentional and necessary economic inequality required to maintain society as it is, one that benefits an increasingly decreasing number of people.
Note, also, even if we accept the estimated $1.2 trillion total of “black buying power” as valid, it still is only 60 percent of the value of J.P. Morgan’s total assets.
A strategy for closing the racial wealth gap currently in popular circulation is to have each of the nation’s 40 million black Americans contribute $10 a month ($120 a year) to a fund to support black owned banks who, in turn, will finance further development of black owned businesses. But the total amount of that fund would only come to $4.8 billion, a tiny speck in America’s overall wealth and national income.
access to family wealth both directly, through transfers from immediate family members, and, indirectly, through kin networks, have markedly higher rates of entrepreneurship and
tenth of the threshold figure for successful entry advanced by Bates in 1995.
While some may argue that the “wealthy tend to make better entrepreneurs” Evans and Jovanovic argue strongly that “the data reject this explanation,” and that the levels of capital required to start businesses systematically exclude non-wealthy individuals, regardless of their entrepreneurial talent. Thus, with the denial of black wealth accumulation and with the continued exclusion of blacks from business credit markets, blacks simply do not have access to the necessary resources to build corporations that can be players in a global economy (Blanchflower et, al.). A black American corporate monolith cannot be built on $1.2 trillion in spending capacity, never mind $4.8 billion in seed capital.
Mehrsa Baradaran (2017) forcefully argues that “buying black, banking black” is a stance that is symptomatic of an attraction to the chimerical dream of “black capitalism.” She contends that, again, in the absence of a wide, deep, and independent foundation in wealth among black Americans, the prospect of a world of giant black-owned corporations is no more than a fantasy. Baradaran’s central conclusion is capitalism, whether black or white, cannot fix problems created by racialized public policies.
We must make it clear that we have no objection to banking black or buying black. In the
