Freedom, Markets, and Well-being Fall 2018

Darity on Inequality

Overview

Piketty is worried about societies dominated by inherited wealth. Hamilton and Darity describe such a society: ours! More specifically, they attribute the inequalities in wealth across racial groups mostly to inheritance. They seek to refute an alternative explanation, namely, that inequalities in wealth across racial groups are due to cultural factors.

Professor Brown’s presentation

Professor Brown introduced us to Darity’s stratification economics by comparing it with a paper written by Gary Becker in the 1950s on the economics of discrimination.

Then she presented the main facts about this particular paper. As promised, the Power Point slides are on Sakai. (Or they will be when I get them.)

According to Hamilton and Darity, the common diagnosis of the racial wealth gap concerns the so-called culture of poverty. The members of the poorer racial groups are poor because they make worse financial decisions and they value education less than the members of wealthier racial groups. The solution to the problem, assuming this diagnosis is correct, is to encourage personal responsibility and to expand access to higher education.

Hamilton and Darity think the diagnosis is wrong: indicators of good financial decisions, such as savings and non-secured debt, are pretty much the same across racial groups (Hamilton and Darity 2017, 61–62). Furthermore, the solutions proposed do not work. Nagging people to be more responsible is futile and access to higher education does not address inequalities in income, much less inequalities in wealth.

Our report (Hamilton et al., 2014) highlights that the median wealth for Black families whose head earned a college degree is only about two-thirds of the median wealth of White families whose head dropped out of high school—it amounts to a difference of more than $10,000 ($34,700 vs. $23,400). A college degree is positively associated with wealth within race, but it does little to address the massive wealth gap across race. It is noteworthy that a “good” job is not the great equalizer either. Income-poor White families have more wealth than middle-income Black families ($15,000 vs. $13,800). The typical White family whose head is unemployed has nearly twice the wealth as the typical Black family whose head is employed full-time (about $23,000 vs. $12,000). The typical Black family whose head is unemployed has zero wealth to deal with their financial calamity (Hamilton et al., 2014). (Hamilton and Darity 2017, 69)

Hamilton and Darity have a different diagnosis. They think inequalities in wealth across racial groups are due to inheritance. The solution they propose is to build wealth directly through what they call Baby Bonds. Everyone born into a family without much wealth would get one of these bonds; they would be used at age 18 specifically for “asset-enhancing endeavors” such as purchasing a house, starting a business, or financing higher education (Hamilton and Darity 2017, 71).

Our Discussion

Jeremy got our discussion rolling by asking why the bonds can’t be accessed by a child’s family. At least, I think he did. I didn’t catch the full details of what he said, but I do know he got us rolling in this direction. Apologies to Jeremy if I got it wrong!

One thing we did not say is that people could borrow against their future bond payouts. That might render most of what follows irrelevant. But I’ll press on anyway.

As the discussion developed, Professor Brown and I took up different positions. I said that if the point of this paper is that Black and Latino families lack wealth, then the most natural solution is to give families wealth. So why wait until the kid turns 18? Just expand the refundable child tax credit and let the money flow! We might be reluctant if we had reason to think that these families would make poor decisions with the money. But, I said, the paper claims they do not. (I’m having second thoughts.) Assuming that is so, let people make their own decisions and build their own wealth.

Professor Brown saw more merit in the idea of withholding the money and restricting its use specifically for building wealth. She noted various ways that money meant to build wealth for a family could be siphoned off into other uses, such as paying an uncle’s medical bills. She also pointed out the activity of predatory financial institutions in poor communities. These are among the many reasons why it is difficult for a family to build wealth even if it is seeded with money.

Obviously, you should put a lot of credence in Professor Brown’s opinions because she studies the way people behave with money while I live in a more … abstract world. I think Peter N. probably knocked me down when he pointed out that the paper only says that there is no racial difference in the quality of people’s financial decisions; that obviously does not mean that the decisions people make are good enough to build wealth on their own. Autumn tried to warn me with a similar point earlier in the discussion, but I didn’t take it up. Well, what can I say, I’m slow.

