Economy Education

Economics of Systemic Racism

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These past few weeks of heightened activism highlights that our nation is waking up to the injustices that our communities have faced for decades. Every person with common sense can acknowledge the rawness of the abuse people of color experience in this country, from the ongoing indignities to the extreme violence, like the horrendous killing of George Floyd. Why does racism still exist? Our country has overcome many social, economic, and political barriers, yet racism is still prevalent in our society. Systemic racism, or institutional racism, is a form of racism expressed in the practice of social, economic, and political institutions. Today, African-Americans face continuing disparities in terms of wealth, employment, education, housing, and representation in leadership positions. Much of this is due to the detrimental economic effects of institutional racism.

The Racial Wealth Gap

Wealth is an accumulation of valuable economic resources that can be measured in terms of either real goods or monetary value. Every family wants wealth to live well and have opportunities. Whether it’s buying a new home, paying off medical bills, or simply gathering food on the table, wealth obviously plays an important role in American families. 

But, there is an uneven distribution of wealth within this country between white and Black households. Households with less wealth have less opportunity to improve their quality of life and build generational wealth. Generational wealth is wealth that is grown or preserved as it is passed from generation to generation.

Here is some data from the 2016 Federal Reserve highlighting the significant wealth gap between Black and white Americans:

  • African Americans make up approximately 10 percent of the wealth owned by white America. In 2016, the median wealth for non-retired Black households 25 years old and older was less than one-tenth that of similarly situated white households.[1]
  • The Black-white wealth gap has not recovered from the Great Recession. In 2007, immediately before the Great Recession, the median wealth of Blacks was nearly 14 percent that of whites. Although Black wealth increased at a faster rate than white wealth in 2016, Blacks still owned less than 10 percent of the wealth owned by whites at the median.[2]
  • The wealth gap persists regardless of households’ education, marital status, age, or income. For instance, the median wealth for Black households with a college degree was about 70 percent of the median wealth for white households without a college degree. The gap worsens as households grow older.[3]

Systemic Obstacles

It’s no secret that there are clear disparities between people of color and white communities. There are many factors that explain the outcome of the wealth inequality between whites and Blacks, as well as other affected levels of society.

Employment

One of the primary causes for the persistent racial wealth gap is the long-standing history of  employment discrimination. Discrimination has limited opportunities for Blacks, causing them to get less advantageous and fewer employment opportunities than white individuals. One study found that Black workers are less likely than white workers to be employed in a job that is consistent with their level of education.[4] Another US study found that job resumes with traditionally white-sounding names received 50% more callbacks than those with traditionally Black names. Black individuals are also twice as likely to be unemployed than white individuals. Once employed, Black individuals earn nearly 25% less than their white counterparts.[5] Statistically, African Americans have had less access to stable jobs, fair wages, and employment benefits — all key factors that create financial stability.

Housing

Even if African Americans had enough to buy their own homes, they would be significantly less likely to be a homeowner because of housing discrimination, further restricting their access to tax benefits that are included with owning a home (homeowners can deduct interest expenses on up to $750,000 of mortgage debt from their income taxes).

Redlining

Decades after the Civil War, many government agencies started to draw maps dividing cities into sections that were either desirable or undesirable for choosing whether to give out loans or not. So when a Black family wanted to buy a house, the banks could deny a loan. If they gave them a loan, it was usually with unfavorable terms. This forced them to live in certain separated neighborhoods, creating a greater divide in affluent areas, and in many instances prevented them from acquiring a home at all.

Despite its illegalization in 1968 under the Fair Housing Act, banks routinely gave subprime loans to hopeful Black homebuyers. This was a process called redlining, and it inhibited access to owning a home and getting a college education — all important for building wealth — for Blacks and other minorities. Redlining essentially barred Blacks and other minorities from economic opportunity and building wealth like their white counterparts by affecting homeownership rates, home values, and credit scores. Since many African-Americans could not access conventional home loans, they had to turn to predatory lenders who charged high interest rates.

Newly Released Maps Show How Housing Discrimination Happened
Photo by National Geographic: This 1939 map of Los Angeles ranks neighborhoods by desirability, as determined by the Home Owners’ Loan Corporation (HOLC). The scale from most to least desirable goes from green to blue to yellow to red. HOLC maps generally rated poorer or less white neighborhoods as less desirable.

A recent study demonstrated that people of color are told about and shown fewer homes and apartments than whites. Black home ownership, where one completely owns a home without mortgage debt, is now at an all-time low (42%, compared to 72% for whites).[6] This statistic can be explained by the higher interest rates that people of color are charged. Furthermore, the current tax code favors high-income families due to increased tax benefits. So even if African Americans own a house or a retirement savings account, their low-income status favors decreased tax benefits. These are just a few to name, but the list of housing disparities go on.

