Freedom, Markets, and Well-being Fall 2020

Darity on Inequality


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.

The Culture of Poverty Theory

The culture of poverty 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).

Our Discussion

Professor Brown started us off with her review of the intellectual history of the term “meritocracy.” The upshot was that an ethically acceptable understanding of “meritocracy” is, roughly, a system in which there is a level playing field on which people can compete for the highest positions and rewards.

Turning to Darity and Hamilton’s paper, she pointed out that they spend most of their time refuting the theory that inequality of wealth among racial groups is due to differences in financial choices. At the end of the paper they propose baby bonds as a solution to the problem of the racial wealth gap.

Their research has a clear link with Piketty’s work since, as Lilly pointed out, inheritance is an important cause of the wealth gap. As Jordan said, Hamilton and Darity don’t want to minimize inheritance, as Piketty seems to advocate. Rather, they want to give Americans at the bottom of the income distribution wealth that they could hand down.

We had some discussion of baby bonds.

Ryan and Jordan compared them with a universal basic income.

I said that baby bonds are paternalistic because they are reserved for building wealth and can’t be used on things that the recipients find more important.

Ryan noted that baby bonds are not reserved for disfavored racial groups. They are universal, although they are obviously more valuable to poorer families than they are to wealthier ones. Agnes said that one advantage of this is that it takes any stigma out of receiving public funds. Ryan said that making the plan universal has obvious political advantages. Prof. Brown noted that it is like Social Security in this way. And Hutch said it conveys a moral message, namely, that everyone starts on equal or fair grounds.

Lilly, Lola, Roman, and Ryan picked up the discussion about paternalism.

My own contribution to this is that the main reason we’re talking about this is that no one is proposing to transfer enough money to get people out of the dilemma they face. People don’t save because they are feel they have to spend on immediate pressing needs instead. Baby bonds give them the resources to buy the house or other asset but are deliberately withheld from being spent on immediate pressing needs. A more generous transfer program could solve both problems without paternalism: give people enough so that they can meet their needs and have enough left over to save. That would be more expensive, of course, but the US has done this before. Government spending on education and housing subsidies built the middle class after the second world war.

We ended with Prof. Brown’s powerpoint on stratification economics.


There is a lot of very interesting material about how government, at various levels, has acted to prevent Black people 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 over the generations.

Here’s a Washington Post story that explains how much home ownership matters and why buying a home has been difficult for Black Americans.

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.


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.