The racial wealth gap is one measure that social scientists use to quantify racial economic inequalities. Wealth is considered a comprehensive measure of economic status, as it takes into account household income and assets as well as levels of indebtedness. Since wealth is often accumulated over generations, the histories and legacies of slavery, Jim Crow laws, discriminatory housing practices, and institutional racism compound to produce discrepancies in wealth along lines of race. The racial wealth gap between white and black Americans usually hovers around ten to one, meaning that white households have about ten times the wealth of African American households. In times of economic hardship, families with less wealth are hit hardest and the gap widens.
This roundtable examines the importance of racial and economic inequality in the impact of the Great Recession. Today’s racial wealth gap, our panelists say, has resulted from a combination of factors including housing and homeownership, access to credit, predatory lending practices, and historically entrenched inequalities.
Since the end of the Great Recession, a number of reports have documented a growing racial wealth gap, including one from Pew Research asserting that the white to black wealth ratio is 20 to 1. What are some current dynamics or trends that we are seeing in race, wealth, and debt in this supposedly “post-recession” era?
Dalton Conley: Over time, the racial wealth gap has hovered around 10 to 1, meaning that the median African American family has ten percent of the wealth, or the net worth, of the median white family. “Net worth” is the value in the marketplace of all your belongings and assets that you can sell. If you sell everything you own and pay off all your debts, the amount of money left over is your net worth, and that’s what we mean by wealth.
With legacies of slavery and the Civil Rights era, African Americans are kind of latecomers to the wealth accumulation game for a variety of historical and institutional reasons associated with the history of race and discrimination in the United States. As blacks typically are overrepresented among the unemployed and low-wealth households, the more that wealth becomes unequally distributed in general across society, the more unequal the racial wealth gap.
Wealth inequality has ebbed and flowed over the course of the century, peaking at about 40% in both 1929 before the financial crash that led to the Great Depression and 2007, with a period in the middle of the century that was more equal. While the security markets have bounced back since the financial crises of 2008, housing markets have not rebounded as much, particularly low-income areas. If anything, the racial wealth gap has been accentuated by the Great Recession.
Rachel Dwyer: The current dynamics in the racial wealth gap are a mix of entrenched inequalities with deeply concerning new developments. The racial wealth gap has long been driven by housing inequality undergirded by continued high levels of residential segregation. New political economic dynamics have changed the nature of black-white housing inequality, however. Whereas once blocked access to mortgages was the principal obstacle to homeownership, loosened financial regulation means that inequalities in mortgage terms and conditions like interest rates, payment terms, and loan servicing increasingly drive housing inequality. Douglas Massey has described these changes as the “moving target” in housing discrimination.
Karyn Lacy: The most important trend impacting the black-white wealth gap in the current period is the fallout from the foreclosure crisis, which began in 2006. Two and a half million people lost their homes between 2007 and 2009. Because a home is the most valuable (often only) asset that the average American owns, it is their primary means of accumulating wealth. Rates of homeownership are significantly higher among whites than blacks, in part because financing a dream home has involved different processes for white home seekers than for blacks. The financing options of both groups have been shaped historically by the discriminatory practices of realtors, lenders, and the federal government—groups that have helped to construct and perpetuate a dual housing market, providing a clear path to homeownership for whites while obstructing the homeownership aspirations of upwardly-mobile blacks.
A different problem emerged in the mid-1990s; a new class of lenders, motivated by the potential for quick profits, was eager to grant mortgages to blacks. The problem is that the terms of these subprime loans triggered a new form of inequitable lending characterized by deceptive loan terms. There are many different types of subprime loans, but the most common type is the adjustable-rate mortgage (ARM), loans that start off at a low interest rate and corresponding monthly payment, but are designed to rise sharply at an established future date. In 2006, 55% of black borrowers held subprime loans, and when these loans reset at higher interest rates, the outrageous terms tipped many borrowers toward default.
