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The $236,500 Hole in the American Dream

The wealth gap between black and white families is greater than ever. Here’s how to close it.

There are many ways to convey the effect that Thomas Piketty, the cover-boy economist, has had on the global debate over inequality. But a good one is to imagine a building uprooted from its foundation and moved, overnight, to the other side of the street. Before the publication of his blockbuster, Capital in the Twenty First Century, the collective consciousness was fixated on the problem of divergent incomes, particularly the runaway compensation of the 1 percent. Piketty argued that the more important factor driving the divide was not compensation but assets. The machinery of a market economy, he demonstrated, grinds out returns on wealth that are higher than income, summed up in the simple formula: r > g. Thus it is ultimately stocks, real estate, and so forth, even more than fat paychecks and bonuses, that produce ever greater economic stratification. “Once constituted, capital”—that is, wealth—“reproduces itself faster than output increases,” Piketty writes. “The past devours the future.”

But Piketty’s analysis does miss a few things. The product of an economist’s class-based view, his elegant formula fails to capture—is not meant to capture—the ways in which historical circumstances might affect how wealth is accumulated by different groups in the first place. And in the United States, one of the most glaring examples of those circumstances is race. Accordingly, the global tax on wealth that Piketty endorses as a solution would do nothing to address the race-based factors that are fueling the economic divide.

As if on cue, two months after Piketty’s book, Ta-Nehisi Coates published his powerful essay on racial discrimination in the June issue of The Atlantic. Though not intended as an addendum to Capital, it proved to be a useful one. In the piece, Coates frames centuries of discrimination against African Americans as a story of wealth stolen or denied. Retracing 250 years of ugly U.S. history, he inventories the many ways blacks have been suppressed economically, and sometimes violently: slavery, Jim Crow, predatory lending scams, barriers to advancement— both legal and de facto—of astonishing variety. Government programs that gave white families a leg up, he reminds us, either excluded or shortchanged African Americans, from Social Security’s omission of agricultural and domestic workers (among whom blacks were overrepresented) to the Home Owners’ Loan Corporation’s redlining of black neighborhoods during the New Deal. Any serious push for economic justice in the United States, Coates asserts, must take the different experiences of the races into account.

For him, that process would begin with the passage of a long-stalled bill by Representative John Conyers that would formally explore potential reparations for African Americans. Deliberately leaving open what the actual reparations might entail, Coates emphasizes the benefits of opening a necessarily painful, potentially cathartic conversation about race in American society.

Setting aside the fact that the Conyers bill remains a nonstarter politically, there’s a conceptual problem here: In the African American context, reparations are invariably associated with redressing wrongs from a distant era. But obstacles to wealth (i.e., methods of gross discrimination) remain very much in place for blacks today. Notwithstanding its undeniable historical roots, the bulk of the black-white wealth gap can be traced to current policies and structures that have made the wealth divide grow at an accelerating pace over the past 25 years.

There is no way around it: Creating a more equitable future is going to require building the median assets of African American families. The good news is that a group of social scientists have recently put a precise, dollars-and-cents figure on the black wealth gap. Their pioneering research even breaks down its constituent sources. With the divide precisely measured and its feeders identified, it becomes possible to fill the chasm through proven policies and programs.

Now, addressing racial wealth inequality is not the same as addressing racial inequality writ large. And even if racial wealth inequality disappeared tomorrow, failing to address the deep structural problems in education and employment would only cause the divide to grow again. But as a discrete goal, closing the wealth gap is not only morally necessary but practically possible. Here’s how it might be done.

Thomas M. Shapiro grew up in Beverly Hills, the son of a successful shoe manufacturer–turned–real estate developer. After graduating from Beverly Hills High (with Richard Dreyfuss, among other future notables), he eventually pursued a career as a sociologist, winding up at Washington University in St. Louis, where he became friendly with an African American doctoral candidate in sociology named Melvin L. Oliver.

