Remember this, America: Your personal finances aren’t just the product of you the person, but how you fit into literal centuries of systems, structures, and laws.
This has become something off of flashpoint of news coverage, when a recent CNBC article suggested that financial literacy was the “critical link” to closing the financial wealth gap between Black and white Americans. The post, which as been updated since initial publishing, goes on to spell out that “social, historical, political and institutional forces have contributed to this gap, and closing it is a daunting task.”
But while learning more about money is sure to help individual people, it doesn’t explain the systemic problems facing people of color, Axios argued — and research shows it’s certainly not the leading cause of the gap.
The “commonly offered myth”
As economists Darrick Hamilton and William Darity Jr. have argued in papers for Duke University and the St. Louis Fed, the call for greater financial literacy as a solution for America’s widening racial wealth gap is a “commonly offered myth.”
“Blacks cannot close the racial wealth gap by changing their individual behavior — for example, by assuming more ‘personal responsibility’ or acquiring the portfolio management insights associated with ‘financial literacy’ – if the structural sources of racial inequality remain unchanged,” they and their co-authors argue.
For example, they call out a 2015 report, also published by the St. Louis Fed, titled “The Demographics of Wealth.” The paper characterizes middle- and older-aged, educated whites and Asians as “thrivers” and young, less educated Blacks and Latinos as “strugglers,” using language that implies that the wealth gap between them is due to agency or education.
“Meager economic circumstances — not poor decision making or deficient knowledge — constrain choices and leave asset-poor borrowers with little to no other option but to use predatory and abusive alternative financial services,” say Hamilton, now executive director of the Kirwan Institute for the Study of Race and Ethnicity at Ohio State, and Darity, a distinguished professor of public policy at Duke.
This is history-spanning stuff. Consider a Washington Post headline from last year: “What Southern dynasties’ post-Civil War resurgence tell us about how wealth is really handed down.” Spoiler alert: the accumulated wealth of former slave-owning Southern elites was passed down through generations either directly or through social networks, where descendants of slave owners married into other rich white families.
“Even after the enslaved people on whom their wealth was built were freed, Southern elites passed their advantages to their children through personal networks and social capital,” observed reporter Andrew Van Dam.
In addition to more modern practices of gerrymandering to deprive Blacks of their political voice, disparate funding in education, and a myriad other factors, two of the main factors driving this gap in prosperity are racist practices hiring and housing.
Racist hiring practices, both subtle and overt, keep Blacks from high-paying jobs
The median white family had more than 10 times the wealth of the median Black family in 2016, the Federal Reserve’s most recent Survey of Consumer Finances shows. A big chunk of this gap comes down to the incredible discrepancy between wages of white and Black people. White Americans can expect to earn a whopping $1 million more than their Black counterparts over their lifetime, per a recent study by McKinsey & Co. Things have only gotten worse over time. The difference in median household incomes between white and Black Americans has grown from about $23,800 in 1970 to roughly $33,000 in 2018 (as measured in 2018 dollars), according to the Pew Research Center.
Bias in hiring is a big part of the problem. Personal finance writer and coach Michelle Jackson, who specializes in financial planning for the Black community, says Black people often aren’t hired into well-paying jobs. This impacts their ability to earn enough to purchase a home, a major factor in accumulating wealth over time.
The Bureau of Labor Statistics shows that 54% of employed Asians worked in management, professional, and related occupations — the highest-paying major occupational category — compared with 41% of employed whites, 31% employed Blacks, and 22% of employed Hispanics.
The racism Blacks face in business can be outright. In a recent BI first-person essay, Lynette Hoag, a Black lawyer and writer, described the discrimination she faced in trying to launch her legal career, despite attending a nationally top-ranked law school. Many top-tier law firms essentially told her they simply didn’t hire non-whites, she said.
But the prejudice can also be more subtle. One Harvard University study found that when Blacks and Asians “whitened” their resumes — for example, used “American” or “white”-sounding names — they got more callbacks for interviews. Twenty-five percent of Black candidates received callbacks from their whitened resumes, while only 10% got calls when they left ethnic details on their resume. In addition, many companies rely on employee social networks for referrals, which can be problematic if your company is largely white. One survey found that three quarters of white employees don’t have any non-white friends.
Black Americans still face the legacy of redlining
Decades of racist lending practices is another huge contributor to the wealth gap.
Though the federal Fair Housing Act banned racial discrimination in lending in 1968, African Americans and Latinos continue to be denied mortgage loans at rates far higher than whites, The Chicago Tribune reports. In other words, redlining — the routine denying of credit to Blacks — is anything but a thing of the past. Over 60 metro areas showed modern-day redlining practices, according to millions of Home Mortgage Disclosure Act records analyzed by Reveal from The Center for Investigative Reporting.
In light of these systems of inequality, focusing on Black people’s personal finance seems less of a real solution and more like a “Band-Aid fix.” According to Hamilton and Darity Jr., the onus shouldn’t be on Black people themselves to fix the gap. Instead, they suggest reparations for decades of racial injustice and/or economic policies that would specifically help Black Americans.
“Addressing racial wealth inequality will require a major redistributive effort or another major public policy intervention to build black American wealth,” they write.
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