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posted on 18 June 2017

The Importance Of Exploring The BlackWhite Wealth Gap

from the St Louis Fed

-- this post authored by Ray Boshara, Senior Adviser and Director, Center for Household Financial Stability

With the difficult topic of race in America in the news recently, I’ve been reminded of the importance of communicating truthfully about our society’s past, about current realities and about narratives that shape our future.

In that spirit, one area that we focus on in our work at the Center for Household Financial Stability is wealth gaps among demographic groups. In particular, wealth inequality between black and white families has been significant and continues to grow, despite other progress on race in America as well as conventional wisdom - especially going to college - about how to address this gap.

This has really been driven home for me by provocative research my colleagues Bill Emmons and Lowell Ricketts have recently published. In short, they found that:

  • Structural and systemic factors, in part reflecting centuries of accumulated disadvantage, may be the most compelling explanation for today’s startling wealth gap between blacks and whites.1

  • A college degree, contrary to being “the great equalizer," has become an engine of that very inequality.2

Different Choices for Different Groups

I say provocative because this research challenged the predominant “post-racial" model among economists - and certainly among Fed economists - that assumes all families face equal choices and opportunities, and that non-white families would have more wealth if they simply made financial choices like white families do.

By contrast, the structural view posits that poor wealth outcomes primarily reflect the very different choices that blacks, as a group, have faced. The results of the structural model suggest that more than 70 percent of the wealth gaps observed are related to differences in group norms and may be structural and systemic rather than behavioral.

College Degrees Widening the Gap

As if that reframing wasn’t eye-opening enough, Bill and Lowell then published an essay showing that the one solution - a college degree - that most believe narrows the rungs on the wealth ladder actually widens those rungs. In fact, it’s actually likely to widen those rungs even more in the decades ahead.

Of course, it’s great to have an economic model that offers new insights into the nature of the racial wealth gap. But, it’s dispiriting that a college degree, while increasingly necessary for middle class success and beyond, may in fact exacerbate that gap, and it’s daunting that only by addressing structural and systemic barriers can we meaningfully impact the racial wealth gap.

Mind the Gap or Grow the Bottom?

But, to me at least, this raises a more fundamental question: Is our primary challenge to combat inequality by narrowing or closing the gap, or is our primary challenge to improve the wealth holdings of blacks (or “raise the short bar") even if the wealth of whites (the “long bar") goes up and even increases inequality as well?

While I tend to fall in the “raise the short bar" camp, I understand that inequality can have harmful effects that merit serious attention as well. But, regardless, it appears that both approaches require attention to structural and systemic barriers to wealth accumulation, given how short the short bar is and how large the wealth gap remains.

This recent research - on race in America, never an easy topic - has been not only eye-opening, but has also strengthened my belief that honest, forward-looking and even provocative research is worth pursuing. Indeed, only by doing so can we hope to understand and address racial and other inequalities in the U.S.

Notes and References

1 Bill and Lowell presented this research at our Center for Household Financial Stability symposium in May 2016. The symposium and related publications and events also examined the wealth of Asians (which, like whites, is significant and growing) and the wealth of Hispanics and other minorities (which, like blacks, is modest and declining). This post, however, focuses on the black-white gap. Future publications will focus on demographic groups beyond blacks and whites.

2 Emmons, William R., and Ricketts, Lowell R. “College Inadvertently Increases Racial and Ethnic Disparity in Income and Wealth," In the Balance, Issue 16, 2017.

Additional Resources

Source

https://www.stlouisfed.org/on-the-economy/2017/june/importance-exploring-black-white-wealth-gap

Disclaimer

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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