Oliver was from Cleveland. His father was a minister who worked in auto care and his mother was a housekeeper. He went to public schools, then paid his way through tiny William Penn University, in Oskaloosa, Iowa—making him the first person in his family to earn a college degree—before landing with Shapiro at Washington University.

As the two graduate students became friends, they talked about how their varying backgrounds had shaped their lives. Shapiro had seen how tax breaks and other policies had helped his family accumulate wealth; Oliver had experienced racial segregation firsthand. After they went on to become successful academics at different schools, they kept in touch.

In 1995, taking advantage of new data from the Federal Reserve and the U.S. Census Bureau, Shapiro and Oliver collaborated on a book they called Black Wealth/White Wealth. Its argument, radical at the time, was that assets were the better way to understand economic disparities. Unlike the fluctuations of income, wealth, which is accumulated over generations, sustains economic wellbeing even during hard times, and yields opportunities unavailable to the less fortunate. “Income feeds your stomach,” Oliver would later say. “But assets change your head.”

Shapiro would later oversee the Brandeis Institute on Assets and Social Policy, where, last year, he and his colleagues Tatjana Meschede and Sam Osoro published another landmark work: “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide.” The study cleared up any remaining murkiness around why whites and blacks accumulate assets at differing rates. When you zero in on income, African Americans would seem to have gained significant ground since the civil rights movement of the 1960s. Today, for instance, the difference between the percentage of white and black households earning $50,000 and $75,000 is within shouting distance—18.7 for whites versus 15.1 percent for blacks, according to the Census Bureau. But look at the respective wealth of white and black America, and you get the real story. In 1984, the median working-age white family had inflation-adjusted assets worth $90,851, compared with a net worth of only $5,781 for the median black family of working age. (Focusing on working-age families yields a subject group older and relatively more prosperous than the aggregate but is easier to track over time; the inequality ratio for the overall white and black populations is actually even higher.) A quarter century later, the median white wealth had jumped to $265,000, while median black wealth was just $28,500. The racial wealth gap among working-age families, in other words, is a stunning $236,500, and there is every reason to believe that figure has widened in the five years since.

Even more valuably, Shapiro’s team pinpoints the main structural factors that drive the wealth gap. Among the biggest ones are housing and the length of homeownership, income, employment, college education, and inheritance. Then, in their neatest trick, the researchers show the precise share that each of the root causes, along with other variables such as marriage, contributes to the overall $236,500 gap.

Notably, all of the material factors the report identifies are traceable to policies put in place in the post–Civil Rights era. Wealth in America has continued to be quietly and overwhelmingly funneled to whites, principally because the asset-building policies now in place are aimed at people who already have assets. Meanwhile, the better-publicized federal cuts in safety-net programs and aid to cities and states that began in earnest under Ronald Reagan have not only made day-to-day existence more difficult for their former beneficiaries, but undermined black asset accumulation as well.

In conservative dogma, of course, the source of blacks’ wealth problems lie elsewhere, namely in the alleged perverse incentives and “cultural dynamics” created by the government programs that Republican politicians have gutted. The Shapiro study takes a torch to that theory. Over and over, it shows that, whenever blacks do achieve the same life advancements as whites, be it home ownership, marriage, or a college education, such achievements generate less wealth, often far less, than those of their white counterparts. African Americans’ accomplishments, on their own, will never, ever be enough to dig them out of the hole they’ve been thrown into.

“The roots of the widening racial wealth gap,” like Piketty’s book, draws upon a trove of previously unavailable data. In the Brandeis case, the key sources have only been around since the mid-’80s: the Federal Reserve’s Survey of Consumer Finances and the Census Bureau’s Survey of Income and Program Participation. The Shapiro research also uses data on 1,118 white and 486 black families tracked by the Panel Study of Income Dynamics at the University of Michigan. (Overall, that massive project has been compiling information on the same set of 5,000 families since 1968, making it the longest-running longitudinal household survey in the world.) It was the detail and depth of the data available that allowed the Shapiro team to identify the primary forces behind the black wealth gap for the first time.

