Submitted by Amy
The wealth gap between white and African American families is wider today than it was thirty years ago. At the current rate of progress, experts say it will take more than 80 years to close this gap. The good news is that there are policies that could more than close the gap in a single generation. In this piece I will explain what the racial wealth gap is, and talk through some of these policies in more depth.
The Racial Wealth Gap
The racial wealth gap is the difference in value between the assets (including, for example, homes, cars, etc) owned by white families and the assets owned by African American families. It’s a matter of simple math: the racial wealth gap is the sum of a bunch of differences. But why does it occur? What causes it? These two questions are actually different.
We know quite a bit about the factors that cause the racial wealth gap. For example, we know that African American families are less likely to be wealthy than white families. We know this is due to a combination of the lower savings rates of African American families, and the higher rates of debt (in particular, credit card debt) that African American families face. We also know that African American families are less likely to inherit wealth from their parents. This too is due to a combination of factors, including family wealth, but also the rate of home ownership and the rate of marriage.
That last sentence is important: the wealth gap is not just due to the racial gap in income. That’s partial, but it’s not the whole story. There is a wealth gap between white and African American families at every level of income. That is, even African Americans who earn a lot of money are less wealthy than white people with the same amount of income. But why does the wealth gap exist? What causes it? Why is it growing? These are hard questions. They are important questions. And they are difficult to answer precisely, because the wealth gap is the result of a large number of factors, interacting in complicated ways.
The reality is that today, Black Americans are represented in all kinds of jobs from fleet washing to investment banking. We can’t simply explain away the wealth gap by occupation alone. The best way to think about the wealth gap is that it is a feedback loop. Wealth begets wealth. If you are born into a wealthier family, you are more likely to attend a better school, which will give you a better education, and that will increase your earning potential. That will increase your chances of attending a good college, which will increase your chances of getting a good job, and so on. Now, this isn’t a mechanical relationship: there are a lot of other factors at play. But it is a huge factor, and it’s a feedback loop. Wealth begets wealth, and poverty begets poverty.
Solutions
So what can we do about it? Closing the racial wealth gap is going to require a combination of policy solutions. The good news is that we have a lot of good ideas, we just need to start implementing them.
One of the most important things we can do is target policies toward reducing debt. African American families carry a much larger debt burden than white families. Debt is a huge factor in the racial wealth gap, and fixing this problem will go a long way toward closing it. One of the best ways to reduce debt is to prevent it from occurring in the first place. That means stopping abusive lending practices, and increasing the regulation of the financial industry.
Another thing we can do is to provide incentives for savings. There is a large mismatch between the savings rates of African Americans and their white counterparts. This is partly due to lower incomes (since lower income people have a harder time saving), but it’s also due to lower rates of education (since people with more education tend to be better savers). One way to fix this is to provide lower-income African Americans with incentives to save. A good first step would be to expand Social Security.
A third thing we can do is to provide a universal basic income. A universal basic income would provide a guaranteed minimum income to every citizen, regardless of whether they are working or not, and would be high enough so that everyone has a certain standard of living. There are a few different versions of this idea, but the basic idea is that it would provide a floor on which people could build their savings (by saving the remainder of their income), and it would also allow people to take more risks with their careers, since they know that they are protected from a period of unemployment or underemployment.
A fourth thing we can do is to change the way we do housing policy. The current housing system is racist in more than one way. It is designed in a way that benefits the wealthy (particularly the wealthy who already own homes), and it is designed in a way that makes it harder for African Americans to own homes. We should pursue policies that provide greater access to home ownership (like subsidies for first time home owners) and greater access to wealth accumulation through home ownership (like mortgage interest tax deduction).
A fifth thing we can do is to provide greater access to education. This is a huge factor in the racial wealth gap, and it is also a huge factor in the racial gap in income. This is because education is a key to higher earnings, but is also a way for people to build their savings, and it’s a way for people to build their human capital.
Conclusion
Closing the racial wealth gap is going to require a combination of policy solutions. We have lots of good ideas. The most important thing that we need to do is to stop putting the burden on the people who are already struggling the most. We can’t ask people who don’t have any wealth to save more money. We can’t ask people who don’t have any wealth to pay for their own housing. We can’t ask people who have already been denied access to education and housing to take on more debt. The burden needs to be shared, and it needs to be shared more fairly.