Tag Archives: homeownership

Education alone can’t solve America’s racial wealth gap

Earlier this month, the United States marked the 50th anniversary of the Selma voting rights marches. While much has changed since, racial wealth gaps have persisted over the past 30 years and even grown since the Great Recession. Today the richest 10 percent of white families own 65.1 percent of the nation’s wealth.

In a new report (PDF), Brandeis University’s Institute for Assets and Social Policy (IASP) and Demos, a progressive think tank where I work as a researcher, investigate what it would take to close this gap. The report concludes that racial disparities in wealth are driven by public policy decisions and calls for “racially aware policies” that could help reduce America’s rising wealth inequality. This includes eliminating disparities in homeownership rates, college graduation and the return on a college degree as well as the wealth return on income.

Education

Conservatives and centrist commentators often present college education as a near panacea to reduce the racial wealth gap. But the Demos/IASP report challenges this claim. It found that increasing graduation rates would reduce the wealth disparity between black and white people by only 1 percent and between Latinos and whites by 3 percent. There are many possible reasons for this. For one, students of color take out more in student loans than white students. The debt burden detracts from wealth-building opportunities over a graduate’s lifetime. In addition, people of color are less likely to get into the most selective schools and face discrimination in labor markets after graduation. As a result, black and Latino students do not reap the same gains from a college education as their white counterparts.

In fact, race is a far greater determiner of wealth than education. As Demos blogger Matt Bruenig pointed out last year, black college graduates have less wealth than white high school dropouts. Using a new model called the racial wealth audit, Demos/IASP researchers found that the racial wealth gap between white and black families would be reduced 10 percent if the returns on college education could be equalized. But that’s not nearly enough to close the divide.

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Income

Bruenig’s previous research found that blacks and Latinos in the same income brackets have less wealth than whites. The Demos/IASP report confirms these findings: Black and Latino households with similar income distribution as whites would still face a substantial wealth gap. Eliminating income gaps would reduce the wealth gap by only 11 percent for black people and 9 percent for Latinos. Among black households, the average family would own $92,545 less wealth than an average white family. The average Latino family would own $94,033 less wealth than the average white family. This is because income distribution only tells part of the story. The remaining gap can be explained, in part, by the differences in opportunities to turn wages and salaries into wealth.

Controlling for the differential returns on every dollar of income shows a far greater effect on wealth disparity. In fact, for every $1 that accrues to black families with an increase in income, white families earn $4.06. For every $1 in wealth for additional income to Latinos, white families earn $5.37. The racial wealth audit shows that equalizing the return on income could reduce the wealth gap with white households by 43 percent for black households and by 50 percent for Latino households. But black and Latino families earning the same incomes as white families will still have only half the wealth.

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It may be surprising to those who think that racial equity depends on equal opportunities in the labor market alone. But it’s important to remember that income is a flow, while wealth is a stock. White families have been building up wealth for centuries, thanks in part to the enslavement of black people and discrimination against blacks and Latinos, who were excluded from those gains.

A 2004 paper from economists Maury Gittleman and Edward Wolff provides some hint as to why income equity cannot solve the racial wealth gap. After controlling for income and with a similar return on capital, the authors found that black families save at the same rate as whites. Previous IASP research corroborates their findings (PDF). Differences in wealth outcomes are explained by factors such as inheritance, home ownership and unemployment.

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As shown in the chart above, in another study (PDF), Wolff and Gittleman demonstrate that black and Latino families are far less likely to receive wealth transfers and that when they do, they tend to be smaller. Wealth transfers include inheritances and tax reductions, which disproportionately benefit white people. In fact, wealth transfers are the most unequal aspect of the wealth disparity. The Gini coefficient, the most common measure of inequality, runs from 0 (in which all wealth transfers are equal) to 1 (in which one household receives all wealth transfers). In 2007 the Gini of wealth transfers (primarily inheritances) was 0.961, compared with a 0.489 posttax and transfer Gini of income in the same year (PDF). That is, the distribution of wealth transfers is twice as unequal as the distribution of income. Even when households that did not receive a wealth transfer are excluded from the analysis, the Gini is still at 0.814. That means nearly all the wealth transfers in the U.S. go to a small group of people at the top.

