Current Policies to Blame for Wealth Gap Increases

MASSACHUSETTS—A NEW research study completed earlier this year at Brandeis University shows the dramatic gap in household wealth that now exists along racial lines cannot be attributed to personal ambition and behavioral choices, but rather reflects policies and institutional practices that create different opportunities for whites and Blacks.

So powerful are these government policies and institutional practices that for typical families, a $1 increase in average income over the 25-year study period generates just $0.69 in additional wealth for an Black household compared with $5.19 for a white household. Part of this equation results from Black households having fewer opportunities to grow their savings beyond what’s needed for emergencies.

“Public policies play a major role in widening the already massive racial wealth gap, and they must play a role in closing it,” said Thomas Shapiro,Ph.D., director of the Institute on Assets and Social Policy and a principal author of the report.

The study, “The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide,” was conducted by the IASP. The research followed nearly the same 1,700 working-age households over what is now a 25-year  period, from 1984 to 2009 to understand what happens to the wealth gap over the course of a generation and the effect of policy and institutional decision making on how average families accumulate wealth.

The new study found the wealth gap almost tripled from 1984 to 2009, increasing from $85,000 to $236,500. The median net worth of white households in the study has grown to $265,000 over the 25-year period compared with just $28,500 for Black house- holds. The dramatic increase in the racial wealth gap has accelerated despite the country’s movement beyond the Civil Rights era into a period of legal equality and the election of the first Black president.

The resulting toxic inequality now threatens the U.S. economy and indeed, American society, the study concludes. Researchers were able to statistically validate five fundamental factors that together account for two-thirds of the proportional increase in the racial wealth gap.

Those five factors include the number of years of home ownership; average family income; employment stability, particularly through the Great Recession; college education, and family financial support and inheritance.

“And what these particular factors provide is compelling evidence that various government and institutional policies that shape where we live, where we learn and where we work propel the large majority of the widening racial wealth gap,” said Shapiro.

Each of the factors highlights a number of specific reasons that whites and Blacks accumulate wealth at different rates. When it came to housing, for example, home equity rose dramatically faster for whites due to the following: White families buy homes and start acquiring equity eight years earlier than Black families. Due to historical wealth advantages, white families are far more likely to receive family assistance or an inheritance for down payments.

The ability to make larger up-front payments by white homeowners lowers interest rates. Residential segregation places an artificial ceiling on home equity in non- white neighborhoods. Based on these and other historical factors, the home ownership rate for white families is 28 per- cent  higher.

“The report shows in stark terms that it’s not just the last recession and implosion of the housing market that contributed to widening racial wealth disparities,” said Anne Price, director of the Closing the Racial Wealth

Gap Initiative at the Insight Center for Community Economic Development. “Past policies of exclusion, such as discriminatory mortgage lending, whichcontinues today, ensure that certain groups reap a greater share of all America has to offer while others are left out.”

The report recommends that policymakers take steps such as strengthening and enforcing fair housing, mortgage and lending policies; raising the minimum wage and enforcing equal pay provisions; investing in high-quality childcare and early childhood development, and overhauling preferential tax treatments for dividend and interest income and the home mortgage deduction.