Combating Racism – Understanding Wealth Disparity – Part 4

As I reported last week, the racial wealth gap in this country spans the demographics of age, education, marital status, and income. Obstacles to wealth building for Black Americans goes back before the Civil War. Shrinking this wealth gap will require a variety of strategies, including such direct monetary policies as Individual Development Accounts (IDAs), Baby bonds, and reparations to descendants of former slaves and those victimized by such racial riots as occurred in Tulsa, Oklahoma and other cities across the nation. In addition to direct monetary policies, this newsletter examines three broad economic policies—reducing the wage gap, taxing wealth, and narrowing the homeownership gap—that will make strides toward undoing the systemic racial injustices that have existed for decades.

Reduce the wage gap

In the four decades between 1978 and 2018, inflation-adjusted CEO compensation (base salary and realized stock options) grew by 940%, while median worker pay grew just 12%. According to an analysis commissioned by the New York Times, in 2020 alone CEO pay grew by 14%, while median worker pay grew by less than 2%.

Since 1973, wages for the most underpaid workers have not kept pace with growth of our economy and total labor productivity. In essence, corporations have not equitably shared the returns of our formidable growth in national productivity with the underpaid workers who made those gains possible.

According to a report by the Economic Policy Institute, as of 2015, relative to the average hourly wages of White men with the same education, experience, metro status, and region of residence, Black men make 22.0% less, and Black women make 34.2% less. Black women earn 11.7% less than their White female counterparts.

The federal minimum wage was last raised to $7.25 per hour in 2009. In 2021, it remains at that level, making this twelve-year period the longest in which the federal minimum wage has remained unchanged since the U.S. first enacted a federal minimum wage in 1938.

Thirty states and Washington, D.C. have minimum wage levels that currently exceed $7.25 per hour. However, twenty other states follow the federal minimum wage of $7.25 or do not have a state minimum wage of their own. Many of these states are located in the South, where a majority of Black Americans live and work. These 20 states have not only failed to raise wages, but most also prohibit cities and counties within their borders from adopting their own minimum wage laws. Of the states with minimum wages higher than the federal minimum, eleven states and Washington D.C. have legislated additional increases to $15 over the next few years.

The Fight for $15—a worker- and people of color-led movement— has highlighted the disconnect between state and U.S. legislators who refuse to raise wages and their constituents, many of whom support a $15 minimum wage. Since 2012, The Fight for 15 campaign has been instrumental in securing minimum-wage increases in a number of states and municipalities, winning $150 billion in raises for 26 million workers. The affected workers comprise nearly 16% of the U.S. labor force. Of the 26 million workers, nearly 12 million (46%) are Black, Latinx, or Asian American. These are real, material gains for millions of people—affecting workers’ ability to buy groceries, pay rent, attend school, and care for their families.

As worker-activists have made clear, zip codes should not determine whether workers are able to earn a baseline living wage. Changes to minimum wage policies can have a profound effect in reducing racial inequity.

Growing earnings inequality has consistently contributed to the expansion of racial wage gaps. The broader problem of stagnant wages must be addressed by raising the federal minimum wage, creating new work scheduling standards, and rigorously enforcing wage laws aimed at preventing wage theft.

Wage theft is the illegal practice of not paying workers for all of their work including; violating minimum wage laws, not paying overtime, forcing workers to work off the clock, and much more. It is a major problem. In Los Angeles alone, low-wage workers lose $26.2 million in wage theft violations every week, making it the wage theft capital of the country.

In addition, closing and eliminating the gaps will require the following intentional and direct actions:

  • Consistently enforce antidiscrimination laws in the hiring, promotion, and pay of women and minority workers.
  • Convene a high-level summit to address why Black college graduates start their careers with a sizeable earnings disadvantage.
  • Strengthen the ability of workers to bargain with their employers by combatting state laws that restrict public employees’ collective bargaining rights, and
  • Require the Federal Reserve to pursue monetary policy that targets full employment, with wage growth that matches productivity gains.

Heavy and progressive taxation of wealth

Any program to close the racial wealth gap must first acknowledge the reality of wealth concentration in contemporary America. The 400 richest Americans have more total wealth than all 10 million Black American households combined. Black households have about 3% of all household wealth, while the 400 wealthiest billionaires, who are almost exclusively White, have 3.5% of all household wealth in the United States.

