The Racial Wealth Gap in the United States

How to Close It

Minority businesswoman
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Photo by Rubberball/Meki Kemp/Getty Images

The racial wealth gap in the United States is the disparity in median household wealth between the different races. This gap is most pronounced between white households and black, Latino, Asian-American, and Native-American households.

In 2013, the median net worth of white households was $134,000. The median net worth of black and Latino households was $11,000 and $14,000, respectively.

Statistics

The Economic Policy Institute reported that 25 percent of black households have zero or negative net worth. Only 10 percent of white families have zero or less net worth. In other words, black families have $5.04 in net worth for every $100 held by white families.

This racial wealth gap exists even when all members are highly educated and have two-parent homes. Black families with graduate or professional degrees have $200,000 less in wealth than similarly educated whites. Even white high school dropouts have more wealth than black or Latino college graduates. Similarly, single-parent white households are wealthier than two-parent black households.

Homeownership is a big contributor to net worth, and minority families fall behind in that area. In 2011, 73 percent of white households owned their own homes. The same was true for 47 percent of Latinos and 45 percent of blacks. 

The gap is worsening. Between 1983 and 2013, median black household wealth declined 75 percent, from $6,800 to $1,700. Median Latino household wealth declined 50 percent, from $4,000 to $2,000. At the same time, median white household wealth increased 14 percent, from $102,000 to $116,800.

Asian American households have more wealth than white households. But that seeming success story hides a wealth gap within the minority. The richest Asian Americans held 168 times more wealth than the poorest Asian Americans. It's a greater disparity that white households, where the richest 10 percent owned 121 times more than the poorest 10 percent.

Native American wealth has not even been measured since 2000. At that time, their median household net worth was just $5,700.

Causes

Until the 13th Amendment in 1865, slavery legally prevented blacks from building wealth. Until the Civil Rights Act of 1964, Jim Crow laws enforced segregation in the south. Even though they've been repealed, these laws created structural inequality that's been difficult to erase.

Under the New Deal, the Federal Housing Administration created loan programs to allow more Americans to buy homes. But the government redlined minority areas, allowing banks to avoid distributing the low-cost loans to entire neighborhoods. From 1934 to 1962, 98 percent of home loans went to white families

In 1935, the Social Security Act excluded farmworkers and domestic workers from accruing benefits. As a result, two-thirds of blacks never received Social Security's wealth-building opportunities.

The G.I. Bill of Rights assisted veterans with housing, education, and jobs. Between 1944 to 1971, it spent $95 billion on benefits. But it was left to the states to administer. As a result, black veterans in the South were denied access.

Welfare programs, such as TANF and SNAP, forbid beneficiaries from accumulating wealth. In some states, they can't save more than $1,000 or own cars worth more than $4,650.

Between 2004 and 2009, Wells Fargo Bank steered 30,000 black and Latino borrowers into subprime mortgages. They gave prime loans to white borrowers with similar credit profiles. Wells Fargo was ordered to compensate the minority borrowers for the extra costs incurred by higher interest rates and fees.

Economic Impact

Black and Latino Americans will outnumber U.S. whites by 2043. As a result, the racial wealth gap drags down the average wealth of the entire country.

Between 1983 and 2013, black and Latino median wealth has fallen. During that time, U.S. median wealth has dropped from $78,000 to $64,000, even while white wealth has increased.

How to Close the Gap

Increase economic mobility. Despite the promise of the American dream, the United States has lower levels of economic mobility than other developed countries.

Progressive taxation will help close the inequality in U.S. income. Poor families spend a larger share of their income on the cost of living. They need all the money they earn to afford basics like shelter, food, and transportation. A tax cut will allow them to afford a decent standard of living. It will also allow them to start saving and increase their wealth.

Equity in education would bring everyone up to at least a minimum standard. Research shows that the greatest single correlation of high income is the education level of one's parents. Equity would allow minority children to be more competitive with those who live in higher-income school districts. It would give them stronger skills in the job market and for managing their finances. Investing in human capital is a better solution than increasing welfare benefits or providing a universal basic income.

One way to do this would be to establish Child Savings Accounts limited to education or homeownership. The accounts could grow tax free and not penalize welfare recipients. In 2016, the Annie E. Casey Foundation found that a CSA program begun in 1979 would have completely closed the gap between whites and Latinos. The gap between whites and blacks would have shrunk by 82 percent.

Another way to increase wealth directly is to expand the First-Time Homeowners Tax Credit. Reducing the racial homeownership disparity would narrow the racial wealth divide by as much as 31 percent.

Strengthen the Consumer Financial Protection Bureau. It oversees equal credit opportunity and fair housing. It also sets standards for all mortgage offerings. It also regulates risky mortgage products like interest-only loans.

Increasing income at the low end of the scale will give those workers an opportunity to save and build wealth. Between 1979 and 2007, income inequality destroyed Americans' economic mobility. Household income rose 65 percent for the top fifth, but just 18 percent for the bottom fifth. If public policy equalized income between blacks and whites, black wealth would grow $11,488 per household, shrinking the wealth gap by 11 percent. Similarly, median Latino wealth would grow $8,765, shrinking the wealth gap by 9 percent.

 

One way to do this is to raise the minimum wage. Studies show that cities that have done so reduced poverty and reliance on welfare.

Stop pretending that trickle-down economics works. The Tax Policy Center showed that Trump's 2017 Tax Cut and Jobs Act would give families earning $25,000 or less annually a $40 tax cut. It would give those earning $3.4 million annually a $940,000 tax break. It will worsen the income and wealth inequality, and thus the racial wealth gap. As a result, it is actually a regressive tax that will increase the racial wealth gap.