Having taken my stroll down memory lane, let me now address the substance of the Institute for Policy Studies paper that provoked the memories. The paper, 30 pages in all, is called THE ROAD TO ZERO WEALTH: How the Racial Divide is Hollowing Out America’s Middle Class. The paper is a statistical analysis of the extraordinary racial inequality in household wealth, far more extreme than the better known racial inequality in household income, on which I commented several days ago.
The statistics are astounding. Median household wealth, which is to say the value of possessions minus debt, is measured in two ways: with or without so-called durable goods such as furniture and cars. Median household wealth of white households [measured in 2013 dollars] is $134,000 with durable goods, $116,000 without. Median household wealth for black households is $11,000 with durable goods, just $1,700 without! Nor is education the great equalizer. The median white household headed by someone with a high school diploma has $64,200 in wealth. By contrast, the median black household headed by someone with a college degree has only $37,600 in wealth [$32,600 for an Hispanic family headed by a college graduate.]
The authors show that median household wealth for Black and Hispanic families has been declining for thirty years. Employing straight line projections [which I consider somewhat questionable], they conclude that a generation in the future, as America becomes a majority non-white country, median household wealth for non-whites will approach zero.
This is what is known, in other contexts, as structural racism. Charles Murray and Daniel Patrick Moynihan to the contrary notwithstanding, the gap between white and non-white wealth is not traceable to personal failings, to cultural inadequacies, to a lack of educational credentials, or to drugs in the hood.
What does explain the astonishing disparities? The authors of the study say very little about that, a fact that I found disappointing. However, they do allude to one of the causal factors, namely the disparity in home ownership, and I think we can elaborate on that.
For most American households, home ownership is the principal way of accumulating wealth. This is a very familiar fact, but it is worth spelling it out a bit. Typically, a family buys a house by paying a down payment of as much as 20% of the purchase price, but more often 10% or even less, and then slowly buys the house – “pays off the mortgage” – over twenty or thirty years. Each monthly payment consists of two portions: the interest owing on the remaining principal, and a payment, very small at first, on the owed principal. The mortgage is structured so that each monthly payment is the same, but over time, as principal owing is paid off, less and less of the payment goes for interest, more for principal, until, at the end of the term of the mortgage, the household owns the house outright. A home mortgage is, in effect, a form of forced savings. Households that rent do not, of course, accumulate any ownership at all. After thirty years, the home owning family has a very large nest egg. The renting family has nothing.
The equity in the house, as the paid off portion of the mortgage is called, can be used as collateral for a “homeowner’s loan.” The household also can refinance the mortgage, in effect taking out its accumulated principal and starting over. In hard times, should the homeowner lose his or her job [or, more often, their jobs], the equity in the home is a cushion. Technically, of course, when a homeowner refinances, he or she is going into debt, but the interest rates on mortgage loans are extremely low, whereas the interest charges on credit card or other consumer debt are punitively high.
Starting at the end of World War II, the Federal government adopted a variety of policies designed to encourage home ownership, with great success. The Federal Housing Authority [FHA] deliberately and openly discriminated against black households, making it very much more difficult for a Black man or woman to get a mortgage loan. This policy, which continued for more than a generation, had extremely long term differential effects on the ability of white and black households to accumulate wealth. The impact of this discrimination reached across generations, because white families, by refinancing their mortgages, could free up capital for their children to make the down payments on home purchases whereas black families could not [I work out an elaborate example in my book, Autobiography of an Ex-White Man.]
This is just one of a number of structural disadvantages that help to explain the huge wealth differences between White and non-White households. Rectifying this multi-generational structural discrimination cannot be accomplished by interracial sensitivity training or Truth and Reconciliation Commissions. It requires carefully thought out structural changes designed not merely to correct the racially encoded disadvantages going forward but also to carry out redistributions of wealth and income. It goes without saying that the place to start this redistribution is at the top, not at the bottom.