Dwyer: Discussions of the racial wealth gap must start with housing, but they should not end there. Racial dynamics related to savings for retirement and indebtedness from student loans and credit cards that have only begun to be understood. The fraying of the social safety net combined with increasing uncertainty in the American economy has resulted in what Jacob Hacker has called the “great risk shift,” making racial wealth inequalities potentially even more consequential for life chances than they have been in the past. Broad shifts like the decline of pensions and rising expectations that individuals will prepare for their own retirement hit Black Americans particularly hard because of the preexisting wealth disadvantage. Declining public support for education means those seeking social mobility must rely more on student loans. Access to consumer debt has undergone the same kind of diversification and complexity as mortgages, creating new forms of racial inequality in debt-holding, perhaps most notably in the area of short-term and payday loans.
In your opinion, what are the most pressing current issues around race, wealth, and debt? Are there policy initiatives that are, or should be, addressing these issues?Dwyer: One key issue is ensuring equal access to good credit for all racial groups. The huge problems with indebtedness that surfaced during the financial crisis should not lead us to conclude that all debt is bad. We need to strengthen financial regulation to require transparency and consumer protections to maintain credit availability, but reduce individual and systemic risk. This is needed for all forms of debt, including mortgages, consumer credit, and student loans. Better regulation is particularly needed for the short-term and payday loans that ravage poor minority communities and families. If we wish to benefit as a society from the positive results of wide access to credit then we also need to have fair and transparent access to bankruptcy provisions (including for student loans) for the cases when those debts go sour. Clearly, better enforcement of anti-discrimination laws is also required to provide equal access to high-quality credit.
Lacy: Even in the post-recession era, when federal policy has scaled back subprime lending, we are still observing the long-term effects of predatory lending on homeownership and wealth accumulation. A growing problem is that predatory lenders have come up with novel ways to circumvent new legislation designed to protect unsuspecting homeowners. For example, once a loan is sold on the secondary market, the new lender may not change the terms of the loan, but new lenders avoid this constraint by simply tacking on a long list of exorbitant fees, from late fees to so-called “processing fees” assessed against borrowers who pay by check or money order rather than online. These practices impose a significant financial burden on borrowers who are barely managing to make their scheduled payments and borrowers who do not have checking accounts or a personal computer.
Conley: If we define net worth as assets minus debts, for some people that ends up being a negative. Quite a lot of people nowadays are underwater on their mortgages, meaning that the amount they owe exceeds the equity in the home because the value has crashed. So, another way to think about the relationship between race and wealth is to ask what is the proportion, that is, overall underwater or in the red. Of the people with negative net worth, we see a huge racial disparity there too. Blacks are way overrepresented in the group that is in the red, that has negative net worth. So, debt of course, is as important as savings and asset accumulation – it’s just the other side of the coin.
The political reality is that it’s going to take a million little issues, a million little policies to try to nudge things in the right direction and that’s probably the best we can hope for. Right now we have a lot of policies that help the rich get richer, we don’t have a lot that helps the poor get a leg up. We could do to address this through things like capping the amount of home mortgage deduction that people can take and promoting wealth production among those who are at the bottom end of the distribution. Even if we did all those things, I’m not sure it would fix the problem entirely.
Dwyer: Rebuilding the social safety net is particularly important for racial minority populations who have less individual and family wealth than the average white family to fall back on as a personal safety net. If we had a better safety net, then fewer Americans would need to turn to usurious and predatory lending. A broad approach that addressed the rising economic precarity of many Americans from all racial and ethnic groups could build coalitions across racial dividing lines and develop the social solidarity that is needed to support ambitious social insurance initiatives. Scholars frequently highlight racial antagonisms as one key factor in explaining why social welfare in the US has been so anemic compared to other developed countries. Paradoxically, rising inequality and precarity in American life could bring a greater awareness that economic vulnerability is an issue for all racial groups, and greater support for policies that lower the costs of losing out for all.
In what ways do specific types of debt (such as, say, credit card debt in contrast to a mortgage) privilege different racial and socioeconomic groups while disadvantaging others?
Conley: Debt itself is not necessarily an evil thing, especially if it allows us to make an investment we wouldn’t otherwise be able to make. If you borrow money for college, at least in theory, we like to think that educational debt is worth it because you’re going to get a better job afterwards. You’re investing in human capital and you’re going to be able to pay that back easily with the additional wages that you’ll get from going to college.