On housing, for instance, the Shapiro study shows that blacks’ disadvantages only start with their historical segregation in neighborhoods suffering from underinvestment and lower prices. The researchers found that, because African Americans receive less in inheritances and gifts from parents for a down payment, they wind up waiting, on average, eight years longer than whites to buy their first homes—and therefore hold less home equity. Another consequence of having less money to put down is that blacks pay higher borrowing costs, both in rates and fees (even setting aside racial targeting for predatory loans). And all of this is when African Americans have sufficient money and credit to be able to buy a house in the first place.

For these reasons, the great escalator ride in U.S. home prices has benefited a much higher percentage of whites than blacks. From 1970 to 1985, home prices rose 230 percent, nearly twice the rate of inflation. But while white home ownership has been 70 percent or higher for years, black homeownership peaked at 49 percent during the bubble and has never cleared 50 percent. And that’s not all: Even though blacks own less real estate, a greater percentage of their wealth is tied up in it—53 percent of overall black wealth is home equity versus 39 percent for whites—mainly because African Americans have fewer other assets. So when housing prices do fall, as they did precipitously during the financial crisis, African American nest eggs are hit disproportionally hard.

Bottom line: Housing contributes 27 percent of the wealth gap, its biggest single share.

Blacks also earn less than whites, so it follows that they would accumulate less wealth from their jobs. But the problem is compounded by the fact that, due to historic factors, black workers predominate in fields less likely to offer employer-based health insurance, sick leave, child care, retirement plans, and other benefits. So black resources are much more often needed to cover emergencies and day-to-day expenses, while whites are able to put more of their earnings aside. As a result, Shapiro and his colleagues show, every extra dollar of income earned by whites generates $5.19 in new wealth over 25 years, while another dollar of income for a black family adds a mere 69 cents to its bottom line. A penny saved is a nickel earned for whites—but less than 1 cent for blacks.

Unless, that is, they begin on equal economic footing. When the Brandeis team examined families of both races with the same household worth (roughly $118,000 was the figure they worked with), they found every extra dollar of black income created more than $4 in additional wealth. Still not the same as for whites, but much closer.

Overall, according to the Shapiro study, differences in household income contribute 20 percent to the wealth gap. Added to housing, that’s about half the gap right there.

The only variable in the Shapiro study that subtracts from wealth is employment, since not having a job means dipping into savings. Black employment has been in a state of perpetual disaster since such statistics were first gathered, and the literature on the structural forces at work is vast and deep. University of California, Berkeley sociologist Loic Wacquant argues that inner-city neighborhoods that once served as a labor supply for urban factories have devolved into what he calls “hyperghettos,” essentially holding areas for a “surplus population devoid of market utility,” with an all-too-intimate connection to the criminal justice system. If the number of prison inmates were included in employment figures, black unemployment would be at least two percentage points higher than what the official count shows.

For the country at large, the financial crisis caused an unemployment crisis. But black unemployment was at catastrophic levels almost a decade earlier, with black joblessness remaining above 10 percent for three years in the wake of the tech wreck. As a result, while median income between 2000 and 2007 stagnated for everyone, it fell for blacks. The picture doesn’t look any better today. In 2013, the U.S. city with the lowest black unemployment was Oklahoma City, at 9 percent. The white unemployment rate there and nationally was half that.

Nine percent, it so happens, is also the share of the wealth gap that comes from blacks’ higher rate of unemployment.

In the study-subjects’ personal lives, assets are the wedding gift that keeps on giving. Shapiro’s research found that whites increased their wealth by an average of $75,635 over a 25-year period by being married, while marriage added to average black wealth not at all. How could that be? Because before they get married, whites “are much more likely to possess positive net worth, most likely due to benefits from substantial family financial assistance, higher paying jobs, and homeownership.” Basically, two poor people don’t create a prosperous couple. That takes wealth.

