Combating Racism – Understanding Wealth Disparity – Part 3

Wealth is a paramount indicator of social wellbeing. Wealthier families are far better positioned to finance independent school and college education, access capital to start a business, finance expensive medical procedures, reside in higher amenity neighborhoods, lower health hazards, exert political influence through campaign financing; purchase better counsel if confronted with the legal system, leave a bequest, and/or withstand financial hardship resulting from any number of emergencies.

According to the 2016 Survey of Consumer Finances, the median White household has a net worth of $171,000 which is ten times the $17,100 net worth of the median Black household. Black households are overrepresented among the poor and working class and underrepresented among the upper-middle class and the wealthy. The racial gap spans the demographics of age, education, marital status, and income.

As an example:

If we take 100 people to represent the United States and $100 to represent its wealth, $40 would go to just one guy. Another $40 would go to the next 9. That leaves about $20 to distribute across the remaining ninety Americans, a dime here and a penny there. The average wealth held by the bottom fourth of the population declined from $0 in 2001 to -$13,000 in 2013.

Obstacles to wealth building

Apart from the national failure to endow Black ex-slaves with the promised 40 acres and a mule after the Civil War, Blacks were deprived systematically of property, especially land, accumulated between 1880 and 1910 by government complicity, fraud and seizures by White terrorists. During the first three decades of the 20th century, prosperous Black communities and the associated property was literally destroyed by White rioters in communities from Wilmington, North Carolina to Tulsa, Oklahoma. The historical use of restrictive covenants, redlining, and general housing and lending discrimination has also inhibited Blacks from accumulating wealth.

The biased treatment of Blacks in asset markets is not limited to the past. A recent report by the Institute on Race and Poverty at the University of Minnesota found that Black Twin City residents in the highest earning categories (above $150,000) were twice as likely to be denied a home loan as Whites in the lowest earning category (below $40,000). And among those fortunate enough to actually get a loan, high-earning Blacks were more than three times as likely to be offered a subprime loan as low-earning Whites.

There has been a documented policy shift in the U.S. Small Business Administration since 1980. The total share of SBA loans and the share of the total dollar amount of these loans offered to Black borrowers declined dramatically, in part due to a shift from Black borrowers to more aggressively targeting women and other minority groups. Of all the SBA loans distributed to minorities in 1980, roughly 40% of the loans and 40% of the total dollar amount of these loans were directed to Black borrowers. But by 2006, Asian borrowers received 43% of all minority loans and 64% of the total dollar amount, while the comparable figure for Black borrowers were 21% and 10% respectively.

Another issue contributing the decline in Black lending was an SBA policy shift from direct lending to the use of banks as intermediaries via loan guarantees. Black borrowers had better access to finance as a result of more relaxed SBA collateral and credit requirements, which, even with loan guarantees, may not have been offered by commercial lenders, where there has been a long established history of racial bias. The shortage of Black banks creates a structural impediment to Black business creation and growth.

In addition, an Ariel/Hewitt study of 401(k) savings disparities found that relative to Whites, Black employees at a sample of 57 large companies from a variety of industries have lower participation and contribution rates to company sponsored 401(k) plans even after controlling for salary, job tenure, and age.

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Shrinking the wealth gap requires a variety of strategies, a fresh mindset and persistence. Past efforts have suffered from a lack of coordination and scale. While there have been successes that changed people's lives, such as the Affordable Care Act, initiatives have to be more concentrated, deliberate and refined. Some of the race-specific social policies that will help improve the income and wealth of minority families include:

While no single action can help close the racial gap or undo the systematic racial injustice that has existed for decades, experts believe that the following race-specific policies are vital to improving the income and wealth of minority families:

Direct monetary policies (covered in this newsletter)

  • Individual Development Accounts
  • Baby Bonds
  • Reparations

Broader economic policies (covered in next week’s newsletter)

  • Reducing the wage gap
  • Taxing wealth
  • Narrowing the homeownership gap


Individual Development Accounts

A notable program designed to develop the asset capacity of the poor—the American Dream Demonstration (ADD)—was designed and directed by the Center for Social Development at Washington University in St. Louis, Missouri. The program uses Individual Development Accounts (IDAs) to create match incentives for the poor to save, creating effective opportunities for low- to moderate-income populations to save and invest in such assets as homes, businesses, higher education, and retirement.

