If Your Grandma Gave You Savings Bonds for Your Birthdays, You Just Might Be White

Thomas Piketty’s findings about inherited wealth driving economic inequality may also hold true for racial gaps.

National Journal
Sophie Quinton
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Sophie Quinton
May 19, 2014, 9:12 a.m.

How’s this for a shock­ing stat­ist­ic: Al­most 40 per­cent of Afric­an-Amer­ic­ans and more than one-third of Lati­nos have no fin­an­cial as­sets at all. No money in the bank, no re­tire­ment sav­ings, no stock-mar­ket in­vest­ments — noth­ing. Whites are more likely to pos­sess (and pos­sess more of) every kind of as­set, in­clud­ing homes.

French eco­nom­ist Thomas Piketty re­cently made head­lines by ar­guing that in­her­ited wealth will drive in­equal­ity over the long term. A new re­port from the Cen­ter for Glob­al Policy Solu­tions, a Wash­ing­ton non­profit, and uni­versity re­search part­ners finds that in­her­it­ance also ex­plains much of the ra­cial wealth gap.

“The fact of the mat­ter is, yes, in­come mat­ters. But it doesn’t ex­plain the en­tirety of the story,” says Re­becca Tip­pett, dir­ect­or of Car­o­lina Demo­graphy at the Car­o­lina Pop­u­la­tion Cen­ter at UNC-Chapel Hill. Even when minor­it­ies and whites bring home sim­il­ar paychecks, minor­it­ies have lower net worth.

Some policy pre­scrip­tions for help­ing low-in­come fam­il­ies get ahead — such as en­cour­aging people to earn cre­den­tials that lead to bet­ter pay­ing jobs — may not do much to ad­dress the ra­cial wealth gap. Black, col­lege-edu­cated heads of house­holds have lower net worth than white heads of house­holds who dropped out of high school, says Dar­rick Hamilton, as­so­ci­ate pro­fess­or at Mil­ano — The New School for In­ter­na­tion­al Af­fairs, Man­age­ment, and Urb­an Policy. Both Tip­pett and Hamilton worked on the re­port.

The re­search team ana­lyzed 2005, 2009, and 2011 data from the U.S. Census Bur­eau’s Sur­vey of In­come and Pro­gram Par­ti­cip­a­tion (a huge na­tion­al sample) to fig­ure out the net worth held by dif­fer­ent ra­cial and eth­nic groups.

They found that the wealth gap ac­tu­ally gets wider the less in­come fam­il­ies earn (see chart be­low). Among the one-fifth of house­holds with the highest in­comes, black house­holds have 43 per­cent of the net worth of white house­holds, and Lati­nos have 34 per­cent. But among the one-fifth of house­holds with the low­est in­comes, black house­holds have less than 1 per­cent of the net worth of white house­holds, and Lati­nos have 7 per­cent.

(Cen­ter for Glob­al Policy Solu­tions)So what’s go­ing on? It’s not that white fam­il­ies are bet­ter at sav­ing more of the in­come they earn, Hamilton says — al­though white fam­il­ies are more likely to have sav­ings ac­counts.

“It’s ac­tu­ally own­er­ship of an as­set at a key point in life — an as­set that’s go­ing to ap­pre­ci­ate, and is go­ing to lead to some sort of forced sav­ings,” Hamilton says. Of­ten, as­sets young people re­ceive from fam­ily mem­bers be­come power­ful sources of fu­ture wealth. Think of par­ents pay­ing the down pay­ment on their daugh­ter’s condo, or grand­par­ents cre­at­ing an in­vest­ment ac­count for their grand­son. Think of the kind of as­sets that slowly and auto­mat­ic­ally in­crease in value for the rest of a per­son’s life.

White fam­il­ies, even those liv­ing on very low in­comes, are more likely to have as­sets oth­er than their paychecks to turn to in­to an emer­gency. They’re also more likely to have a di­verse mix of as­sets, so they’re more cush­ioned from eco­nom­ic shocks. The hous­ing col­lapse pro­foundly af­fected minor­it­ies, partly be­cause home equity rep­res­ents a much great­er share of minor­ity fam­il­ies’ net worth.

“People don’t like this term, but there has to be some type of re­dis­tributive mech­an­ism in place to really ad­dress these huge dis­par­it­ies,” says Wil­li­am Dar­ity, pro­fess­or at Duke San­ford School of Pub­lic Policy and an­oth­er coau­thor of the re­port.

Cash trans­fers from the gov­ern­ment, like food stamps and hous­ing as­sist­ance, can help keep fam­il­ies out of ab­ject poverty, but they don’t help grow wealth. To ad­dress the wealth gap, Dar­ity thinks the gov­ern­ment should cre­ate a per­son­al trust fund for every child that he or she would be able to ac­cess upon reach­ing adult­hood. Ba­bies born to wealth­i­er fam­il­ies would get less money in their ac­counts.

Wash­ing­ton is cur­rently more fo­cused on reign­ing in en­ti­tle­ment spend­ing than on start­ing new in­vest­ment pro­grams. But the Cen­ter for Glob­al Policy Solu­tions wants to make sure law­makers are at least aware of the wealth-gap stat­ist­ics. At the very least, they help ex­plain why eco­nom­ic down­turns are so dis­pro­por­tion­ately hard on cer­tain minor­ity groups. Con­sider that as of 2011, the me­di­an Afric­an Amer­ic­an held only $200 in as­sets that could reg­u­larly be con­ver­ted in­to cash. Lati­nos held $340, Asi­ans $19,500, and whites $23,000. 

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