And then there’s college. As a recent Brookings Institution study documented, the earnings gap between degree-holders and the rest is only getting wider, making higher education, despite its escalating cost, ever more remunerative. That blacks have a lower matriculation rate is problematic enough, but African Americans are also more likely to drop out of college for financial reasons and more likely to carry school debt if they do graduate. Accordingly, while college education adds to black wealth in an absolute sense, it also produces more wealth for whites than blacks. And here we have our final 5 percent of the wealth gap.

Now let’s imagine how to close the divide. Imagine is the operative word, because what follows supposes, first, that the political will to tackle racial wealth inequality is fully in place—that the country has decided to devote whatever resources are needed to get the job done. Beyond that, this is a necessarily subjective exercise. Someone else, after talking to the experts and reviewing the literature, might well arrive at a different menu of policy solutions. But the point is that this cat can be skinned.

Even as asset scholars obviously acknowledge the historic and institutional disadvantages unique to African Americans, most of the changes they champion focus on promoting wealth building among those at the bottom of the economic ladder, regardless of race. This is partly out of pragmatism; they want their proposals to have a fighting shot at being implemented some day. Of course, since the black wealth gap is driving so much of overall inequality, class-based measures push us to the same place.

My own objectives, as I consulted with Shapiro and others to compile a platform to shrink the wealth divide, were to maximize efficiency and quantifiability. As a consequence, the fixes here don’t match up directly to the separate factors driving the wealth gap. Take black unemployment. A federal public works program would address African Americans’ isolation in places with few available positions. Retraining initiatives could help people upended by the more than half a million jobs slashed since the Great Recession from the public workforce, where blacks are overrepresented. But the wealth returns of such macro investments could be hard to capture. A real asset-building program would nonetheless have to include efforts to combat unemployment, but I’ve focused on moves that would reduce the gap in easier to estimate chunks.

The first would be to reengineer the misguided asset-building policy that the federal government already has in place, the most prominent parts of which are the home-interest deduction and tax-subsidized retirement plans. It’s a well-funded effort at some $500 billion a year. The trouble is that those policies are tilted overwhelmingly toward increasing the wealth of people who already have it—that is, homeowners and people with retirement accounts. Think of this as an accelerator to Piketty’s r > g. According to the Corporation for Enterprise Development, the wealthiest 5 percent of American households receive more than half of federal asset-building subsidies— $265 billion worth—while the bottom 60 percent receive only 4 percent. According to Shapiro et al.’s calculations, African Americans get just 3.5 percent of the total. That’s about $50 billion less per year in asset-building assistance than they’d be given if their share matched blacks’ 13 percent of the population.

It’s in housing, specifically, where existing policy does the most to exacerbate the black wealth gap. Consequently, for any hope of progress, the nation’s perverse mortgage credit system must be overhauled, root and branch. When Reagan said that he wanted to “get the government out of the housing business,” he meant it—but only for low-income people. In 2012, for instance, Washington spent $270 billion on housing subsidies, according to the Center on Budget and Policy Priorities (CBPP), nearly all of it going to people who already own homes, with the wealthy getting the lion’s share via the home-interest write-off. Add all housing programs together, including Housing and Urban Development subsidies for low-income people, and the CBPP finds that people making less than $20,000 a year got $1,471 in benefits, while those marking more than $200,000 a year got $7,014.

“It is difficult to see the policy purpose served by providing such large benefits to higher-income households,” the CBPP observed, with hall-of-fame understatement. To close the wealth gap, the flow of those federal resources must be directed toward the lower end of the economic spectrum.

