ANOTHER GOLDEN OLDIE

I thought I would start the new year by reproducing the passage to which Professor Rossi referred in his very complimentary comment about my Black Studies book.  Keep in mind that it was written almost twenty years ago, so the numbers would have to be updated.  Here goes:

One of the paradoxes of the post-Civil War era is that it saw the development of a greater degree of distance between the races than had existed under slavery.    The physical closeness of slaves and masters gave way to an increasing separation.  In the North, Black people were segregated in urban communities from which they found it impossible to move even if they had the money to afford better housing.  

At first, these all-Black sections of the big Northern cities were vibrant and functional working-class neighborhoods, with a wide range of small black-owned establishments – beauty parlors, funeral parlors, shops, restaurants, pool halls, churches, newspapers and even on occasion local banks.  There were networks of social relationships that knitted the neighborhoods together, and although the inhabitants were economically consigned to the lowest level jobs, these neighborhoods functioned successfully as communities.

But as the structure of the American economy shifted after World War II, the jobs at the low end of the economy began to disappear.  At the same time, the growth of all-White suburbs radically changed the racial composition of the big Northern cities.  Just as Blacks gained admission to industrial jobs only when those industries were declining, so Blacks gained access to urban political power only when Mayors were losing the tax base they needed to support programs for their constituents.  

Why didn’t the Blacks in the cities move to the suburbs and buy homes?  Were they too carefree and spendthrift to save the money needed for a down payment?  Did they lack family values, the desire to have a home of their own on which they could lavish care and attention?  Did they suffer from a ghetto mentality?

Well, one reason is that White people deliberately adopted the policy of denying them the mortgages they needed to get a start.  In 1934, in the depths of the Depression, the Federal Government established the Federal Housing Authority for the explicit purpose of underwriting home ownership.  The FHA put out an Underwriting Manual as a guide to its loan officers in selecting suitable families for mortgage loans.  As a matter of official government policy, the manual directed loan officers not to extend loans to Black applicants.  Here is the language of the manual: “if a neighborhood is to maintain stability, it is necessary that properties shall continue to be occupied by the same social and racial classes.”  The manual recommended “restrictive covenants” as a useful device for preserving residential racial purity.  One result of this policy, which was in force until February 15, 1950, was that all 82,000 residents of the famous Long Island suburban development, Levittown, were White.

The impact of this discriminatory policy has reached across half a century beyond its official termination, depriving Black families unto the third generation of an equal stake in the rising American economy.  Prompted by the analysis by Melvin Oliver and Thomas Shapiro of the enormous gap between the assets of Black households and those of White households, I worked out a little thought experiment to demonstrate just how far-reaching the continuing effects of past discrimination can be.  

Everyone in America lives somewhere, even the homeless.  And everyone who is not homeless either owns or rents.  In this little example, I am going to trace the asset accumulations of two lower-middle class American families over a thirty-year period.  The first family is Joe and Mary Smith, who are White, and their two children, Skip and Jane.  The second family is William and Esther Robinson, who are Black, and their two children, Michael and Carolyn.

In 1950, after World War II, the Smiths buy a small house in a new suburban community, aided by an FHA insured mortgage.  They pay $10,500, and secure a thirty year 6% fixed rate loan for $10,000, the remainder scraped together from money Joe has saved in the army.  William Robinson has also saved $500 from his army pay, but he is denied a loan under the Federal Government’s explicit and official policies of racial discrimination.  Unable to buy a home, the Robinsons rent an apartment for their family, at an initial rental of $120 a month.

Both Joe Smith and Bill Robinson find jobs in post-World War II America, and they make, let us suppose, exactly the same wage.  What is more, let us imagine that over the next thirty years they get identical raises, and are never out of work.

Now let us trace over a thirty year period the housing expenditures and asset formation of the Smith family and the Robinson family.  I am going to make some reasonable simplifying assumptions about changes in rental rates, insurance rates, and real estate taxes, and also about the savings propensities of families with disposable income.  Let us see what happens to the Smiths and the Robinsons.  Remember – the families have identical starting assets, they are the same age, they have equivalent jobs, they get the same raises, and – I shall assume – have identically stable homes with identically responsible and committed bread-winners.

The Smiths first.  The annual cost of a 6% fixed rate 30 year mortgage is $72/1000, or $720 a year.  Since this is a fixed rate mortgage, that amount never changes over the entire thirty year period of the loan, despite the fact that between 1950 and 1980, the Consumer Price Index rose by 341%. [The CPI for housing actually rose more than that, but let us keep this simple.]

In the thirty year period from 1950 through 1979, Joe and Mary Smith pay out a total of $21,600 in monthly mortgage payments.  They also pay insurance and real estate taxes, of course.  I will assume that taxes and insurance start at $260 a year, and rise slowly to $1300 a year by the time the mortgage is paid of at the start of 1980.  Suppose these items, over thirty years, total $22,550.

So, in thirty years the Smiths spend $44,150 on housing.

But much of that is tax deductible, thanks to federal policies designed to encourage home ownership. For example, $11,600 of the mortgage payments is interest [the total paid out less the original loan.]  In addition, roughly $17,500 of the taxes plus insurance is deductible real estate taxes.  So over the years, the Smiths have enjoyed a $29,100 tax deduction, which we will assume, at an average marginal rate of 25%, returns to them $7,275.  Thus, the net cost to the Smiths of housing has been $36,875.

The Smiths put $2,000 of this tax break in the bank, and spend the rest on such things as college educations for their children, Skip and Jane.

