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. In making their case, 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 a 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 high savings rates and low levels of 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)

Be careful with the sentence about college education not mattering. Not as many people drop out of high school now as they did in the past; the high school dropout they are describing is probably going to be old. Now, imagine comparing the wealth of a recent college graduate with that of a fifty year old plumber who has been working for thirty years and owns a home. The older plumber is going to have a lot more wealth than the recent college graduate: he has savings and a paid off house! The recent graduate, by contrast, will have debts. There is a chance that it is their different points in the life cycle rather than race that explains the difference in their wealth.

In any event, Hamilton and Darity have a different diagnosis than the culture of poverty theory. 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).

How much is this about race?

There is a fact to be explained: Black people have much less wealth than non-Hispanic white people. There is a straightforward explanation of this fact: how much wealth you have largely depends on what you inherited from your family. It should be clear to anyone with even a cursory familiarity with history why this would lead to the distribution of wealth across racial groups in America that we see.

That’s a tidy story. And it fits pretty nicely with the proposed solution of baby bonds.

It is not an exclusively racial story. Poor white people should have the same problem. And, indeed, baby bonds are not addressed solely to the members of any particular racial group. If we just look at the part of the population in poverty, the benefits will mostly go to non-Hispanic whites since they make up the largest group living in poverty.¹ Again, the solution fits the problem. It just is not as much about race as you might have thought it would be.

It is harder to fit some of the other things they say into a tidy story. For example, the idea behind stratification economics, as I understand it, is that dominant groups seek to maintain their place in the economic hierarchy. That is true. But it is hard to get from that truth to an explanation of the distribution of wealth across racial lines. It would be surprising if there were no relationship. It is just that it is hard to say exactly what it is. For example, you have to explain why white Americans did not block Asians from earning the highest incomes. You also have to explain why there are poor non-Hispanic white people. “It’s easy! It’s class!” you say. And I agree, except for the “it’s easy” part. My point is that this is a different story. And it is going to be complicated when you start mixing race and class as explanations of the observed facts.

I think there is a lot of interesting material in the paper to explain why upward economic mobility is harder for poor Black families than it is for poor non-Hispanic white families. The list is long and every point on it seems valid to me. All I wish to say is that it is hard to disentangle all of that from the simple inheritance story. More importantly, is not clear how far baby bonds go towards addressing all of those factors. To give just one example, stereotype threat is going to continue to exist even with baby bonds.

Updates on September 19

First, there was a paper published over the summer that finds that economic mobility has changed in the past fifteen years.

White children born to low-income (25th percentile) parents in 1992 grew up to earn less on average than white children born to low- income parents in 1978. Over this same period, income increased for white children born to in high-income (75th percentile) families. These divergent trends resulted in growing class gaps among white children. The gap in average household incomes for white children raised in low- versus high-income families grew by 28%, from $10,383 for those born in 1978 to $13,202 for those born in 1992 (Figure 1).

For Black children, incomes in adulthood increased across all parental income levels. As a result, Black-white race gaps in economic mobility shrank. The gap in average household incomes between white and Black children raised in low-income families fell by 27%, from $12,994 for children born in 1978 to $9,521 for children born in 1992 (Figure 1).

This paper is based on data about 57 million children born between 1978 and 1992. While this is not my normal beat, that seems like a very large data set to me. So this is probably a very good study.

Second, here is some substantiation of what I was saying about Social Security.

I was wrong when I said that Social Security had eliminated poverty among the elderly. But it is still a really big deal.

Social Security benefits play a vital role in reducing poverty in every state, and they lift more people above the poverty line than any other program in the United States. Without Social Security, 22.7 million more adults and children would be below the poverty line, according to our analysis using the March 2023 Current Population Survey. Although most of those whom Social Security keeps out of poverty are aged 65 or older, 6.2 million are under age 65, including 900,000 children. (See Table 1.) Social Security is particularly important for older women and people of color, who have fewer retirement resources outside of Social Security.

This got me wondering about how poverty rates are calculated for the elderly and disabled. Poverty is defined in terms of income.

In determining poverty status, the Census Bureau compares a family’s cash income before taxes with poverty thresholds that vary by the size and age of the family.

The elderly and disabled generally do not work, so they do not have employment income. Some live on the income generated by savings.

But I would think that many elderly people also spend down their savings: you can’t take it with you, after all. So they will have access to more money than just their income alone. I wonder how that bears on poverty in the sense of “I don’t have enough money to live in comfort.”

I know a little bit more about disability. My son will get social security disability payments very soon because he will have no income. But he enjoys a fairly high standard of living because he lives with me. If I can save enough, he should be comfortable for the rest of his life, in part because I can create various legal vehicles that let me leave him money in ways that will not count as far as his eligibility for disability and medicaid is concerned. This is strange, I know.

In any event, I cannot possibly save enough to provide for him without payments from social security. Without that, he would be poor both in the sense of not having any income and also in the sense of not having any wealth at all.

In short, Social Security is a big deal.