How Big is the Wealth and Income Gap Between Whites and Blacks?

 

Wealth Vs. Income

The difference between wealth and income can seem trivial to most people. However, the effect of each on one’s life are drastically different. Income is how much money someone makes. People’s primary source of income is typically their job, but it can also include returns on investments. Wealth, on the other hand, is the total value of someone’s assets: how much they have saved, and any property or investments that have monetary value even if it is not immediately accessible. While income is an important factor in one’s wealth, it is not the best measure of one’s financial security. Living paycheck to paycheck, like most Americans do, doesn’t really allow for saving for the future. This has two major implications. The first is that emergencies and unexpected circumstances can have massive negative consequences for people without wealth. A car break down is not much of an issue if you have $1000 saved to repair it and get to work for the week while it is in the shop. However, if that breakdown prevents you from getting to work, it can result in lost wages and eventual job loss. The other issue is that wealth grows exponentially over time and if you cannot afford to invest in long-term assets, it is very hard to catch up. Someone who spends $100,000 on a house that increases in value by 50% over ten years will end up with $150,000, compared to someone who spends $100,000 on rent over that time span and ends with $0.

In the Media

While wealth inequality has been getting a lot of attention recently, especially from politicians like Bernie Sanders, the conversation about the racial wealth gap has been avoided. Bernie takes a very class based view of the issue and believes that by fixing wealth inequality across the board, many of the racial divides will be reduced. When googling the racial wealth gap, the majority of results are academic papers. Searches for income and wealth inequality, however, pull up many recent articles with a much larger audience. A lot of this has to do with the audience being marketed to. With more and more voters voting solely along race lines, champions of economic justice risk losing large parts of their base if the issue begins to appear racial. 

The lack of media attention to the issue results in huge misunderstandings about black wealth. A recent Yale study found that white people massively underestimate the wealth and income gap by about 80%.  These responses to a Forbes article about the issue highlight many of the other key misconceptions, the most common being that black people don’t work hard.

Screen-Shot-2018-12-13-at-11.31.52-PM.pngUntitled drawing

None of the responses talked about redlining, income gaps, inheritance or the history of segregation and slavery that prevented black families from amassing the resources that many white families have today. While this is a complex issue and there are thousands of intricately related causes, there is still a need for recognition of the problem in the media and public perception. The generational nature of wealth means that there is no quick fix and to see change in the future, we have to start working towards it now.

Income Inequality

The Opportunity Atlas

The Opportunity Atlas is a collection of publicly available data following the lives of children from nearly every neighborhood in the United States. By mapping their income, wealth, incarceration rates, employment, and much more, the atlas seeks to illustrate disparities in opportunity for children of different races based on where and how they grew up. The opportunity atlas is the brainchild of economists and professors from Brown University and Harvard University whose  “mission is to develop scalable policy solutions that will empower families throughout the United States to rise out of poverty and achieve better life outcomes”. The data was collected anonymously from 20 million Americans using the American Community Survey (ACS), and the statistical summaries used in the Opportunity Atlas data have all been cleared by the Census Bureau’s Disclosure Review Board under the release authorization number CBDRB-FY18-195.

first
The Opportunity Atlas website showing the entire country. You will notice the options to refine the map by race, gender, and parental income to observe median incomes.
second
A subsection of the map showing the median incomes of all the children who grew up in New Orleans, LA

While the opportunity does an excellent job of sourcing its data from reputable and completely unbiased sources, it does have a few shortcomings. Some of its data is sourced from self reported numbers like individual, household, and spousal earnings. They cannot control what’s reported to the census bureau, and there are points where there is a slight room for error because of things like unreported earnings. This said the overwhelming majority of these reports are known to be accurate, as few people would skew this data because of legal repercussions and many other reasons.  There are also points in the atlas in which there is insufficient data to make definitive reports on all the children who grew up in certain areas. Much of this is due to residential segregation- the fact that many neighborhoods are still segregated and don’t contain enough diversity to add to the data. All of this said, the data is more than sufficient to establish clear patterns occurring across our nation.

third
This is the same view of New Orleans refined by race (black). The grey areas on the map indicate neighborhoods with insufficient data to contribute to the income data for the black children in the study.
fourth
This is again the same view of New Orleans, however this time refined by race for white children.

As you can see, many of the grey areas on the previous map now have color and many of the colored areas on the previous map are now colored. This demonstrates the very clear residential segregation present. Generally, the upper class white neighborhoods have too few black children to give data to the study and the lower class black neighborhoods have too few white children to be studied. Notice also that the maps have the same color schemes, however the scale in the bottom right corner which indicates what each color means changes dramatically from black to white. This further indicates the income disparities present.

The Opportunity Atlas map is interactive, and if you’d like to look at your own neighborhood on the map to see how close this issue is to all of us in America, you can find it here. 