In 1980, the Smiths have a bank account of $2,400 [including bank interest], and a home which they own free and clear.  In the intervening thirty years, real estate has soared, and their little house, even though thirty years old, is now worth $50,000 on the housing market.  So the total assets of the Smiths add up to $52,400.

Meanwhile the Robinsons have been living in their apartment and paying rents that rise steadily, thanks to inflation.  In 1950, they pay $120 a month for their apartment, but over thirty years, the rent rises to $350 [this is of course a very modest assumption.  Real rents have risen considerably more.]  Assuming a schedule of gradual rises, we can estimate that at the end of thirty years, the Robinsons have paid a total of $82,200 for housing.  This is $43,325 more than the Smiths paid, even though the Smiths were paying off the mortgage on their home, and the Robinsons were renting an apartment.

What assets have the Robinsons accumulated in thirty years?  The simple answer is none.  They have had no tax breaks from their rental payments, they do not own the apartment in which they have lived for thirty years, and because of their rising rents, they have been unable to save a portion of Mr. Robinson’s salary.

Thus, purely as a consequence of discriminatory policies adopted explicitly by the Federal Government in the 1930's, the Smiths, who are White, have net assets of $52,400 in 1980, and the Robinsons, who are Black, have net assets of zero.

 The long-term effects of the original discrimination do not end here, however.  They are transmitted to the next generation - to Skip and Jane and Michael and Carolyn [all of whom, note, have grown up in stable, secure lower middle class homes with two parents and good family values.]

First of all, the Smiths have been able to divert a considerable portion of their income to the education of their children, because of the beneficial laws and policies governing housing.  This advantage shows up in the higher incomes the Smith children are able to earn, as compared with the equally talented, but less well educated Robinson children.

Secondly, the Smiths are in a position to make available to their children the advantages of home ownership.  By 1950, when Skip is thirty-two, housing has risen so much that a new small house costs $100,000, not $10,000.  Skip needs a $10,000 down payment to secure a mortgage loan, and even though he has a good job – better than his father was ever able to obtain – he simply cannot save the $10,000 out of his paycheck.  But his father can now help him out.  Refinancing the family home, which the Smiths now own outright, Joe Smith takes a $10,000 mortgage and gives his son [tax free] the down payment.  In effect, the Smiths are advancing a portion of the children’s inheritance to them in this form.  Skip buys a home, and begins to enjoy all the advantages that his parents were able to secure thirty years earlier.  

Michael, on the other hand, even though he has as good a job as Skip, will never be able to buy his own home, for his father has no assets that may be deployed to give him the down payment.  The disadvantages of the fathers are visited upon the sons.

Thoughtless social commentators will wonder why Skip is doing so much better by the year 2000 than Michael is, and will come up with elaborate cultural and psychological explanations, blaming low self-esteem [if they are liberals] or the lack of a suitable work ethic [if they are conservatives], but all of their fancy explanations will be wrong.  The real explanation is the generations-long effects of explicitly discriminatory policies of previous eras, which continue to manifest themselves in dramatic inequalities of wealth, even after inequalities in income have been corrected by the marketplace or even by affirmative action and anti-discrimination laws.

This is one story – many others could be told – that shows the persistent effects of the four centuries old division of American society into two unequal racial groups.  As I was writing these words, I came across a story in the New York TIMES about a study that shows that black buyers of Nissan cars consistently pay considerably more than white customers for their car loans. [NY TIMES, 4 July, 2001 – Independence Day.]   There are countless such systematic disadvantages built into the fabric of American society, which taken all together more than account for the disparities between the wealth accumulation of black and white families.

Joe and Mary Smith are hard-working people who have a very keen sense of entitlement to the secure and comfortable life they have built for themselves and their children.  In their eyes, people like Bill and Esther Robinson – if, indeed, the Smiths ever take notice of them – must be irresponsible, or wasteful, or lacking in Middle Class values, if after thirty years they still live in an apartment and cannot afford to send their children to college.  The politicians who represent Joe and Mary Smith, from their City Councilor all the way up to the President of the United States, tell them as much every chance they get.

Bill and Esther Robinson see the American story differently.  They recall quite vividly the day on which Bill was turned down for an FHA-secured home mortgage.  The Smiths, if they were told about that event from the distant past, would probably wonder why the Robinsons insist on dwelling on ancient history.  After all, the policy they blame for their lack of assets was reversed ages ago.  The Robinsons know differently.

Fifty years ago, when I was a young sophomore at Harvard, Carl Sandburg came to lecture.  New Lecture Hall was packed to the rafters, and I was barely able to find a spot to stand in the aisle.  He sang a few songs and read a bit from The People, Yes, and then he told a story about two cockroaches.

It seems that these two cockroaches were brothers, and they were riding into the city on the back of a truck one day when the truck hit a bump.  One brother fell on top of a dung heap, and the other fell down a sewer drain.  Now, a dung heap is very heaven to a cockroach, and that brother waxed fat and prospered.  He just sat on that dung heap for a year, getting bigger and shinier.  The other brother nearly drowned, and spent the same year slowly, painfully dragging himself out of the sewer back onto the street.  By the time he got there, he was emaciated and his shell was mottled and sickly looking.  Looking around, he saw his brother on top of the dung heap, and greeted him.  “Brother,” he said, “look at you!  I am half-dead, and down to a third of my normal weight.  You are fat and shiny and fine looking.  How on earth did you get so prosperous?”  His brother looked down at him, preened himself, and replied, “Brains.  And hard work.”