Feb 27, 2013

Blog: Closing the Racial Wealth Gap: Why it Matters by David Thigpen

Many Americans see the existence of a black middle class and the first African American president as symbols of a post-racial America where discrimination has been vanquished. But a growing body of research suggests that a very different reality lies behind the symbols – one where the invisible hand of public policies and economic forces have a decidedly racial impact, leaving millions of hard-working, people of color unable to catch up to their white counterparts.  

In a persuasive new report released this week, Thomas Shapiro of Brandeis University’s Institute on Assets and Social Policy finds that over the last two decades the gap between the net worth of white households and African American households has widened. In 2009 the median wealth of a white household was $113,149. The median wealth of a black household? $5,677.

Wealth --  “what you own minus what you owe” – as Shapiro defines it, is a bellwether of economic health, reflecting a family’s economic security as measured in assets such as homeownership and savings accounts. Where income provides resources for short term needs, wealth provides resources for families to plan for their future -- like paying for college, launching a business, or buying a house. A widening racial wealth gap indicates that far from moving toward a post-racial society, we are in fact moving in the opposite direction, toward a society of haves and have nots, cleaved along racial lines.

The report, entitled Why is America’s Racial Wealth Gap Growing? builds on Shapiro’s previous research, including his groundbreaking study with Melvin Oliver, Black Wealth, White Wealth (2006) to argue that our present policies are failing us. In a country that is becoming more racially diverse, the current course is a prescription for increasing economic inequality, decreasing productivity, slow economic growth, and its handmaiden – political conflict. The gap is less a result of personal behavioral choices than it is of barriers and restricted opportunities that work against people of color, says Shapiro.

For anyone who believes the economy is a free-market meritocracy where success trickles down, the report’s data should come as quite a shock. Between 1984 and 2009, years which saw two of the longest running bull markets in history, the gap between African Americans and whites tripled, from $85,000 to $236,000. While the wealth of white households has accelerated, the wealth of black households has not. Tracking the fortunes of a set of families over this 25-year period, Shapiro isolates five factors driving the gap: homeownership, household income, unemployment, inheritance and education.    

Homeownership, the largest driver of the racial wealth gap, is 28% higher for whites than for blacks. For African Americans, difficult access to credit means spending less on their homes than whites. Those who do access credit pay more for it. And once they move into their homes, residential segregation draws down values in African American neighborhoods.   
The household income gap results from African Americans clustering in low-wage occupations. But even at higher levels, due to discrimination, blacks receive less pay for comparable work than whites. This puts pressure on income, making savings and investing difficult:  every $1 increase in income for blacks leads to 69 cents of wealth, but for whites $1 creates $5 in wealth. 

Unemployment affects African Americans at twice the rate it affects whites, and African Americans are far more likely to deplete savings after loss of a job.
Inheritance is a driver that plays a significant role in the economic life of white families but is almost non-existent among African Americans. Whites are five times more likely to inherit financial resources than blacks, and when they do, they inherit amounts ten times larger. 

Education rewards both African Americans and whites with wealth but whites derive greater wealth from the same degree. This is in part due to workplace discrimination, but debt also plays a role as blacks commonly lose a larger portion of their income to the repayment of tuition debt. 80% of blacks graduate with student debt versus 64% of whites.
In identifying these drivers, Why is America’s Racial Wealth Gap Growing? also offers guidance to policymakers on where to focus remedies. Will Washington take notice? Although it is unrealistic to expect to quickly close a gap that has been long in the making, setting a goal of creating policies that will help move greater numbers of people of color closer toward economic security is a strong starting point.

What would economic security look like? In broad strokes, it is not much different from what is widely thought of as the American dream: ownership of a home, a steady job that provides a middle class standard of living, some savings, a retirement account or pension, and access to quality education for offspring.  
Key ways of moving the country closer to this goal include income-building, asset-building and wealth-protecting policies such as:

  • Adopt a realistic national standard of economic security to better measure true costs of living and asset-poverty, allowing policymakers to coordinate efforts and set targets
  • Protect the wealth-protecting safety nets of Medicare and Social Security
  • Expand proven job-producing and income-raising strategies such as school to job pipelines for people of color
  • Provide greater capital access and investment and opportunities for women- and minority-owned businesses
  • Adopt methods that evaluate the economic impact of policies and programs on low-income populations of color before they become law
  • Improve college affordability and widen availability of inexpensive educational financing 


All of these efforts should be coordinated as part of a   national sustained effort at closing the racial wealth gap, where government policymakers, academics, business leaders and communities collaborate in a collective effort to highlight and implement solutions to this urgent problem. That’s a winning prescription to free America’s bottled up productivity, reverse our slide, and usher in the broader prosperity that lies within our reach.

David E. Thigpen is Vice President for Policy and Strategic Advancement at the Insight Center in Oakland, California