Explainer: The Racial Wealth Gap

To further advance the goals of Black History Month, we will be using the month of February to explore the Black experience in America, starting with a series of explainers on issues affecting the Black community and culminating in a feature story at the end of the month.

So without further ado, let’s dive in.

What is the racial wealth gap?

The racial wealth gap is the disparity between the household wealth of the average white family and that of the average Black family.

In America, white families hold eight times the wealth that Black families do, with a median and mean household wealth of $188,200 and $983,000, respectively, as compared to $24,000 and $142,500 for Black families.

Why is there a racial wealth gap?

In short, slavery and the failure to adequately mitigate its adverse effects.

In long . . .

In January of 1865, Baptist minister Garrison Frazier told Union General William T. Sherman that the way that newly freed slaves could best care for themselves would be by the issuance of plots of land, which they could then turn and till by their own labor. Four days later, Sherman issued Special Field Order No. 15, providing for the confiscation of 400,000 acres of land along the Atlantic coast of South Carolina, Georgia, and Florida and the division of it into parcels of not more than 40 acres apiece, on which 18,000 formerly enslaved families would be settled.

While President Lincoln approved the order, his successor, Andrew Johnson, chose to reverse course, overturning the order and issuing a proclamation that would return the land to its southern owners. This decision ultimately bred the economic consequences that we see today, as slaves had spent years creating wealth for slaveowners, with nothing to show for it themselves.

As we know, wealth begets wealth. It grows across generations, fueled by the increasing value of assets and investment opportunities. But newly freed slaves enjoyed no such assets and no such opportunity, nor did their progeny. And the discrepancy between the wealth that they held and the wealth that they built for slaveowners only compounded over time.

Today, home and land ownership is the greatest source of wealth for most American families. But upon securing their freedom, slaves were ultimately denied the land that they were promised and had little, if any, means to purchase it themselves. And when the New Deal was enacted by President Roosevelt decades later, the newly implemented Federal Housing Administration declined to insure loans for homes that were deemed to be too risky—with risk often inextricably linked to race—in a practice known as redlining. It was said then that property values would go down once a Black family moved into a neighborhood, so the more Black families that were present, the lower the likelihood that the FHA would insure the loan. This, taken together with predatory practices by mortgage companies (Black people were twice as likely to get subprime loans as white people, and more than three times more likely when considering those with good credit), led to the segregation and spatial isolation of minority communities, which resulted in fewer housing and employment opportunities, a shrinking tax base, and concentrated poverty. And as a result of some of these predatory practices, in the wake of the housing crisis of 2008, Black households saw a 53 percent decline in their median net worth, while white households saw only a 16 percent dip.

These conditions combined to create a climate of systemic discrimination, which led to a lower rate of homeownership in the Black community. Indeed, as of the fourth quarter of 2020, the homeownership rate in the United States was 74.5% for white Americans and just 44.1% for Black Americans—a 30-point variance. And not only are Black households less likely to own their homes, when they do own their home, it is more likely to be lesser in value than the homes of their white counterparts. This results in fewer tax dollars available to be allocated, and because of this, schools in these communities often suffer. Which is likely why white Americans are more likely to enroll in and graduate from college than their Black peers. And this discrepancy in education levels only further compounds the problem. Thus, it becomes a vicious cycle where generational wealth (or lack thereof) determines the neighborhood one lives in, which determines whether or not one has access to quality education, which determines career advancement opportunities, which determines earning power, which determines the neighborhood one lives in. And this cycle has been repeating itself for decades, with few interventional measures.

So how do we fix this?

The solution most often bandied about is reparations, and such a move would not be without precedent. In the wake of World War II, for example, the United States paid $1.5 billion to Japanese Americans who were interned during the war. And through the Marshall Plan, the United States helped to ensure reparations for Jewish people, following the Holocaust. In fact, in the ultimate twist of cruelty, we can count slaveowners themselves amongst past recipients of reparations, as some were awarded $300 per slave under Lincoln’s District of Columbia Compensated Emancipation Act.

With that frame of reference, it is impossible to argue that we lack precedent for reparations, and it would not be difficult to contend that the forced labor of slaves—which resulted in a $3 billion economic impact and spanned centuries—should qualify.

Nonetheless, critics suggest that it would be unfair for taxpayers who never personally owned slaves to redistribute their wealth to people who were never enslaved themselves. And they argue that comparisons to restitution for Japanese Americans is a false equivalent, as the number of victims was relatively small, and they were easily identifiable and still alive.

These arguments, however, are not particularly persuasive. First, the redistribution of wealth is not new to this country, despite the paranoia that currently exists around socialism. Just last year, for example, we redistributed $46 billion to bail out farmers, and what’s good for the goose is good for the Black American. And while the number necessary to close the racial wealth gap would be much higher, as they have said in a number of cinematic masterpieces, “Don’t do the crime if you can’t do the time.”

Yes, it is true that there are no slaves alive today, but it has long been legally established that it is reasonable for some claims to survive death, and there is no reason why that same logic could not be applied here. Further, slaves were not the only victims. Discriminatory practices persisted long after the shackles were removed, oppressing subsequent generations of Black Americans for years. So we have much to atone and correct for. And, ultimately, closing the racial wealth gap benefits us all, as McKinsey has estimated that, in closing the gap, U.S. Gross Domestic Product could stand to grow by 4 to 6 percent by 2028.

Regardless, we have a moral imperative to address the problem proactively, as it has proven not to be self-rectifying, and there is no evidence to suggest that will change. So while some may argue that it would be impracticable to issue direct payments to descendants, there are other types of transformative investments that we should be able to coalesce around. These options include free college tuition and/or student loan forgiveness (read about the implications of student loan debt here), downpayment and housing revitalization grants, business and entrepreneurship grants, funding for disadvantaged schools (read about funding gaps here), and the issuance of baby bonds, amongst other policy options like making the tax code more race-neutral.

Whatever the eventual solution, we must commit to action. Because while it is true that the task before us is daunting, intimidation is no excuse to be cowed into moral failure.

For those interested in reading more on this topic, pick up a copy of Mehrsa Baradaran’s “The Color of Money: Black Banks and the Racial Wealth Gap” or Richard Rothstein’s “The Color of Law.”

And please consider purchasing them from a black-owned independent bookstore. A list can be found here.

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