IDAs were originally proposed by Michael Sherraden in 1988 in Rethinking Social Welfare: Toward Assets, Social Policy, and the program has been organized and implemented by the Corporation for Enterprise Development in Washington, D.C., and funded by 12 private foundations.

Legislation supporting IDA programs nationwide was originally passed at the federal level in the Assets for Independence Act (AFIA) of 1998. Since that time IDAs have been introduced and spread in the United States so that over 40 states now have some type of IDA program. Current IDA programs are small; the total number of IDA participants in the United States probably does not exceed 50,000.

IDAs enable low-wealth families to save and enter the financial mainstream by providing low-income families with an opportunity to build assets and reach life goals. Like 401(k)s, where an employer matches an employee’s savings, IDAs encourage savings by offering a match on deposits (often 1:1 or 2:1). These savings can be used to buy a home, pay for post-secondary education, or start a small business. Financial education is usually required for IDA account holders, including education on specific asset purchases such as home ownership.

IDA programs are implemented by community-based organizations in partnership with a financial institution that holds the deposits. Federal and state governments and/or private sector organizations and individuals can match deposits for low-income families. There is potential for creative program design and partnerships among the public, private, and nonprofit sectors in cooperation with account holders themselves. The savings and financial literacy components of IDAs are attracting the financial community to be involved in IDA programs. Several financial institutions across the U.S., including community banks and credit unions, are currently running IDA programs, and many other financial institutions are funding IDA programs and holding accounts.

Overall, in survey data, the effects of IDA saving and asset accumulation appear to be multiple and positive in areas such as work behavior, home ownership, plans for education, and confidence and control. In qualitative interviews, IDA participants report:

  • they are more likely to work or stay employed;
  • 41% work more hours;
  • 73% bought or renovated a home;
  • 60% say they are more likely to make educational plans for their children and 59%, educational plans for themselves;
  • they are more confident about the future;
  • 84% feel more economically secure and 85%, more in control of their lives.
  • Participants can “see more clearly” and “visualize a future;” and
  • they have a way to reach goals.

In sum, respondents identify the IDA program structure as changing both outlook and behavior related to saving and reaching life goals.

Baby bonds

Baby bonds aren’t a new idea. They were first started by FDR during the Great Depression as a birthright in America. In 1935 baby bonds looked like traditional savings bonds.

In July 2019, Senator Cory Booker introduced the American Opportunity Accounts Act which aims to mitigate the growing wealth gap between American families by creating a seed savings account for every American child when they are born. The funds would sit in an interest-bearing account that would receive additional deposits each year depending on family income. At age 18, account holders could access the funds in the account only for wealth-building activities like buying a home, paying for educational expenses, or starting a business. The legislation would be fully paid for by reforming federal estate and inheritance taxes. Senator Booker’s plan would provide each family of four people with an annual supplemental payment amount based on their income level. The proposed payments are depicted below:

Note: Amounts in 2019 US dollars. Source

When the child turns 18, depending on the families’ income, they could have nearly $50,000 in this account. A child from an affluent family, would end up with just over $1,600 by age 18 since they wouldn’t be getting annual payments.

According to investment firm Morningstar, Booker’s American Opportunity Accounts Act could reduce the racial wealth gap by 40%.

These individual trusts would be invested in Treasury bonds and could grow in federally managed investment accounts with guarantees of 1.5-3% annual growth rates. Eligibility would be based on the net worth position of the child’s family rather than their income, such that all children whose families fell below the national median for wealth would receive “baby bonds.” Based on a crude estimate, the budget for the program would be less than 10% of the non-war spending for the Department of Defense. This estimate does not incorporate savings resulting from reduction in other federal transfer programs associated with better-resourced young adults.