That said, I do think two things are worth taking into consideration. First, we tend to have paternalistic attitudes towards the poor. Hamilton and Darity remind us that these attitudes are not necessarily warranted. While it might make sense to think that most people who make bad decisions wind up poor, it doesn’t follow that most people who are poor make bad decisions. (And the first part isn’t obviously true either; an inherited pillow can cushion a lot of bad decisions.)

Second, the proposition that the government will be wise and prudent with this money is not one that you can simply take for granted. It’s obvious that if you compare the decisions that real people make with their money with the decisions that an ideal investor would make, the real people will come out behind (whether they are rich, poor, Black, White, or whatever). But that’s never the relevant comparison. Rather, there are always real people with all their real flaws on both side of the equation.

That said, I think Prof. Brown is getting the better part of this argument. It would still be interesting to find a real world test, if that were possible.

Extras

One thing that I have learned quite recently is just how much the state has done to prevent Blacks from accumulating wealth. Reading the material that I am about to describe has been an eye-opening experience for me. So if this seems outlandish to you, I’m telling you that I’ve gone down the road ahead of you and I came out convinced. And if it seems obvious to you, I tip my hat; you know more than me.

One way this happened was in the housing market. Look at this map of Los Angeles. It shows the neighborhoods that Federal Government agencies rated as high and low risks. Black neighborhoods were marked high risk. A mortgage in a neighborhood rated as a low risk would be a lot cheaper than a mortgage in a neighborhood rated as a high risk and that can make the difference between owning a home and not owning one. Real estate is one of the chief investments that most people have. So this had a significant impact on the distribution of wealth.

For more detail on the state’s intervention in the real estate market against Black citizens, see Ta-Nehisi Coates’s celebrated article “The Case for Reparations” (2014), Douglas S. Massey and Nancy A. Denton’s American Apartheid (1993), and Richard Rothstein’s The Color of Law (2017).

More broadly, I had not understood how much the New Deal was designed to preserve racial inequality. For example, domestic servants and agricultural laborers were excluded from Social Security when it began; these were jobs mostly held by African Americans. For the history of this period, see Ira Katznelson’s When Affirmative Action Was White (2005).

We should also include the more recent war on drugs.

I’m sure that I am just scratching the surface here. As I said, I’m just learning.

Here are a couple of other extras. First, Hamilton and Darity refer to a Pew Charitable Trusts report on debt that concludes that the racial wealth gap has more to do with the lack of assets than it does with variation in the amount of debt taken on by the members of different racial groups. That’s pretty important for their thesis!

Second, here is some new data from the Survey of Consumer Finances on the distribution of wealth across racial groups. In a nutshell, nothing much has changed.

Newly released data from the Survey of Consumer Finances (SCF) show that wealth rose for families in all race and ethnicity groups between 2013 and 2016. The long-standing and substantial wealth disparities between families of different racial and ethnic groups, however, have changed little in the past few years. Wealth losses during the Great Recession, and the magnitude and timing of the recovery, also varied substantially across families grouped by race and ethnicity.

If you want to skip straight to charts, avoiding all those pesky words and numbers, we’ve got you covered.

Update October 22

Senator Booker is proposing baby bonds! His parents’ story illustrates the problem Hamilton and Darity seek to overcome as well.

References

Coates, Ta-Nehisi. 2014. “The Case for Reparations.” The Atlantic Monthly, 54–71.

Hamilton, Darrick, and William A. Darity. 2017. “The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap.” Federal Reserve Bank of St. Louis Review 99 (1): 59–76. doi:10.20955/r.2017.59-76.

Katznelson, Ira. 2005. When Affirmative Action Was White. New York: W.W. Norton.

Massey, Douglas S., and Nancy A. Denton. 1993. American Apartheid: Segregation and the Making of the Underclass. Cambridge: Harvard University Press.

Rothstein, Richard. 2017. The Color of Law: A Forgotten History of How Our Government Segregated America. New York: Liveright Publishing.