Overview

We talked about “Spreading the Wealth Around,” by Gregory Mankiw, and “The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap,” which was co-authored by Darrick Hamilton and William A. Darity (Hamilton and Darity 2017; Mankiw 2010).

Mankiw and Piketty

Mankiw agrees with Piketty that inequality is increasing. He believes this is due to gaps in education levels between the top and bottom of the income distribution. Piketty, of course, has a different explanation.

Mankiw and Piketty also approve of merit (talent and effort) as a source of wealth. However there are subtle differences between what each author says. Mankiw’s just deserts theory holds that it is morally right for those who contribute more to society to have higher incomes. Piketty holds that the belief that higher wages are earned by skill or effort performs an important function in societies whose members believe in equality. He also calls the distribution of wealth by inheritance “arbitrary,” suggesting that it is not deserved.

Piketty is worried that inherited wealth will undermine the meritocratic system that he believes the wealthy countries have had since the 1950s.

Mankiw does not address inheritance. On the face of it, the just deserts theory gives heirs no claim to inherited wealth.

Darity and Piketty

Unlike Mankiw, Hamilton and Darity are quite worried about inherited wealth. They think this is the chief reason why Blacks and Latinos make what appear to be bad financial decisions (they have no savings to fall back on) and why they persistently trail Whites regardless of educational achievement.

In fact, Hamilton and Darity think that widening access to education will never be enough to overcome the effects of inherited wealth specifically for Blacks and Latinos. This is due to the stereotype threat effect (Hamilton and Darity 2017, 65–66). Consequently, they propose that the state take direct steps to help poor people build wealth for themselves and their heirs.

Hamilton and Darity report 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” (Hamilton and Darity 2017, 69). So I doubt they would think that the American economy is anything like a meritocracy or that wages reflect each person’s contribution to society.

Hamilton and Darity’s proposal to reduce inequality is different than Piketty’s. Piketty wants to lop off the top with taxes while Hamilton and Darity want to build up the bottom with progressively graduated baby bonds. The two proposals are, of course, compatible.

Our discussion

We spent most of our time on Hamilton and Darity’s paper. We noted that while the body of the paper was about the distribution of wealth across racial groups, their proposal is to give everyone “baby bonds” whose value is based on the wealth of the baby’s family. So are they more interested in class than race? Maybe so.

But remember their starting point: the claim the Blacks and Latinos have less wealth because they make bad decisions, such as failing to pursue higher education. (Stating the thesis goes a long way towards refuting it. Why would Blacks and Latinos be especially bad at financial decision making?)

Anyway, disputing that is the paper’s aim. In the course of doing so, they take on a policy agenda that both Republicans and Democrats support: expanded access to higher education. They have arguments for the conclusion that this would specifically not do much for minorities. They propose class-based baby bonds to take the place of education as a solution to the problem.

One thing to bear in mind is that a lot of the evidence in the paper does not really support their position as strongly as they suggest. For example, they show that Blacks and Latinos have nearly no savings and that they take out financially disadvantageous loans. But there are at least two available explanations for these facts. One is that they do these things because they have no inherited wealth and so have no choice but to live on the edge and resort to desperate loans. The other explanation is that they do these things because they make bad decisions that they could otherwise avoid. I think the former explanation is far more plausible myself. But I don’t think that this kind of evidence shows it is the correct one.

This paragraph, by contrast, makes the kind of argument they need to make.

the Pew Charitable Trusts (2015) report on American debt concludes that the racial wealth gap has more to do with a lack of assets for Black and Latino families than racial variation in debt or an abundance of debt on the part of Blacks and Latinos. Instead, the report cites other research as suggesting that inheritance and other intergenerational wealth transfers benefit Whites to a much larger extent. (Hamilton and Darity 2017, 64)

Well, it points to a study that makes the right kind of argument. The paragraph itself just states the conclusion.

Update: Digression on Hamilton and Darity’s Target

Why do Hamilton and Darity take aim at the proposition that Blacks and Latinos have less wealth because they make bad decisions? As I said, just putting it that way makes you scratch your head. What would the causal link between race and financial decisions be?

As I was rolling this around in my head, I found myself wondering about something else. Why is this something that they take seriously enough to make the target of their paper?

I don’t know, but I have a guess.

Suppose you think that the US economy works as a meritocracy, such that those who do well do so because of their talent, intelligence, and effort. It would follow that those who do poorly do so because they lack talent, intelligence, or effort. So you would get a chain of reasoning like this.

1. The US economy is a meritocracy. This means that, over time, the talented, intelligent, and resourceful will get rich while the talentless, stupid, and lazy will become poor.
2. Therefore, participants in the US economy who are poor must lack talent, intelligence, or effort.
3. A disproportionate share of poor people in the US are Black or Latino.
4. Therefore, Blacks and Latinos must lack either talent, intelligence, or effort.

When I put it this way my first thought is “the conclusion (4) is so ridiculous that the premises that lead to it must be wrong.”

But I can see how someone who is quite committed to premises 1 and 2 might reason in the other direction: the reasons for believing those two premises are so compelling that there must be something to the conclusion (4), no matter how outlandish it seems.

So maybe Hamilton and Darity are trying to push back against someone like that. They are trying to amass empirical evidence against the conclusion (4) and thereby roll back the chain of reasoning that leads to it. Is that what they are thinking? As I said, it’s just a guess.

Digression on Mankiw and Nozick

(I’m only adding this because I think that drawing distinctions among libertarian authors helps to make it more clear what, exactly, Mankiw is claiming. I don’t think that any divergence from Nozick’s position amounts to a flaw in Mankiw’s piece.)

There are two respects in which Mankiw’s position differs from the one Robert Nozick articulated in Anarchy, State, and Utopia (Nozick 1974).

First, Nozick’s theory is that people have rights to whatever they acquire on their own or receive from others, provided that their acquisition is legitimate and that the givers had rights to what they gave. There is no requirement that the receiving party contribute to society. Thus Nozick’s theory covers inheritance while Mankiw’s does not.

Mankiw still seems to me to have some residual attachment to utilitarianism. He thinks that rights to things are justified only if those who have them benefit society first. Nozick just thinks you need someone to give you something and that benefitting society is not a requirement.

Second, Nozick’s theory is historical. It holds that a given distribution of wealth is justifiable only if the historical chain leading up to that distribution of wealth did not involve violations of anyone’s rights. That is why we go from Nozick’s theory straight to reparations for slavery in Philosophy 33.

Mankiw’s just deserts theory, by contrast, only takes into account what people can do at the present moment. It does not look at how one person came to be able to do more than another.

History Lessons

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; I had no idea.

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” (Coates 2014), Douglas S. Massey and Nancy A. Denton’s American Apartheid (Massey and Denton 1993), and Richard Rothstein’s The Color of Law (Rothstein 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 (Katznelson 2005).

I’m sure that I am just scratching the surface here. As I said, it’s something I am just learning about. But it’s not at all a pretty picture.

Update: the staunchly libertarian Jacob Levy reminds me to include the war on drugs. I knew about that one!

Update: New Data

There is new data from the Survey of Consumer Finances on the distribution of wealth across racial groups.

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.