Last spring when Federal Reserve chair Ben Bernanke visited Morehouse College, an undergraduate student asked him what accounts for the enormous racial disparity in wealth. Bernanke responded that the source of the problem was the lack of “financial literacy” and “financial education” on the part of blacks, particularly with respect to savings decisions.
He said nothing about the lack of access to inherited wealth, such as inheritances and other intergenerational transfers. Most wealth acquisition today takes place by such asset shifts. Even more astonishing, Bernanke never mentioned the notorious history of white violence that included the seizure, destruction and appropriation of black property.
Acknowledging this unfairness is not an excuse but a powerful truth; remedying it requires straightforward government action, rather than lectures on the value of saving. In fact, the racial wealth gap can be decreased – and without using a race-specific strategy of wealth redistribution.
We propose Children’s Development Accounts, an expanded and non-incremental version of what Manning Marable of Columbia University has called the “Baby Bond” plan. It would provide an endowed trust fund for all children born into families with a net worth below the national median, progressively rising to $50,000 to $60,000 for children whose families are in the lowest wealth quartile. The program could be structured like the Earned Income Tax Credit, which uses a benefits phase-out schedule.
These individual trusts could grow in federally managed investment accounts and children could access the fund once they reach 18 years of age. The funds could be used only to finance a college education, a new home or a new business.
There are about 4 million babies born each year in the U.S. If the average trust is set at $20,000 per child and three-quarters of all newborns (3 million) are made eligible for the program, the baby bond program would cost about $60 billion per annum. Based on a crude estimate, the budget for the program would be less than 10 percent of the non-war spending budget for the Department of Defense. Although this simple estimate does not incorporate costs resulting from increased fertility incentives, it also does not incorporate savings resulting from reduction in other federal transfer programs associated with better-resourced young adults.
Bernanke expressed a perspective that locates the source of the black-white wealth gap in a fundamental deficiency in black behavior. The Bernanke perspective fits comfortably with the highly popular but incorrect view that in general, racial economic disparities in the U.S. are due to black ignorance or stupidity.
But the source of the black-white wealth gap has little, if anything, to do with bad financial judgments on the part of blacks. Savings behavior does not come close to explaining disparities this large. Arguably no one, regardless of race, creed or color, does much saving in America. Indeed, a number of studies over the past 40 years reveal that there is no difference between black and white household savings rates after controlling for income. Instead, the principal explanation for the enormous black-white wealth gap is the systemic denial of black households the capacity to accumulate wealth across generations.
Apart from the 250 years of slavery in which blacks themselves were both capital and financial assets for whites, and even upon emancipation, the national failure to endow black ex-slaves with the promised forty acres and a mule, blacks systematically have been denied the ability to accumulate property. Land acquired between 1880 and 1910 frequently was taken by government complicity, fraud and outright seizures by white terrorists. With the consolidation of the Jim Crow period, prosperous black communities and associated property were razed by white rioters in cities ranging from Wilmington, N.C., to Tulsa, Okla.
Restrictive covenants, redlining and general housing and lending discrimination also circumscribed black wealth accumulation. Today, as demonstrated by the ongoing evidence of predatory targeting of creditworthy black households and black neighborhoods for high-cost, subprime mortgage loans, blacks continue to face discrimination in credit markets.
Data from the 2002 Survey of Income and Program Participation shows the median white household has a net worth of $90,000. Latino households have a net worth of only $8,000, and black households have a net worth of a mere $6,000. More recent data from the 2007 Survey of Consumer Finances places median white household net worth at $170,400, median Latino net worth at $21,000, and median black net worth at $17,000.
A race-blind society that has not yet achieved race-fairness is a cruel society that locks in inequity. A race-fair society is one that breaks the link between race and advantage or disadvantage across generations. Public provision of a substantial trust fund for newborns from families that are wealth-poor would go a long way toward achieving that ideal.