Millennials

The Demos/IASP report also shows the deficiency in the way millennials understand race in the United States. This is worrying given the fact that the millennial generation is often said to be postracial. Millennials are more likely to believe that racial disparities should be allowed to correct themselves than their parents are. In many ways, their views align with those of conservative Supreme Court Chief Justice John Roberts, who in 2007 argued, “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” However, it ignores the effects of history and how wealth replicates itself. In his pioneering book “The Son Also Rises,” historian Gregory Clark notes that:

Groups that seem to persist in low or high status, such as the black and the Jewish populations in the United States, are not exceptions to a general rule of higher intergenerational mobility. They are experiencing the same universal rates of slow intergenerational mobility as the rest of the population. Their visibility, combined with a mistaken impression of rapid social mobility in the majority population, makes them seem like an exception to a rule. They are instead the exemplary of the rule of low rates of social mobility.

Clark found that the residual effects of family wealth remain for 10 to 15 generations. A family’s wealth cache simply won’t go away without dramatic changes.

Even more concerning, the notion that racial inequality can take care of itself is not only embraced by white millennials but also by millennials of color (though to a lesser extent). This means that the institutionalized structural barriers to racial equity are not receiving enough attention. Many Americans fail to understand how much more unequally wealth and financial assets are distributed than income.

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To parrot Roberts, the best way to reduce the racial wealth gap is to reduce the racial wealth gap — not simply to increase access to education or income. Policies that bolster home ownership — the leading wealth asset for most middle-class families — and those that reduce neighborhood segregation will do far more to close the wealth gap than changes in education. Other progressive ideas such as a baby bond program, which establishes wealth-building opportunities for those who have been excluded from them in the past, could substantially reduce wealth gaps.

Deeply entrenched wealth disparity is the product of history. Eliminating it entails reckoning with history as well as robust public policy reform. Ideological commitments to equality of opportunity without policy action won’t be enough.

This piece originally appeared on Al Jazeera

How the Supreme Court is about to explode America’s racial wealth gap

When discussing race, the conservative argument is best expressed by the famous words of Chief Justice John Roberts: “The best way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” Translation: America has done bad things in its history, but those bad things are gone now, so we should move past those horrors and look forward.

Conservatives believe that if blacks and Latinos simply work hard, get a good education and earn a good income, historical racial wealth gaps will disappear. The problem is that this sentiment ignores the ways that race continues to affect Americans today. A new report from Demos and Brandeis University, “The Racial Wealth Gap: Why Policy Matters,” makes this point strongly. The report shows that focusing on education alone will do little to reduce racial wealth gaps for households at the median, and that the Supreme Court, through upcoming decisions, could soon make the wealth gap explode.

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Wealth is the whole of an individual’s accumulated assets, not the amount of money they make each year. As such, in his recent book, “The Son Also Rises,” Gregory Clark finds that the residual benefits of wealth remain for 10 to 15 generations. To understand why that matters, consider the fact that Loretta Lynch, Obama’s recent nomination for U.S. attorney general, is the great-great-granddaughter of a slave who escaped to freedom. (That’s four generations). Consider also that most people on Social Security today went to segregated schools. (That’s two generations.) If Clark is correct in his thesis, then the impacts of wealth built on the foundations of American slavery and segregation will continue to affect Lynch’s great-great-great grandchildren.

It is therefore unsurprising that addressing just one aspect of this disparity cannot solve racial wealth gaps. Demos/Brandeis find that equalizing graduation rates would reduce the wealth gap between blacks and whites by 1 percent, and between Latinos and whites by 3 percent at the median. Equalizing the distribution of income would only reduce the wealth gap by 11 percent for blacks and 9 percent for Latinos. Part of the durability of wealth gaps is the disproportionate benefits that whites still enjoy: They face less job market discrimination and are more likely to reap a big inheritance, for example. This means that the returns to education and income are generally higher for whites. But even after controlling for these returns, income and education can’t explain the entire wealth gap.

