Freedom, Markets, and Well-being Fall 2019

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 started with some facts about the distribution of wealth, particularly after the 2008 recession. Then she presented Hamilton and Darity’s paper. She made two broad points.

First, Hamilton and Darity are especially interested in the bottom quarter of the income distribution. These are the people whose wealth went from zero to negative after the 2008 recession.

Second, she sees them as critical of individualistic economics. She referred to papers by Gary Becker on racial discrimination as exemplifying the individualistic approach. Darity’s stratification economics maintains that social groups play a large role in the economy and that the efforts of social groups to keep wealth and power for their members explains racial inequality.

Another individualistic theory holds that the racial wealth gap is due to the so-called culture of poverty. The idea is that the members of the poorer racial groups are poor because they make worse financial decisions and they value education less than the members of the wealthier racial groups do. 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).

Extras

There is a lot of very interesting material about how government, at various levels, has acted to prevent Blacks from accumulating wealth. It wasn’t the outcome of laissez-faire.

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, a lot of the New Deal and post-War, well, socialism 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). There’s material in there about housing and education as well. Basically, the Federal Government created the middle class but only for white people. Reading this book was an eye-opening experience for me.

We should also include the more recent war on drugs.

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 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.

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.