Racial Wealth Gap in the United States
Is There a Way to Close It and Fill the Divide?
The racial wealth gap in the United States is the disparity in median wealth between the different races. This gap is most pronounced between white households and racial minorities. Whites have more wealth than black, Latino, and Native-American households.
What Is the Racial Wealth Gap?
The racial wealth gap is larger than most whites imagine. They think that black Americans' wealth is about 80% that of whites. In fact, data from the U.S. Census Bureau reveals that black Americans' wealth is only 9% that of whites.
The Racial Wealth Gap in Numbers
In 2016, the median net worth of non-Hispanic white households was $143,600. The median net worth of Black households was $12,920. Native American wealth has not even been measured since 2000. At that time, their median household net worth was just $5,700.
In seeming contrast, Asian American households have more wealth than white households. But that apparent 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 than among white households, where the richest 10% owned 121 times more than the poorest 10%.
The Racial Wealth Gap Is Worsening
Between 1983 and 2013, white households saw their wealth increased by 14%. But during the same period, black household wealth declined 75%. Median Hispanic household wealth declined 50%.
One reason for the discrepancy is the number of extremely poor black families. The Economic Policy Institute reported that 25% of black households have zero or negative net worth. Only 10% of white families are that poor. Since so many black families own nothing or are in debt, it drags down average wealth for the entire group. Put another way, black families have $5.04 in net worth for every $100 held by white families.
Historic Roots of the Racial Wealth Gap
Until the 13th Amendment in 1865, slavery legally prevented blacks from building wealth. Until the Civil Rights Act of 1964, Jim Crow laws continued segregation in the south. They detailed what jobs blacks could take and how much they could be paid. They restricted where blacks lived and traveled. Public parks, transportation, and restaurants were segregated. Even some towns were off limits to blacks.
Social Security's Contribution to the Racial Wealth Gap
In 1935, the Social Security Act excluded farm workers and domestic workers from accruing benefits. At that time, most blacks still lived in the U.S. south, where they were more likely to be farm workers and domestic workers. As a result, two-thirds of blacks never received Social Security's wealth-building opportunities.
The Civil Rights Movement and the Racial Wealth Gap
The mobilization for World War II and the civil rights movement sought to reverse this legal discrimination. It had mixed results.
In 1948, President Harry Truman ordered integration in the military. The G.I. Bill of Rights assisted veterans with housing, education, and jobs. Between 1944 and 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 often denied access.
In 1954, the Brown v. Board of Education Supreme Court ruling determined that school segregation was unconstitutional. But schools followed local neighborhood boundaries and neighborhoods were segregated.
In 1964, the Civil Rights Act ended Jim Crow laws. In 1965, the Voting Rights Act protected blacks’ right to vote. In 1968, the Fair Housing Act ended legal discrimination in renting and selling homes.
The Legacy of Jim Crow
The legacy of the Jim Crow laws created a structural inequality that's been difficult to erase. Despite these laws, discrimination against blacks owning wealth has continued. Welfare programs, such as the Transitional Assistance for Needy Families and the Supplemental Nutrition Assistance Program, forbid beneficiaries from accumulating wealth. In some states, beneficiaries can't save more than $1,000 or own cars worth more than $4,650.
Wealth Building Initiatives Worsen the Gap
Federal government policies actively promote wealth building. Each year, the federal government offers around $400 billion in tax cuts designed to build wealth, according to the Corporation for Enterprise Development. At least 34% of the cuts promote homeownership, while another third subsidizes savings and investment. A 2018 Duke University study reported that reducing the racial homeownership gap would narrow the racial wealth gap by 31%.
The cuts help the wealthy more than the poor. The wealthiest 5% of Americans are in the best financial position to take advantage of these tax cuts. As a result, half of the $400 billion goes to them. The middle 60% only receive 4% of these tax cuts. The bottom 20% of taxpayers get almost nothing.
Economic Impact of the Racial Wealth Gap
Perversely the wealth gap has also created an achievement gap between groups. That gap, in turn, has cost the U.S. economy billions in lost GDP.
Education is a powerful factor in improving economic mobility. Education increases the income that generates greater economic growth. Over a lifetime, Americans with college degrees earn 84% more than those with only high school degrees. A 2009 McKinsey study found that the average score of black and Hispanic students on standardized tests was two to three years behind that of white students of the same age.
This racial wealth gap exists even among blacks who are highly educated and come from two-parent homes. Black families with graduate or professional degrees have $200,000 less in wealth than similarly-educated whites. These black or Latino college graduates don't even have as much wealth as white high school dropouts. Similarly, two-parent black households have less wealth than single-parent white households.
In fact, the McKinsey study cited above found that the achievement gap has cost the U.S. economy more than all recessions up to the date of publication. If there had been no achievement gap in the years between 1998 and 2008, U.S. gross domestic product would have been $525 billion higher in 2008. Similarly, if low income students had the same educational achievement as their wealthier peers over that same period, they would have added $670 billion in GDP.
How to Close the Racial Wealth Gap
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.
Improving Educational Access
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%.
A University of Michigan study found an inexpensive and effective method to improve access. Researchers sent application packets to hundreds of high-performing, low-income high school students in Michigan. The packets invited them to apply to the University and promised scholarships to pay for all costs. More than two-thirds applied to the university compared to 26% in a control group that didn't receive the packets.
Boosting Minimum Income
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% for the top fifth, but just 18% 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%. Similarly, median Latino wealth would grow $8,765, shrinking the wealth gap by 9%.
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.
Selling Bonds for Babies
Professor William Darity, from the Samuel DuBois Cook Center on Social Equity at Duke University, suggests a baby bonds program. It would pay for a trust fund for the 4 million new children born in America each year. It would cost $100 billion or 2% of the federal budget. Children from poor families would receive more, while those from wealthy families would receive less. Beneficiaries could use it for education, home equity, or other investments when they turned 18. They could plan their lives knowing this fund was available.
The program would generate more revenue for the government through higher income taxes. They would generate more revenue for local communities through higher property taxes.
Improving Government to Close the Gap
Ultimately, to reduce the racial wealth gap, Americans may need to re-think how the nation currently directs the largess of government spending and tax policy. To give just one recent example of policy that makes inequality worse, 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. The act would give those earning $3.4 million annually a $937,700 tax break. It is actually a regressive tax that will widen the racial wealth gap.
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