A new explanation for the stubborn persistence of the racial wealth gap

by Christopher Ingraham in the Washington Post, 3/14/19

Few data points more clearly illustrate how decades of discrimination affected black Americans than the racial wealth gap. As of 2016, the typical black family had a net worth of $17,100, roughly one-tenth the $171,000 accumulated by a white household, federal research shows.

Economists tend to trace the staggering divide to the nation’s long history of bigotry against its black citizens, starting with slavery. But decades of discrimination after the Civil War played a role, too, from the overt racism of Jim Crow laws to the more subtle forms of biasbuilt into the New Deal, the G.I. Bill and many of the nation’s economic and criminal justicepolicies of the 20th century.

But there’s less agreement on the exact mechanisms by which these policies contributed to such disparate financial outcomes. Some economists say it comes down to inheritance, which allows families to build on the gains of preceding generations. Other researchers contend the difference can be found in the types of financial assets held by black and white families.

But in February, research by the Federal Reserve Bank of Cleveland concluded that differences in black and white wealth can almost entirely be explained by disparities in black and white incomes. If confirmed, the finding could help lawmakers better understand which policies would be most effective at closing the racial wealth gap.

“We find that the income gap is the primary driver behind the wealth gap and that it is large enough to explain the persistent difference in wealth accumulation,” the authors write. “The key policy implication of our work is that policies designed to speed the closing of the racial wealth gap would do well to focus on closing the racial income gap.”

Wealth, or net worth, is a measure of a family’s assets — such as a home, retirement accounts, and money in the bank — minus its debts, which usually include things like mortgages, credit card debt and consumer loans. If income is a flow of money into a household, wealth is the household’s stock of financial assets. Typically economists view this stock as growing over time, as households save money that they don’t need to spend.

But in order to save money, you have to be bringing in enough income to cover all your expenses. And black families tend to earn much less than white ones: In 2016, for instance, the typical black family earned $35,400, while the typical white household brought in $61,200. Those differences persist even when you control for other factors, like education, that can have a significant effect on earnings. In 2014, for instance, white college-educated families earned about $24,000 more per year than black college-educated families, according to the Pew Research Center.

The Cleveland Fed economists constructed a sophisticated economic model capable of projecting changes in household wealth over decades, factoring in things like inheritances, income and financial portfolio composition. That model suggests that, given what we know about black and white finances today, it would take approximately 260 years for the wealth of the average black family to achieve 90 percent of the wealth of the average white family.

“We find that one factor accounts for the racial wealth gap almost entirely by itself: the racial income gap," they wrote.

One vivid illustration of this: If black and white incomes had been similar starting in 1962, their model shows, the black-white wealth gap would have all but disappeared by 2007. They found that tweaking other model parameters, like inheritances and investment composition, had a much smaller overall effect.

Those findings complement research published last year by Alexandra Killewald and Brielle Bryan in the journal Social Forces, which used survey data to trace how “whites accumulate wealth more rapidly than blacks and Hispanics throughout early and middle adulthood, with the result that both groups fall further behind whites in amassed wealth with each passing year.”

They found that while inheritance played a role in shaping the racial wealth gap, “disparities in outcomes like income, marriage, and homeownership rise with age,” and that “together, these intragenerational processes explain a greater share of accumulation gaps in middle adulthood than at younger ages.”

 Taken together, the two studies suggest that policies addressing the racial income gap could help reduce both income and wealth disparities. Some Democratic presidential hopefuls, for instance, have begun discussing certain universal benefit programs, like free daycare and child allowances, that would have a larger proportionate effect on black families simply because those families make less money than their white counterparts. President Trump, for his part, prefers to focus on the decline in black unemployment that has occurred since he took office in January 2017, a trend which began under his predecessor.

Meanwhile, the question of paying reparations to black families has lately gained increased prominence in national policy discussions, with commentators on both the left and rightembracing the idea as a way to address the wrongs of the past and set black families up for more prosperous futures.