Some states—Pennsylvania, Connecticut and New Jersey—have begun programs similar to college savings programs. Baby bonds are seen as an alternative to reparations and come with a lower price tag.

However, baby bonds alone cannot close the racial wealth gap.


The most straightforward approach is for the federal government to provide money to descendants of American slaves. In their book, From Here to Equality, William A. Darity and A. Kirsten Mullen have proposed a detailed program that addresses eligibility, total outlay, payment mechanisms, and oversight of a potential reparations policy.

In “The Case for Reparations,” journalist and author Ta-Nehesi Coates writes that reparations beckons us to see America as it is—the work of fallible humans. Reparations would mean a revolution of the American consciousness, a reconciling of our self-image as the great democratizer with the facts of our history.

Coates notes that when slavery was legal, the economic value generated by slave labor went entirely to slave owners and the government. Beyond stolen labor, Whites benefited financially from insurance policies on slaves, and the taxing and notarizing involved in slave sales. After slavery ended, the plunder continued. In the Jim Crow South, Whites could and did take the property of Black citizens at will through means that were shady at best, illegal at worst. The federal government also aided in the creation of the wealth gap between Blacks and Whites. Many New Deal programs, like the Federal Housing Administration (FHA), Social Security, unemployment insurance, and the G.I. Bill often considered some of the most progressive in the nation’s history, explicitly excluded African Americans.

According to Coates, if Americans claim ownership of the celebrated aspects of their past like democratic institutions, they need to likewise take responsibility for the negative aspects. A model for such a national reckoning is that of West Germany paying reparations to Israel in the 1950s for the crimes committed in the Holocaust. The issue has languished in Congress for more than three decades, though reparations have gained traction in a smattering of cities and local governments as the country continues to grapple with fallout from the death of George Floyd in 2020.

More than a century and a half after slavery was abolished, there still remains an intense debate over whether the federal government should compensate the descendants of former slaves to atone for the country’s legacy of slavery and what form reparations should take. Some historians noted that if the value of the once-promised 40 acres and a mule were adjusted, it could mean that every African-American family descended from slaves would be owed $40,000.

Some suggestions include direct cash payments to Black Americans who are descended from former slaves. Others include a combination of financial assistance and social programs aimed at benefiting the Black community, including affordable housing, education programs and free college tuition, as well as grants for housing and Black-owned businesses to help ensure long-term economic success for Black Americans. Reparations to address harm could come in the form of developmental aid for counties, the return of colonized land, treasured artifacts and cultural items, systemic corrections of policies and laws that may still oppress, and full-throated apologies and acknowledgments.

The late Michigan U.S. Representative John Conyers, Jr. worked to pass a reparations bill through Congress for more than 30 years. In April the House Judiciary Committee passed HR 40—The Commission to Study Reparation Proposals for African Americans Act—a bill that would create a federal commission to study “the lingering negative effects of the institution of slavery” in the U.S. and to develop proposals for “appropriate remedies,” including potential reparations for Black Americans. First introduced by Rep. Conyers in 1989, the bill was finally approved by the Judiciary Committee and now awaits a vote on the floor of the House of Representatives. H.R. 40 faces a bleak future in the U.S. Senate. But if passed, the legislation would be the first step in making national reparations a reality.

“No one can know what would come out of such a debate. Perhaps no number can fully capture the multi-century plunder of Black people in America. Perhaps the number is so large that it can’t be imagined, let alone calculated and dispensed. But I believe that wrestling publicly with these questions matters as much as—if not more than—the specific answers that might be produced. An America that asks what it owes its most vulnerable citizens is improved and humane. An America that looks away is ignoring not just the sins of the past but the sins of the present and the certain sins of the future. More important than any single check cut to any African American, the payment of reparations would represent America’s maturation out of the childhood myth of its innocence into a wisdom worthy of its founders.”
~ Ta-Nehisi Coates

Arguments against reparations include the idea that slavery was abolished so long ago that “no one currently alive was responsible,” as Republican Sen. Mitch McConnell said in 2019 after a House hearing on the matter. McConnell argued the country has since made racial progress and strides toward rectifying the past, including passing civil rights legislation and electing Barack Obama. However, as Ta-Nehisi Coates, pointed out when he testified before the House Judiciary Committee in 2019, “well into this century, the United States was still paying out pensions to the heirs of Civil War soldiers...despite no one being alive who signed those treaties.” To opponents, reparations would simply cost the federal government too much money.