A second big slice of the federal-asset building budget, about $165 billion, goes to tax-free retirement plans. Blacks are underrepresented in jobs offering that benefit, but an alternative exists. Individual Development Accounts (IDAs) are savings accounts for the non-wealthy that, like IRAs and 529s, are restricted to certain uses, but are subsidized by federal matching grants. The idea got a major test drive during the Clinton administration, which in 1997 launched a program called the American Dream Demonstration to see whether IDAs would boost the savings rate of low-income families. Spoiler alert: They can, so long as properly supported.

In his 1999 State of the Union address, President Clinton proposed subsidies of $500 billion over ten years for IDA-type accounts. George W. Bush later endorsed the IDA concept (albeit at lower funding levels) as part of his “ownership society” agenda. But IDAs are still waiting for their big rollout. By aggressively building on the successful experiments in the late ’90s and making IDA-type retirement accounts available nationwide, the government could provide an important new wealth pillar for those with few existing resources to fall back on after they’ve left their earning years.

Separately, the government could roll out means-tested subsidized education accounts. These targeted IDAs would partly balance out the intergenerational gifts received in greater numbers by young white people. They’d help more black students be able to afford to stay in school until earning their degrees—degrees that would then yield higher incomes and greater wealth—and decrease black student debt.

A more ambitious “baby bond” program put forward by the Washington-based Center for Global Policy Solutions would kick in at birth—the reasoning being that since asset-accumulation happens over the long term, it’s most efficient to goose it early in life. All newborns would be enrolled in savings accounts bearing 1.5 to 2 percent interest, subsidized up to a maximum of $60,000 for households with below median wealth. (So, indirectly, benefits would be going to poorer black households.) The savings could be applied to some authorized investment—a house, or starting a business. As a side effect, marriage would now have a positive wealth effect for African Americans. The Center for Global Policy estimates the cost at $80 billion a year. The question isn’t whether the United States can afford that. It’s one of priorities.

There’s a separate side to asset-building that is more like asset protection, and here the government’s record is equally unimpressive. The racial nature of mortgage predations that led to the financial crisis are by now well known; suffice it to note that an African American with a good credit score was three times more likely to wind up with a subprime loan than a white person. Indeed, an African American family making $200,000 a year was more likely to be put in a subprime loan than a white family making $30,000. It was too much to ask, apparently, for the government to provide reasonable regulation of the financial system before it stripped the wealth of millions. But here’s a modest way to make amends, put forward by asset scholar Reid Cramer: “Abolish predatory lenders and high-cost, low-quality financial services.”

Yes, let’s. Rather than consigning African Americans to subprime mortgages, payday loans, and other financial Ford Pintos, the government should instead dramatically increase support for Community Development Financial Institutions, a successful Treasury Department–certified program that provides credit to underserved areas.

Another notion: Wall Street banks and their foreign counterparts are expected to pay approximately $100 billion in legal settlements related to the mortgage era. As many have noted, that is, in context, a slap on the wrist. But instead of returning the money to the government, those proceeds should be put in trust to subprime mortgage customers who’ve lost homes to foreclosures, much like the compensation now being organized for victims of General Motors’s ignition-switch fiasco. The issue is the same: defective products knowingly sold to uninformed consumers. Given the $1 trillion in minority housing wealth destroyed during the crash, fully half of all housing losses, according to the Center for Responsible Lending, it’s incumbent on the federal government—Wall Street’s great enabler—to take this small step toward restitution.

It is just one more irony of the American race story that the government is faulted on the right for doing too much to help African Americans’ relative wealth position and on the left for doing too little. But on both sides, the government is assumed to actually be helping. Would that it were true.

At the same time, there’s no doubting the political difficulties that any measures to reallot popular tax breaks or implement new spending would face as they move from the whiteboard to legislation. So now that we’ve seen that the gap can be reduced, a final, more modest proposal is in order. Maybe the best way to move the country toward racial wealth equality is to simply start ending the abuses that make the divide worse. Think of it as an asset-building equivalent of the Hippocratic Oath: First, stop doing harm.