However, not all debt is treated equally. For example, the interest you pay on a home mortgage, because of U.S policy to promote home ownership, is tax deductible, but that tax deduction is not even capped. If you take out a 2 or 3 million dollar mortgage, you are able to deduct the interest from your taxes at the same rate for each individual dollar of interest you pay as someone who has a $20,000 mortgage on a home. I agree that we need policy to be encouraging, but, I don’t think that we need to incentivize luxury homeownership.
Compared to mortgages, educational loans operate very differently. For instance, if you file for bankruptcy, student loan debt is not forgiven. Because of pressure and lobbying from the loan companies, student debt follows you to the grave no matter what.Dwyer: The issue is what kinds of credit do different groups have access to and thereby what kinds of risks do they face? All credit carries risk. Racial and socioeconomic groups are differentiated in access to different types of credit with different levels of risk. Sometimes this differentiated access operates through discrimination and prejudice. Sometimes this differentiated access occurs as a result of inequalities in resources (which may of course be caused or worsened by discrimination as well). For example, it is usually better to hold debt on a credit card than in a payday loan. But some groups do not qualify for a credit card and therefore are restricted in the types of loans they can get. This means that more white and affluent people can benefit from lower-cost and better-termed credit than many minority and poor people. This is an instance of David Caplovitz’s classic insight that “the poor pay more.”
Lacy: One of the most pressing concerns is the misrepresentation of the causes and scope of the foreclosure crisis in the public sphere. Speaking from the floor of the House, Representative Bachmann argued that unwise decisions on the part of black borrowers caused the housing crisis. The media play a role too, as one headline after another asks whether the foreclosure crisis has decimated the black middle class. The focus on black borrowers to the exclusion of other troubled borrowers has made blacks the public face of the foreclosure crisis. But studies of the crisis reveal that high-income Hispanic and Asian homeowners foreclose at higher rates than any other group. These borrowers are concentrated in “boom markets,” states where the steep housing prices exceeded the national average prior to the economic crisis and plummeted during the crisis, making these high-income, minority borrowers vulnerable to foreclosure.
How does inequality in wealth and debt influence other forms of inequality?
Lacy: Wealth inequality depresses a family’s opportunities to provide the good life for their children. Persistent residential segregation contributes to this problem. Property values rise less rapidly in predominately black neighborhoods than they do in majority white neighborhoods, depriving many black homeowners of the kind of equity accumulation that could be parlayed into financing a child’s college education or helping an adult child to start a business or purchase a home of their own.
Dwyer: There are a great many ways that wealth inequalities impinge on life chances, because wealth levels affect whether a family can invest in education, or a home, how a person or family survives shocks like a job loss, divorce, or medical crisis, and the amount and type of intergenerational transfers. There are also important interactions between debt-holding and asset accrual that have implications for wealth inequality itself. Some take on debt to accelerate asset accrual (this is the hope for many homeowners). For others debt-holding is a net drain that weakens wealth accrual or even draws down savings. Some forms of wealth provide new types of credit access, like home equity loans and some forms of retirement savings, but taking out that credit can sometimes end up destroying the collateral asset. The financialization of the US economy and the increasing diversity of financial instruments available to average Americans make these issues of financial well-being increasingly important for life chances, and particularly important for racial minorities struggling to achieve wealth mobility.Conley: My research examines the effects of this wealth disparity. I look at what predicts how far kids get economically in life, whether they get a four-year college degree, work in a professional occupation, and how much income and wealth they end up earning and accumulating in their lifetimes. I find that of all the measured factors of their parents, of the family they grew up in, only two matter: number one is their parents’ education level and number two is their parents’ wealth level. Wealth inequality then is driving racial inequality and class inequality in a number of other dimensions. I don’t mean to say that race doesn’t matter because race itself is almost the best predictor of wealth levels, but that wealth gap itself then becomes the perpetuator of racial inequality in the next generation. Essentially, it’s this kind of vicious circle, race predicts wealth but then wealth predicts, along with education, everything else. Each generation keeps reproducing itself.