Education

Generally speaking, a good education is crucial to future employment opportunities. But, Black students are finding their educational opportunities severely limited. Nationwide, high-poverty areas with low-achieving schools tend to be in minority communities. White students are more likely to attend high-achieving, more affluent schools. Resources such as funds for extracurricular activities, paying high-quality teachers, and infrastructure attach unequally to schools according to racial and socioeconomic composition.[7]. This ties back to the practice of redlining as the school district’s funding largely depends on the property taxes. An impoverished neighborhood compared to a more affluent neighborhood has significantly fewer educational resources for their respective schools. Without the proper education that is crucial for employment, it will be hard for people of color to build wealth.

Healthcare

In America, the US healthcare system is of vital interest to the nation’s economy and government policy spending. However, certain disparities exist within the system that make Black citizens vulnerable. A 2012 study found that a majority of doctors have “unconscious racial biases” when it comes to their Black patients.[10] From 2013 to 2017, white patients in the US received better quality health care than about 34% of Hispanic patients, 40% of Black patients, and 40% of Native American patients.[11] Black Americans are far more likely than whites to lack access to emergency medical care. The hospitals they go to tend to be poorly funded and staffed by practitioners with less experience. 

Recently, the coronavirus has ravaged America’s healthcare system, exploiting the existing racial health disparities. In Michigan, Black people make up 14 percent of the state’s population but account for 41 percent of coronavirus deaths.[12] Similarly, in Illinois, Black people make up 14% of the population, but account for 32.5% of coronavirus deaths, according to the state’s Department of Public Health.[13] In Louisiana, Black people make up about 33% of the population but account for more than 70% of the state’s coronavirus deaths, with the majority of these fatalities taking place in New Orleans.[14] If Blacks are in the minority of these states, then it begs the question: why do they comprise the majority of coronavirus deaths? 

Corporate America’s Current Response

Recent events have prompted corporate America to shine a light on racism and take action. Large companies have released statements in early June. Nike, on June 5th, announced a $40 million “commitment over the next four years to support the Black community in the U.S.” On June 3, Chairman & CEO at Goldman Sachs, David M. Solomon announced the creation of a $10 million Goldman Sachs Fund for Racial Equity to support the vital work of leading organizations addressing racial injustice, structural inequity and economic disparity. Many others like Amazon, Apple, and Facebook have donated millions as well.

Additionally, JPMorgan Chase is working to promote financial literacy in disadvantaged Black communities through Advancing Black Pathways. — an initiative that builds on their existing efforts to help Black people chart stronger paths towards economic success and empowerment. Through Advancing Black Pathways, JPMorgan Chase works to improve educational opportunities and job readiness for Black students. This includes hiring 4,000 Black students at the firm in roles such as apprenticeships, internships, and post-graduation roles over the next five years.

Wealth Transfer

“Wealth transfer is exactly what’s needed. Think about this. For 200-plus-years or so of slavery, labor taken with no compensation is a wealth transfer. Denial of access to education — which is a primary driver of accumulation of income and wealth — is a wealth transfer.”

— Robert Johnson

Moreover, well-known entrepreneurs are beginning to act on the scene. Robert Johnson, founder of BET and the first African American to become a billionaire, states that “now is the time to go big” to keep America from dividing into two separate and unequal societies, and demands reparations for slavery. By providing $14 trillion of reparations, he believes that there needs to be a transfer of wealth — Robinhood style. Johnson said reparations sends the signal that white Americans acknowledge owed damages for the systemic racism slavery created and the decades since, and finally put a close to America’s racial wealth gap.[15]

Potential Systemic Solutions

Although racism will always exist, we can go against it. Policymakers and elected officials should use their position to deliver solutions that will close the racial wealth gap and remove these systemic obstacles. These include:

Building savings 

  • Expand housing and home ownership among Black families.
  • Improve access to retirement savings, expand opportunities for entrepreneurship.

Reducing debt load and cost 

  • Protect the Consumer Financial Protection Bureau (CFPB), which is an agency of the United States government that promotes fairness and transparency for mortgages, credit cards, and other consumer financial products and services.
  • Improve access to banking, improve college affordability.

Improving income and employment 

  • Improve opportunities for collective bargaining, raise the minimum wage.
  • Adopt fair chance hiring policies.

Final Thoughts: Continuity and Change

“Genealogy itself is something of a privilege, coming far more easily to those of us for whom enslavement, conquest, and dispossession of our land has not been our lot.

Tim Wise

Families can accumulate wealth over time, creating a better life for the next generation and the next. However, for many years, the ability to gain and preserve wealth was not available to African Americans. Since the beginning of American independence, the American experience for Blacks was largely unjust because of racism. From the start, white plantation owners enslaved Black people for their economic benefits. This left Black people unable to create wealth for their own and future generations. After the Civil war, African Americans found themselves in more labor of sharecropping — a legal plantation system similar to slavery. This left them in a cycle of continual debt.

