Doing Well By Doing Good: The Economic Case For Closing The Racial Wealth Gap

Racial equality has become a central theme of this presidential election cycle. The racial wealth gap – the massive difference in the wealth that African-Americans and whites own – has gained particular attention, in large measure because it has been persistently large with African-Americans owning about one-tenth the wealth of whites. This gap is the result of centuries of exploitation, oppression and discrimination of African-Americans, from the horrors of slavery to the Jim Crow era to modern day mass incarceration. Rectifying those historical and present-day wrongs is not only the just thing to do, but, as it turns out, it is also economically the smart thing to do. Lifting up the wealth of African-Americans will boost economic growth due to more economic stability, greater home ownership and increased spending, a recent estimate shows.

The difference in wealth between African-Americans and whites has always been large, but it has widened in recent years. In 2016, the last year, for which data are available, the average wealth for non-retired African-Americans 25 years old and older was $102,477 or about 11% of the $935,584 for whites. At the median, working-age African-Americans had $13,460 or 9.5% of the $142,180 of whites then. Importantly, the racial gap widened since the late 1990s when African-Americans had almost one-fifth of the wealth of whites either on average or at the median.  

Closing this persistently large and widening wealth gap will help African-Americans gain access to more economic opportunities and financial security. In fact, African-Americans have less economic mobility than whites. They tend to start off with lower incomes early in their careers than is the case for whites and fall further behind as they get older. The lack of wealth to start a business, to move to a new job when better opportunities arise elsewhere, to pursue an education and to invest in one’s community contributes to lower economic mobility in African-American communities. Conversely, more wealth will give black Americans more opportunities for upward economic mobility.

African-American families wouldn’t be the only beneficiaries from closing the racial gap. Closing the gap would create a sizable effect that would raise living standards for all American families. A recent report from McKinsey & Company shows that the economy would be between four and six percent larger by 2028 if the country managed to close the racial wealth gap by then. This is a meaningful economic effect that would raise living standards for all American families.  

The underlying logic for the economic benefits of eliminating the racial wealth gap is straightforward. Without the wealth gap, African-Americans will be more likely to be homeowners. This boosts construction. It would also strengthen local communities, reduce physical and psychological stress, and lower health care costs, among other benefits. African-Americans would also have less debt, particularly student loans, allowing them to spend more money, thus again contributing to faster economic growth. And black Americans would invest more in the stock market and in other financial products, which could contribute to more savings for them but also to more investments economy wide.

To see why closing the racial wealth gap makes economic sense from a different perspective, consider the current situation with a persistently large difference. The McKinsey & Company report breaks its discussion into four distinct categories of obstacles to wealth building for African-Americans. These include adverse community context, low family wealth to begin with, low incomes due to low wages and fewer job opportunities and fewer savings opportunities due to predatory lending practices, among other factors. Eliminating the racial wealth gap means eliminating these obstacles and thus not only helping black American families, but also the economy overall.

An important and often overlooked obstacle to the racial wealth gap is the gap in supportive resources in predominantly African-American communities. The report points out, for instance, that African-Americans are concentrated in states that on average perform well below the national average on a number of key measures. The largest gap between states with relatively large African-American populations exist on measures of health care quality and access. States with large African-American populations such as Mississippi, Louisiana, Alabama, and North and South Carolina, among others, have health care quality that scores at 63% of the national average level. Poor health care, though, make it harder for people to keep their jobs and earn money, while it raises costs and makes it harder to save. Providing more access to community resources such as Medicaid would instead make it easier especially for African-Americans to build wealth.

Intergenerational wealth or the lack thereof is another obstacle for African-American families to build their own wealth. The McKinsey report shows that only 8% of African-Americans inherited an average of $83,000 in 2013, compared to 26% of white families that had inherited an average of $236,000. Importantly, the numbers for inheritances vastly undercount the intergenerational wealth transfers from parents to children since this does not include gifts that parents have given to their children while they were alive. Moreover, the data do not account for the real economic value of social networks. White families tend to have social networks that tend to be wealthier than those of non-whites. Less wealthy social networks makes it harder for African-Americans to finance a start-up business, but also to gain access to job and business opportunities, for instance. Programs such as proposed baby bonds, whereby every child would receive an annual investment until they reach age 18, would offset these intergenerational advantages.

Yet another obstacle is the fact that African-Americans tend to have lower incomes as they face systematic obstacles in the labor market. Even after controlling for education, for instance, African-Americans have unemployment rates that are much higher than those of whites. Making sure that African-Americans have equal access to job opportunities would make it easier for them to save for their future. And better jobs would not only strengthen African-Americans’ financial security but also boost their consumption and thus economic growth.

And African-Americans have more high-cost debt such as car loans, credit card debt and student loans than whites do. Ensuring equal access to affordable financial products for African-Americans would increase their returns on their savings since banks could siphon off less money. Moreover, less student debt would translate into particularly large gains in college attendance and graduation rates for African-Americans. Inversely, higher debt levels among African-American college graduates have kept the number of college graduates in the country too low and thus impeded innovation and economic growth.

Addressing the racial wealth gap is an economic imperative. It robs African-Americans of economic opportunities and exposes them to more financial risks than is the case for whites. The result is less growth than would otherwise be the case. African-Americans cannot take advantage of business opportunities, new jobs and education to the same degree that whites can. Without closing the racial wealth gap, policymakers leave real money on the table and impede higher living standards for all.