What is needed is an active program of wealth redistribution and the removal of structural and discriminatory obstacles that stand in the way of bridging the wealth divide.

According to a study by the Brookings Institute, “any plan to eliminate the racial wealth gap requires, in addition to a transformative national investment in Black households and communities, a program of heavy and highly progressive taxation aimed at the very wealthiest Americans.”

It is clear that racial justice requires progressive taxation. Top marginal income tax rates have fallen from a peak of 92% in the early 1950’s to 37% today. The current income tax rewards wealth over work by taxing income from ownership at much lower rates than income from salaries and wages.

State and local taxes, moreover are generally regressive. A regressive tax is one that is assessed regardless of income, in which low- and high-income earners pay the same dollar amount. This kind of tax is a bigger burden on low-income earners, for whom the same dollar amount equates to a much larger percentage of total income earned.

Although nominally color blind, the U.S. tax code is not race-neutral in its effects. Tax expenditures disproportionately help upper middle class Whites. Tax advantages for home ownership amount to a racial subsidy for White families while local property tax assessments are systematically biased against Black homeowners.

Home valuation

The racial homeownership gap has persisted in America for decades. The gap has grown since the Great Recession and has contributed to the racial wealth gap. Since 2001, the Black homeownership rate has seen the most dramatic drop of any racial or ethnic group, declining 5% compared with a 1% decline for White families, and increases for Hispanic and “other” families, which primarily include Asian Americans and Pacific Islanders (AAPIs).

Homeownership is often viewed as the entree to the American dream and the gateway to intergenerational wealth. However, this pathway is often less achievable for Black Americans who post a homeownership rate of 46.4% compared to 75.8% of White families. Compounding matters, homes in predominately Black neighborhoods across the country are valued at $48,000 less than predominately White neighborhoods for a cumulative loss in equity of approximately $156 billion. These are significant contributing factors to the racial wealth gap.

The cohort of Black Americans that has lost the most ground relative to other racial and ethnic groups is middle-aged homeowners ages 45 to 64. These homeowners, having lost their homes during the 2008 crisis, find themselves unable to move back into homeownership as they approach retirement age.

Studies have highlighted how a substantial disparity in the value of homes owned by Black and White homeowners exacerbates the racial wealth gap. A study by the Urban Institute identified three patterns of homeownership that contribute to the housing wealth gap.

  • Black homebuyers buy less expensive first homes with more debt than White homebuyers,
  • Black households buy homes later in life than White households, and
  • Black homeowners are less likely to sustain their homeownership than White homeowners.

The inflation-adjusted average housing wealth at age 60 or 61 for White households was $124,000, compared with $54,000 for Black households, a 57% gap.

As shown in the chart below, the average first home purchased by Black homebuyers is valued at $127,609, compared with $139,415 for White homebuyers, yet Black homebuyers, on average, have higher mortgage debt ($90,436) than White homebuyers ($74,736). Surprisingly and notably, the difference in mortgage debt ($15,700) is larger than the difference in the home value ($12,806). The higher mortgage debt relative to the house value suggests that Black households fall behind in their journey to building future wealth at the initial purchase. Higher mortgage debt not only lowers current and future wealth but could be a barrier to moving and realizing housing wealth gains.

Buying a home at a younger age leads to greater wealth in retirement. Eighty-seven percent of White homeowners bought their first homes before age 35, compared with only 53% of Black homeowners. In addition, 18% of Blacks never own a home before turning 60 or 61.

Delaying homeownership affects future wealth. For both Black and White households, those who bought their homes before age 35 have the greatest return on housing at age 60 or 61. Because a greater proportion of Black homebuyers buy their first homes later in life, their future housing wealth is stunted.

In the average U.S. metropolitan area, homes in neighborhoods where the share of the population is 50 percent Black are valued at roughly half the price as homes in neighborhoods with no Black residents. Homes of similar quality in neighborhoods with similar amenities are worth 23% less ($48,000 per home on average, amounting to $156 billion in cumulative losses) in majority Black neighborhoods, compared to those with very few or no Black residents.

Metropolitan areas with greater devaluation of Black neighborhoods are more segregated and produce less upward mobility for the Black children who grow up in those communities. To see an interactive map showing how devaluation of Black homes plays out in different communities across the United States, click here.

