The gap in ethnic wealth is the largest and most persistent economic inequality between black and white Americans. According to SCF +, the average black American’s wealth over the past few decades has been less than 20 cents for every white dollar.
Such persistent racial disparities in resources have fueled ongoing discussions about what principles can stop this form of inequality. Various studies have emphasized the importance of ethnic income and education convergence (Bertocchi and Dimico 2010, Margo 2007 and 2016, Chetty et al. 2018), housing policy (Akbar et al. 2019; Kermani and Wong 2021), and finance (Bertocchi and Dimico 2010) and Carabarbunis 2021). Others discuss the role of support in families with children (Zewde 2020) and compensation for slavery in reducing racial inequality (Darity and Mullen 2020).
Our new study (Derenoncourt et al. 2022) contributes to this discussion by linking the current ethnic wealth gap with its past and answering the following questions: How did ethnic wealth inequality develop after liberation? How much can history explain today’s dynamics in the gap between ethnic resources?
US Ethnic Resources Spacing: 1860-2020
We create a long-term series of ethnic wealth gaps defined as the black-and-white ratio of wealth per capita by drawing on a myriad of data sources, including fully calculated digitalized censuses, primary state tax records, national reports, and annuals. The study of black economic progress, and the historical and modern wave of the Survey of Consumer Finance (SCF +). From the 1880s to the 1980s, when most modern resource surveys with race data began, our large-scale data collection and coordination efforts filled nearly 100 years of missing national resource gap data. We present in Figure 1 our final series of per capita white-black wealth ratios from 1860 to 2020.
Starting from a ratio of about 60 to 1 on the eve of the Civil War, the ethnic wealth gap has evolved into a ‘hockey-stick’ pattern, from 10 to 1 in the 1920s and from 7 to 1 in the 1950s, where it has been hovering since. The period of the fastest convergence was in the early decades after the release. In 1860, before liberation, when 89% of the black population was enslaved and thus legally barred from owning any kind of property, the average black American owned less than 2 cents per white dollar of wealth. Shortly after the abolition of slavery in the United States, the per capita white-black wealth gap narrowed by about 60%. This unbroken uniformity occurred at a time when the initial exercise of the rights of black Americans during the Reconstruction led to the trimming of ethnic order in the 1900s. However, even as Jim Crow’s rule reached an increasing level, the gap between ethnic resources continued to narrow, further decreasing by 10% (in the ratio of 9 to 1 between 1930).
In the decade of the Great Depression, New Deal-era relief and social insurance policies, despite the tendency to exclude regions or sectors with a large representation of black workers, we estimate a relatively stable gap of about 9: 1. The 1940s and 1970s saw dramatic changes in the landscape of ethnic progress and inequality. Yet, from a long-term perspective, such changes seem to have had little effect on the convergence of ethnic resources. Finally, the last 70 years of our time series have been marked by stagnation, at a level between 5 and 6, and, in recent decades, the wealth gap has widened rather than closed.
The driver of convergence: racial differences in initial status, savings and capital gains
We rationalize the overall shape of the convergence arising from the above data series using a stylized theoretical framework for resource extraction. This framework considers three distinct channels of wealth accumulation: (i) the initial state immediately after the Civil War, (ii) the accumulation of savings-induced wealth, and (iii) capital gains.
Using this framework, we first simulate a hypothetical scenario where two ethnic groups enjoy equal conditions for resource acquisition after 1870. The resulting asset spacing is presented in Figure 2 (solid black line). We see that on equal terms for acquiring wealth after slavery (in other words, uniform savings rates and capital gains for black and white Americans), the gap between ethnic wealth today should be about 3.1. Despite the equal conditions for the acquisition of wealth, this large and long-lasting gap emphasizes the continued relevance of the initial difference in wealth in today’s wealth gap, even after 150 years of release.
Compared to this ideological scenario, wealth acquisition conditions between black and white Americans were not the same, and uniformity has slowed down accordingly. Our analysis shows that savings rates (s) and capital gains (q) have been consistently lower for black Americans than their white counterparts (see gray dotted line in Figure 2). The slow accumulation of incentives by black Americans has been a major driver of convergence dynamics for the past century and a half. More recently, however, ethnic differences in capital gains have played a more influential role in shaping the evolution of ethnic wealth gaps and leading to deviations from its historically convergent path.
Recent Differences: Introduction to Portfolio Composition
Beginning in the 1980s, ethnic wealth gaps have completely stagnated and even begun to widen. This period of variation can be characterized by two characteristics. On the one hand, the accumulation of ethnic income has come to a complete standstill, thus contributing to the accumulation of savings-induced wealth in the convergence of ethnic wealth. On the other hand, the capital gains of assets owned by white Americans have increased much more than the assets owned by black Americans.
Examining the wealth portfolios of white and black Americans can explain such a strong increase in racial differences in terms of capital gains. In Table 1, we present the shares of different asset classes with their total asset value.1 On average, white household portfolios are more diverse than black households, with about 40% in wealth housing and 20% in equity. Black households, by comparison, hold about 60% of their assets in housing while investing less than 10% of their assets in equity. This gap in equity holdings, combined with an upward stock market, has led white households to benefit more from higher capital gains in the equity market since the 1980s, widening the ethnic wealth gap in capital gains.
Table 1 Black and white portfolio assets share
Our study emphasizes the role of the outside of the initial state under slavery in determining the rate of aggregation between black and white resources. In light of these results, we conclude that policies that redistribute large stocks of wealth, such as compensation, immediately reduce racial wealth inequality. Although policies aimed at portfolio composition or increasing income convergence may bring us back to a convergent path, it can take hundreds of years to take effect.
Nevertheless, we argue that these two types of policies are highly complementary if policymakers aim to continuously close the ethnic wealth gap, because policies that redistribute stock of wealth without resolving the wealth gap between savings and capital gains have a transient effect on wealth gap.
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Bertocchi, G and A Dimico (2010), “Historical roots of inequality”, VoxEU.org, 14 November 2010.
Boerma, J and L Karabarbounis (2021), “The Gap of Revenge and Continued Ethnic Resources”, NBER Working Paper No. 28468.
Chetty, R, N Hendren, MR Jones and SR Porter (2018), “Race and Economic Opportunities in the United States”, VoxEU.org, 27 June 2018.
Darity Jr., WA and AK Mullen (2020), From here to equality: Compensation for black Americans in the twenty-first centuryChapel Hill: University of North Carolina Press.
Derenoncourt, E, CH Kim, M Kuhn and M Schularick (2022), “Resources of two nations: the gap between US ethnic resources, 1860-2020”, NBER Working Paper No. 30101.
Kermani, A and F Wong (2021), “Racial Discrimination in Housing Returns”, NBER Working Paper No. 29306.
Margo, R (2007), Race and Schooling in the South, 1880-1950University of Chicago Press.
Margo, R (2016), “Perseverance for Racial Discrimination in the United States”, VoxEU.org, 08 June 2016.
Zewde, N (2020), “Universal child bonds reduce black-and-white wealth inequality, gradually increasing the net worth of all young adults”, Review of black political economy 47.1: 3-19.
1 Includes assets in the form of equity and liquid assets defined contribution (DC) pension.