It has been 150 years since slavery’s abolition. But, America has yet to fully reckon with how to atone for this original sin. With disparities that have existed — slavery, Jim Crow, redlining, school segregation, mass incarceration, environmental racism — past systems have inhibited African Americans from accessing opportunities to grow wealth.

The persistent racial wealth gap leaves African Americans in a cycle of economic struggle from one generation to the next; the lack of sufficient wealth and opportunity inhibits economic mobility over time. Although there are ways the country is striving to close the wealth gap such as improved access to higher education (through the practice of affirmative action), that is simply not enough. And although large companies have donated millions to the Black lives matter cause, that is simply not enough. There must be persistent attention to racism and equal wealth creation among races in order to address this blatant inequity in our country. Despite the most painful parts of our history, change is possible — and there is still so much work to do.

Citations

  1. The average non-retired African American household 25 years old and older had only 11 percent the wealth of the average non-retired white household 25 years or older in 2016. The racial wealth gaps differ little when considering the entire population.
  2. Authors’ calculations based on data in survey year 2016 from Board of Governors of the Federal Reserve System, “Survey of Consumer Finances (SCF),” available at https://www.federalreserve.gov/econres/scfindex.htm (last accessed January 2018). See also Table 1.
  3. Hanks, Angela, et al. “Systematic Inequality.” Center for American Progress, 21 Feb. 2018, www.americanprogress.org/issues/race/reports/2018/02/21/447051/systematic-inequality/.
  4. Economic Policy Institute. “Black Workers Endure Persistent Racial Disparities In Employment Outcomes.” https://www.epi.org/publication/labor-day-2019-racial-disparities-in-employment/. Accessed Feb. 5, 2020.
  5. Abdul Latif Jameel Poverty Action Lab. “Discrimination in the Job Market in the United States.” https://www.povertyactionlab.org/evaluation/discrimination-job-market-united-states. Accessed Feb. 5, 2020.
  6. Marks Jarvis, Gail. “Why Black Homeownership Rates Lag Even as the Housing Market Recovers.” Chicagotribune.com, Chicago Tribune, 3 June 2018, www.chicagotribune.com/business/ct-black-homeownership-plunges-0723-biz-20170720-story.html.
  7. Fiel, Jeremy E. “Decomposing School Resegregation: Social Closure, Racial Imbalance, and Racial Isolation.” American Sociological Review. no. 5 (2013): 1-21. (accessed September 24, 2013).
  8. Duncan, Arne. “Civil Rights Data Collection.” Office for Civil Rights, 21 Mar. 2014, www2.ed.gov/about/offices/list/ocr/docs/crdc-discipline-snapshot.pdf.
  9. Goff, Phillip Atiba, et al. “The Essence of Innocence: Consequences of Dehumanizing Black Children.” American Psychological Association, 2014, www.apa.org/pubs/journals/releases/psp-a0035663.pdf.
  10. staff, Science X. “’Unconscious’ Racial Bias among Doctors Linked to Poor Communication with Patients.” Medical Xpress – Medical Research Advances and Health News, Medical Xpress, 15 Mar. 2012, medicalxpress.com/news/2012-03-unconscious-racial-bias-doctors-linked.html.
  11. Agency for Healthcare Research and Quality. “National Healthcare Quality and Disparities Report.” https://www.ahrq.gov/sites/default/files/wysiwyg/research/findings/nhqrdr/2018qdr-final.pdf. Accessed Feb. 5, 2020.
  12. “Michigan Data.” Coronavirus – Michigan Data, 8 June 2020, www.michigan.gov/coronavirus/0,9753,7-406-98163_98173—,00.html.
  13. “COVID-19 Statistics.” COVID-19 Statistics | IDPH, 8 June 2020, www.dph.illinois.gov/covid19/covid19-statistics.
  14. Team, WDSU Digital, and Hearst Television Inc. “’Big Disparity’: 70% of Louisiana’s Coronavirus Deaths Are African Americans, Governor Says.” WDSU, WDSU, 6 Apr. 2020, 9:02 PM, www.wdsu.com/article/covid-19-impacts-in-louisiana-high-death-rate-among-african-americans/32058042#.
  15. Rogers, Taylor Nicole. “BET Founder Robert Johnson Calls for $14 Trillion of Reparations for Slavery.” CNBC, CNBC, 1 June 2020, www.businessinsider.com/bet-founder-robert-johnson-slavery-reparations-george-floyd-murder-protests-2020-6.

About the author

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Currently, I am a prospective high-school senior from the Bay Area. My interests lie at the intersection of finance, entrepreneurship, and programming. I'm passionate about leveraging my knowledge to solve challenges in financial illiteracy.

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