To bolster Black homeownership nationwide, the Brookings Institute recommends the following:

  1. Increase support for small dollar mortgage loan programs. It is a pervasive myth that homes of lower value are riskier investments for mortgages, but recent analysis from the Urban Institute shows that these buyers have comparable credit scores and their mortgages have similar loan-to-value ratios to more valuable properties. As homes in Black neighborhoods are already devalued, this barrier to entry to homeownership disproportionately affects Black buyers, especially those who are first-time buyers.
  2. Reduce uneven costs of mortgages for Black homeowners. Creating a rate-and-term refinancing option would help more households reduce monthly mortgage costs and lower the barrier to homeownership.
  3. Tackle Housing Supply Constraints and Affordability. Increase federal efforts to improve the existing supply of affordable housing, including making investments directed toward historically segregated and devalued neighborhoods; explore and expand production of affordable housing types like manufactured housing, and factory-built housing; improve condo lending and occupancy requirements for FHA lending; review the viability of programs like lease-to-own and shared equity as pathways to homeownership; and advance HUD’s efforts to collaborate with mission-driven organizations to make affordable real-estate units for sale.
  4. Advance local policy solutions. Such local policy solutions could include responsibly expanding small-dollar mortgages for purchases and renovations (micro-mortgages); reforming local land use and building codes, and revisiting zoning laws and regulations; removing discriminatory language in Homeowner Association (HOA), Condominium Owner Association (COA), and Planned Unit Development (PUD) deeds on single-family residential units; and considering property tax relief for lower and moderate-income taxpayers.
  5. Extend credit and down payment assistance to borrowers impacted by discriminatory housing and lending practices. While it is not enough to simply extend credit based on redlining maps drawn in the New Deal Era, past injustices must be redressed by helping to develop areas left behind by racist policies.
  6. Adopt credit scoring practices with less discriminatory impacts. Current metrics of credit scoring do not account for regular payments from rent and utilities, instead they prioritize loan and credit card payments. Expanding notions of credit-building can dispel the myth that Black homeowners are risky investments.
  7. Increase diversity in the appraisal profession. Nearly 9 in 10 property appraisers are White, while 2% are Black, according to an Urban Institute analysis of 2019 Census data. With the numerous instances of appraiser bias making headlines on a consistent basis, better representation in the profession which holds sway over much of the valuation process could go a long way to mitigating the effects of societal bias against Black neighborhoods.
  8. Ensure compliance with the Community Reinvestment Act (CRA). The CRA, which passed in 1977, requires the Federal Reserve and other federal banking regulators to encourage financial institutions to help meet the credit needs of the communities in which they do business, including low- and moderate-income (LMI) neighborhoods. The Federal Reserve and other banking regulators can advance efforts to enhance incentives for banks to serve non-white communities.
  9. Continue stimulus and relief efforts for homeowners and buyers in the wake of the COVID-19 pandemic. The disparate impacts of the pandemic and associated recession mean that preexisting Black homeowners faced disproportionate difficulty with mortgage payments. Foreclosure moratoriums allowed many to hold onto their homes, but now they face repayment of deferred mortgages, and a bifurcated economy has not yet returned Black employment to pre-pandemic levels.

CONCLUSION

When people ask: "Are these policies government handouts or an investment?" Remember that settlers in the American frontier received tracks of land under the Homestead Act that enabled them to build wealth. The government has subsidized many industries: corn and soybean farmers, oil and gas exploration, and air and rail transportation. There are plenty of points in history where we've made strategic investments in the population for a benefit.

Each of the policies covered here and in last week’s newsletter, if carefully implemented, has the potential to lift working families out of poverty, support greater economic mobility, and reduce inequality. These policies could be enacted at the local, state and federal levels if there is political will. While there is still some disagreement about the best way to reduce inequality, there is a growing consensus that inequality should be reduced.

Wealth inequality reduces overall economy growth as well as challenges basic democratic principle and fairness. But getting policymakers to prioritize these policies will depend on the actions of advocates, voters, and other supporters with a vision for a fair and inclusive society that can overwhelm the powerful forces that seek to maintain the status quo. As former National Urban League President Hugh Price has said, we as a society know what we need to do to address persistent racial wage and employment inequality. We just need the political courage.

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