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 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).
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.
Professor Brown gave a presentation on Darity’s theory of stratification economics.
Our discussion ranged over a number of issues. I wanted to clarify my remarks about one of them and flag another.
First, Social Security. I am not an economist and cannot go toe to toe with anyone on the numbers. But this is one of those topics where the relationship between information and knowledge sometimes takes a U shape: you start out basically knowing what is going on, as you get more informed about the details your knowledge plummets, and then as you become fully informed your knowledge goes back up. I am on the left side of the U but I don’t think I’m at the bottom of the U, so I’m willing to blabber about what I think.
What I think is that Social Security is part of the budget of the Federal Government along with the Department of Defense, payments on bonds the government issued, and a whole bunch of other things. If there is going to be a Social Security crisis, it will be for political reasons; there is no law of economics dictating that a crisis has to happen or that the system will run out of money.
Suppose there will be fewer workers paying taxes in the future and that this means there is less money available for the government. That will make it more difficult to fund all of the parts of the government. But no one says that the Department of Defense won’t be there for you when you retire. You make the sensible projection that something will be done to pay for it: maybe the budget will shrink a bit, taxes will go up a bit, money will be borrowed, and so on. You should think the same way about Social Security.
The only reason we don’t think that way is that there is a specific tax called the Social Security tax. If you don’t think that money to pay for Social Security can come from any source other than this tax, then I guess you could talk yourself into seeing that there is a problem. But that would be a political choice. And it would be a weird political choice. Who wants to enrage the part of the population most likely to vote? I would not stay up at night worrying about this.
I also think that there are lots of things that can happen to alleviate the demographic pressure on the future tax base of the government. The economy can grow larger, the productivity of workers can grow, and the population can grow.1 Economic growth and productivity growth are difficult for the political system to reliably produce. But the size of the population is easy. There are literally billions of young, highly productive workers who would love to pay Social Security tax in the US. And they would drive down the cost of providing services to retirees too. If the US faces a mismatch between workers and dependents, it can choose to have more workers.
Finally, a lot of the doom and gloom projections about caring for retirees lumped Social Security together with Medicare. Since health care costs were growing much faster than the rate of inflation, the Medicare part of that lump was genuinely scary looking. Addressing the growth in the cost of health care was a significant part of so-called Obamacare. And, for whatever reason, the rate of growth in the cost of health care has flattened. I won’t pretend to understand why. But that makes the problem of having a smaller ratio of workers to retirees less daunting.
The other thing I wanted to note here is this paragraph from Darity and Hamilton.
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)
Professor Brown said she suspected that this is spurious. The white high school dropouts are old: they have been earning and saving all their lives. The Black college graduates, by contrast, are young. They are just getting started earning and have debts for things like college or a house. So what they are probably measuring here is a fact about the accumulation of wealth over a lifetime and not anything about race.
Strictly speaking, population growth produces economic growth all on its own.↩︎