Fixing the Racial Wealth Gap Could Add $5 Trillion to the Economy. Here’s Where to Start.

Inequality is costly. Citi put a $16 trillion price tag on the economic cost of racial inequities over the past 20 years in a report released last week and estimated that closing some of the racial gaps completely could add $5 trillion to the U.S. economy over the next five […]

Inequality is costly. Citi put a $16 trillion price tag on the economic cost of racial inequities over the past 20 years in a report released last week and estimated that closing some of the racial gaps completely could add $5 trillion to the U.S. economy over the next five years.

Social protests in the wake of the killings of George Floyd and others by police have put a spotlight on race while the pandemic has exposed inequities as the virus has hit lower-income and Black and Hispanic families especially hard.

Companies, including financial services firms, are also talking more about inequality amid pressure from investors and clients. Earlier this month,


which oversees $2.6 trillion, said that it would recommend sustainable investing over traditional investing to clients globally. And Citi last week unveiled $1 billion in strategic initiatives to close the racial wealth gap—targeting areas that help build wealth like housing and entrepreneurship. Even the Federal Reserve has raised the issue and said its policies will focus on “broad-based and inclusive” job gains, though it has also said fiscal policies may be better to address inequality.

Citi took a deep dive into the factors contributing to income and wealth racial gaps and outlined proposals to narrow the gap in its report that was partly driven by alarm at the worsening of racial inequality even before Covid-19. “You can’t expect a journey to equity to be a straight line, but you don’t like to have a regression,” says Citi global chief economist Catherine Mann, who co-wrote the report with economist Dana Peterson.

The current gap between Black and white family homeownership—a major source of wealth for Americans—is greater now than before 1968 when housing discrimination was legal, and the gaps in college degree attainment between Black and white Americans is wider now than during the 1950s and 1960s, according to Citi.

Too often, Mann says, the inequality conversation is viewed through a zero-sum lens, with the assumption that closing a gap means someone else needs to give something up. But Mann says that’s not the right view. “If you give people more income, what are they going to do? They are going to spend it, representing an increase in demand. If you have people with more training and education or access to capital, then we are talking about job creation and the supply side of economics.”

That is especially relevant when the economy has taken a major hit and is piling on debt. Eventually, that needs to be paid off, Citi says. “You do it by expanding the pie,” Mann adds. In its $16 trillion estimate for the cost of wage, education, housing and investment gaps Black Americans faced over the last 20 years, Citi attributed $13 trillion in revenue that could have come from providing fair and equitable lending to Black entrepreneurs. Another $2.7 trillion was attributed to the wage gap.

Covid-19 could widen the inequalities further. The per capita death rate has been higher for Black and Hispanic Americans—a rate of 92 per capita and 74 per capita—compared with 52 per capita for white Americans and 35 per capita for Asian Americans. The economic fallout has also hit these communities harder as job losses have been heavier in low-skilled and discretionary sectors that largely employ minorities. High earners were less likely to lose their job during the pandemic and they also saw a more rapid recovery. By late May, employment for high-wage earners had returned to pre-Covid levels but was still down 15% for low-wage workers as of late July, according to a paper co-written by Harvard economist Raj Chetty.

These communities also often have less of a buffer to deal with the crisis. For example, Black families’ median liquid assets—$11,400—are less than half of white families’ median liquid assets of $29,200. Hispanic families have even less liquid at $6,500. Meanwhile, the leverage ratio, or debt to assets, for Black families is above 25% over the last three decades compared with 10% to 15% for white families. Wealth and debt play a major role in social mobility. “That rising inequality within and across generations really is something people don’t appreciate,” Mann says.

Entrepreneurship is a major pathway to income and wealth. Credit cards, using housing as collateral, and tapping friends and family are the three most common things entrepreneurs use to start a business—and Black entrepreneurs are often at a disadvantage on all three, Mann says. Unequal access to credit, lower homeownership due to things like redlining, and the lack of intergenerational wealth transfer play a role, with Black founders less likely to receive business loans or funding from investors, according to Citi.

To get at addressing these inequities means looking at the factors that contribute to income and wealth—everything from education, which is dictated by school quality that is often linked to property taxes and housing, which are in turn affected by unequal access to credit, policing and even policies around voting. “It’s all related,” Mann says.

Citi outlined many steps to narrow the gap. Here are five of their policy proposals.

Funding Education and Skills

The average difference in funding of predominantly white school districts and minority school districts is $23 billion, though they serve roughly the same number of students, according to Citi. Addressing underfunding of schools with a high concentration of minorities could help narrow the education gap.

Training in specific skills through community colleges to fill identified gaps in the labor force has also been “instrumental” in narrowing economic inequality. Citi says funding for these programs is vital.

Raising Wages

Income begets wealth. Black males, on average, make 80 cents on the dollar compared with white male wages, according to Citi. Where a person works determines wage potential and lack of diversity in certain fields play a role here. Black workers represent 10% or less of many of the top-paying occupations, including STEM, finance, legal, medicine, and management jobs, according to Citi. Black workers, however, make up a larger share of jobs that are at risk of automation.

Raising minimum wages, Citi says, would have dramatic implications on the racial wealth gap since a larger share of Black workers—38%—work for minimum wage.

Increasing Access to Financial Services

Almost half—47%—of Black households are unbanked. Lack of access to traditional financial services and higher account requirements tend to push Black families to alternative financing options that are costly. Increasing access to financial services is crucial, according to Citi. One proposal: Enabling the U.S. Postal Service to provide financial services could be an alternative way for these families to get banking services, according to Citi. So far, the Postal Service’s has said its core function is delivery, not banking.

Citi also proposes public policy that focuses on housing as a pathway to wealth, with Black ownership rate just 44% compared with 70% for white families. That means tackling affordability, promoting equitable and accessible financing and financial counseling.

Tax Reform

Households in the top percentile received almost a quarter of the total 2018 tax cuts, while the bottom 60% received less than a fifth of the benefits. Since white households are three times as likely as Black or Latino households to be in the top percentile of income, it exacerbated the racial gaps, according to Citi. Tax reforms that encourage work among lower income families like the earned-income tax credit or the Child Tax Credit could help narrow the racial gap, according to Citi.

Providing State Health Care

The three groups who saw unemployment spike the most in April were women, Black Americans and Latinos. Citi said providing minimum government-supported health care would boost the level of health security for workers in industries that may be challenged in the wake of the pandemic.

Write to Reshma Kapadia at [email protected]

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