Because America’s primary vehicle for wealth accumulation is our homes, much of the explanation of the racial wealth gap lies in unequal homeownership rates. According to the Brandeis/Demos analysis, equalizing homeownership would reduce the racial wealth gap by 31 percent for blacks and 28 percent for Latinos. This effect is muted because centuries of discrimination—including racial exclusion from neighborhoods where home values appreciate, redlining, and discriminatory lending practices—mean that people of color are segregated into relatively poor neighborhoods. Indeed, in 1969, civil rights activist John Lewis bought a three-bedroom house for $35,000 in Venetian Hills, Atlanta. He and his wife were the first black family in the middle-class neighborhood. In his book, “Walking with the Wind,” he notes that, “within two years… the white owners began moving out.” Had the value of his house simply kept up with inflation, it would be worth $222,881 today. But Zillow shows that three-bedroom houses in Venetian Hills, Atlanta, are currently selling for around $65,000 to $100,000.

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Systematic disinvestment in communities of color means that even when blacks and Latinos own their homes, they are worth far less than white homes. In addition, blacks and Latinos are targets of shady lending. They are more likely to be offered a subprime loan even if they are qualified to receive a better rate. In the wake of the financial crisis, big banks like Blackstone scooped up foreclosed homes and are now offering them to people of color to rent, further pulling wealth out of these communities to benefit rich whites.

The financial crisis had a disparate impact on people of color. A Center for Responsible Lending report examined the loans originated during the subprime boom (2005 to 2008), and found that blacks and Latinos were almost twice as likely to have foreclosed during the crisis. The New York Times reported that Wells Fargo “saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania.” They discovered that loan officers “pushed customers who could have qualified for prime loans into subprime mortgages” and “stated in an affidavit… that employees had referred to blacks as ‘mud people’ and to subprime lending as ‘ghetto loans.’”

These problems are troubling, but, as unlikely as it seems, things are about to get even worse. The Supreme Court is set to decide Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, a landmark case challenging the disparate impact test, which allows a practice to be considered discriminatory if it disproportionately and negatively impacts communities of color, even if a discriminatory intent can’t be proven.

The case involves an excellent example of why disparate impact is so important: Nearly all of the tax credits that the Texas Department of Housing and Community Affairs had approved were in predominantly non-white neighborhoods. At the same time, the department disproportionately denied the claims in white neighborhoods. A federal judgedecided that regardless of racial intent, the result had a “disparate impact” and increased neighborhood segregation. As Nikole Hannah-Jones has extensively documented, disparate impact has been crucial in holding banks accountable. For instance, the Justice Department used it to settle with Bank of America for $335 million after it was discovered that a mortgage company purchased by BofA had been pushing blacks and Latinos into subprime loans when a similar white borrower would have qualified for a prime loan.Because there was no official policy that required blacks and Latinos to get worse loans, the case would not have been won but for the disparate-impact statute.

The Supreme Court has already decimated the Voting Rights Act, opening the door for onerous restrictions on voting. They upheld a law banning affirmative action at state universities and have already crushed integration efforts at K-12 schools. Worryingly, as Demos Senior Fellow Ian Haney López told ProPublica, “It is unusual for the Court to agree to hear a case when the law is clearly settled. It’s even more unusual to agree to hear the issue three years in a row.” Given the importance of neighborhood poverty to upward mobility and wealth building, this case had the potential to be the most destructive, dramatically curtailing opportunity and making the wealth gap into a chasm. As Patrick Sharkey notes, “Neighborhood poverty alone accounts for a greater portion of the black-white downward mobility gap than the effects of parental education, occupation, labor force participation, and a range of other family characteristics combined.”

Demos and Brandeis suggest policies to boost homeownership, like better enforcement of anti-discrimination laws, lowering the cap on the mortgage interest deduction so blacks and Latinos can benefit and authorizing Fannie Mae and Freddie Mac to allow homeowners to modify their loans. In addition, America needs to systematically invest in poor neighborhoods. Equalizing public school education funds for poor and nonwhite schools would increase home prices in poor neighborhoods. In addition, a baby bond program would directly reduce wealth gaps by giving children money that could be used for a down payment on a house or an investment in their education. What’s clear is that we cannot simply hope that wealth gaps will disappear. These gaps were created by racially biased federal policies and need to be remedied by public policy as well. Government created the white middle class in the 1950s; now it’s time to create a black and Latino middle class. The Supreme Court, with its supposedly race-neutral philosophy, will only make it more difficult to close racial wealth gaps.

Catherine Ruetschlin is a Senior Policy Analyst at Demos and co-author of the report “The Racial Wealth Gap: Why Policy Matters.