Talk of reparations goes back well before slavery was even abolished as the U.S. Quakers and other abolitionists often argued that freed slaves should be entitled to some form of compensation for the free labor they provided.

In the final months of the Civil War, the Union’s Special Field Orders, No. 15 called for 400,000 acres of land to be confiscated from Confederate landowners in Southern states and given to newly freed slaves and their families to ensure they could survive economically after generations of servitude. The land was to be divvied up in parcels no larger than 40 acres apiece, which became the inspiration for the expression “40 acres and a mule” often cited today by those in favor of reparations (H.R. 40 takes its name from the expression).

The order is generally seen as the first-ever form of government reparations offered to free slaves. However, after President Abraham Lincoln’s assassination, President Andrew Johnson ordered all of the land returned to White Confederate landowners, provided they pledged loyalty to the United States.

Later in the 19th Century, there was a movement to create pension funds for former slaves to compensate for their involuntary labor. But with many federal agencies vehemently opposed to the idea, legislation ultimately failed.

One of the few historic cases of a former slave actually being awarded reparations for their forced servitude came in the 1870s, when Henrietta Wood (who had been freed but then kidnapped and sold back into slavery) won a lawsuit that included an award of $2,500, or about $70,000 in today’s dollars.

One of the most notable modern efforts to secure reparations came in 2002 from Deadria Farmer-Paellmann, a descendant of slaves. Her class-action lawsuit sought billions of dollars from corporations such as Aetna insurance and R.J. Reynolds Tobacco for financial ties to slavery. A federal judge ruled the plaintiffs did not prove a connection between the companies and the plaintiffs’ enslaved ancestors.

Reparations are not only a federal issue. With the broader reckoning around racial injustice in the U.S., various local efforts to offer slavery reparations in some form have sprung up across the country.

Those include the city council of Asheville, North Carolina’s 2020 decision to apologize for slavery while offering reparations in the form of funding programs aimed at increasing homeownership and business opportunities for Black residents in the mostly White city.

And, in March in the suburb of Evanston, Illinois, officials voted to set aside the first $10 million in tax revenue from the now-legal sale of recreational marijuana to fund programs that narrow the city’s racial wealth gap. “This is powerful because people understand the ‘war on drugs’ targeted Black people disproportionately all across the board. So what more poetic justice than to have the revenue to support a repair that comes from the legalization of marijuana,” says Dr. Ron Daniels, convener of the National African Americans Reparations Commission (NAARC). Evanston was the first city to implement a plan to repair the harm caused by slavery—and what occurred there could set the tone for what may happen at a national level.

In California, officials recently announced the formation of a state task force to study the issue of reparations and make proposals to compensate the state’s Black residents within two years.


Unfortunately, policy makers have often put the responsibility for fixing centuries of racial inequity back on the shoulders of Black people. For decades, elected officials have argued that personal choices explained racial disparities. But what we have learned is that even when Black people have advanced degrees, own their home, have high paying jobs, and engage in other behaviors associated with asset building, their wealth is typically much lower than their White peers. Individual-level factors are simply not the explanation for the difference in the economic fortunes of Black and White people.

Black Americans cannot close the racial wealth gap by changing their individual behavior—by assuming more “personal responsibility” or acquiring the portfolio management insights associated with “financial literacy”—if the structural sources of racial inequality remain unchanged.

While it is often true that change is hard and takes time, we have seen repeatedly that when we prioritize change and act with urgency, change is embraced and can occur quickly. The most effective path to accountability comes from creating clear action plans with built-in institutional accountability measures. Collectively, we must create greater urgency and public will to achieve racial equality.

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