Income in Suffolk County

In Massachusetts, the median income for a white individual is $42,360. For a black individual it is $21,725. Whites make almost double what blacks make which should be enough to see that income inequality by race is a huge issue in MA. Those numbers don’t control for other factors however, such as childhood household income. When controlling for income, it’s clear that race is a major factor in a child’s expected income. Black children raised in households of varying income levels grew up to be in a lower-income percentile than white children who grew up in the same income bracket. On average, white children ended up in the 59th percentile compared to the 48th for black children. This is a difference of almost $10,000 a year and $150,000 over a 15 year span. For children from 50th percentile households, the difference was around $42,000 over a 15 year span, smaller but still significant. Income Disparity in Boston

Boston is very much a growing city but that growth is almost exclusively for whites. A Boston Globe series exploring racism in Boston highlights how new developments such as the Seaport target not just rich, wealthy people, but specifically rich, wealthy, white people. Not only are these developments targeted towards a white audience, but the income generated by their construction has gone disproportionately to whites. Despite making up less than 50% of the city’s population, whites made 75% of the income from construction of the Seaport and there were 0 black senior executives at any of the 14 firms on the project team.

National Income

The same trends can be seen on a national level as well. When controlling for parent income levels, black and hispanic kids grow up to make less than their white counterparts. While class mobility is a problem that affects all races, it’s clearly not the only reason income inequality exists today. White kids are more likely to make more than their parents than black kids.National Income By Race Chart

Wealth Inequality

Information About the Sources

All the national data came from the Federal Reserve which collects debt and asset information from the Survey of Consumer Finances each year. The survey measures the median value of a households assets such as their house, savings and stocks. It also tracks consumer debts from housing, credit cards, and outstanding loans. They calculated net worth by subtracting total debts from total assets (excluding 401k and Thrift Savings Plans).

In 2015, the Federal Reserve Bank of Boston released a report on wealth inequality in the city of Boston. The study collected asset and debt information from over 400 respondents as well as homeownership and income information. While 400 responses may seem somewhat small, it is still statistically significant and the ethnic breakdown of the respondents matched census data. Unlike previous studies, they broke down non-white groups into a variety of sub-groups, specifically distinguishing African-Americans from Caribbean blacks, Dominicans, Puerto Ricans, and Hispanics. By looking at the Boston metropolitan area specifically, they were able to control for asset and debt variables, specifically housing prices, that can vary significantly in larger studies.

National Wealth

Just like income, massive disparities exist across the country in wealth for black and white families. In fact, the difference is much greater with white families having a median net worth 10 times greater than black families.

Final National Wealth Bar Chart

Wealth Disparity in Boston

While the income gap in Boston is troubling, the wealth gap is even more shocking. So shocking that the Boston Globe had to print this headline about the issue:

Screen Shot 2018-12-13 at 3.37.21 PM.pngThat number alone is problematic. Any medical emergency, loss of job, or sudden expense such as a parking ticket would likely put a black household into debt and financial crisis. CNBC recommends putting away 3-6 months pay towards an emergency fund which, on average, comes out to at least $6,000. Even more troubling, the median age of respondents was 51, at which point families should have around $25,000 saved for retirement. The numbers look even worse when compared to white families though.

Screen Shot 2018-12-11 at 7.48.51 PM

All the causes of this wealth gap in Boston would take too long to explain. However, since around 34% of a family’s wealth typically comes from their home, it’s important to understand the history of black and white home ownership. Redlining is the practice of denying financial services or investments to certain neighborhoods based on race. Redlining was a systematic practice across the country and was practiced in Boston through the 70s. Without investment from banks, it was nearly impossible to buy homes or develop minority communities resulting in low homeownership rates and property values. At the same time, the Federal Housing Administration (FHA), was investing heavily in majority white suburbs, allowing white families to amass wealth. While the practice was officially outlawed, the effects can still be seen today as white homeownership rates are close to 80% compared to blacks at 33%. Even today, African-Americans and Latinos face discrimination in half their attempts to buy homes.

Why is the Wealth Gap so Large?

Today’s racial wealth gaps reflect two processes: One historical—this country’s long legacy of actively excluding African-Americans from asset ownership beginning with slavery, and the second contemporary—there are still processes that continue to hinder asset accumulation among nonwhite families, even those that come from wealthier families.
Read more at: Three generations of data show how wealthy (white) families stay wealthy

While historical racism still has huge implications on today’s society, there still exists racism that contributes to the wealth gap. There is overwhelming evidence that the criminal justice system is racist, and the chain effects on wealth are huge. In addition to loss of property and wages, it affects the educational achievement gap and has huge implications on child development. Additionally, property in majority black neighborhoods is valued 23% less than in white neighborhoods. After controlling for neighborhood differences such as crime, there is still a $48,000 difference per home.

The key concept behind the wealth gap is that wealth grows exponentially and is passed along from generation to generation. The best ways to pass along wealth are through supporting the next generation’s education, ability to buy a home, and marriage. None of these are possible without initial wealth to begin with and parents under financial pressure are less able to contribute to their children’s education. We’re only 5-6 generations removed from slavery and 2-3 away from Jim Crow so there are still real lasting consequences. Redlining hindered black wealth through the 70s meaning many of today’s black parents grew up with no wealth because of systematic racism. Segregation in schooling goes back about three generations meaning many of today’s parents black parents were the first or second of their family to attend desegregated schools.

Conclusion

It’s clear that there are a variety of factors, both historical and contemporary, that result in the huge economic gap between whites and blacks. Due to the nature of wealth, even if income inequality were solved today, it would take multiple generations for the wealth gap to shrink. While this may sound grim, there is some progress being made. Elizabeth Warren recently unveiled a new housing plan that directly addresses the racial wealth gap. Most people aren’t able to solve this problem on their own, but, by raising awareness, they can help make it a priority for elected officials with the power to help.

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