Wealth Distribution
Currently the richest 1% holds about 38% of all privately held wealth in the United States while the bottom 90% whole 73% of all debt. (Walter 1) The wealth gap is a prevalent issue because it determines how well equipped a family is to handle their current financial situation and to make investments for their future. These numbers are stating that 1 percent of the U.S. population makes essentially over one third of the money in the country and 90 percent of the U.S. population accounts for more than three fourths of the country’s total debt. This is a prime example of how the way money is distributed in the world is lopsided. This wealth gap is not only due to aspects such as opportunity and work ethic but is also attributed to uncontrollable factors such as race. The unequal distribution of wealth in the United States can date back all the way to colonial times and today the gap has just increased. Barriers that help to create the increasing wealth gap of blacks and whites must be addressed if it is sought to ensure all Americans are able to adequately support their families.
Wealth is the value of a household's property and financial assets minus the value of its debts. After World War II all the way into the 1970s there was a lot of economic growth and financial prosperity. The amount of income raised at fast pace and this caused inflation between the late 1940s and early 1970s. However during this time the wealth gap between those with higher income and those with middle to lower income, although substantial, do not change dramatically. Beginning in 1970s the economic growth slow down and the wealth gap expanded. Income for families in the middle to lower part of the financial ladder decreased fiercely while families at the top of the financial ladder continued to increase at a strong pace. The concentration of money coming in to the families at the very top of the distribution reached levels that hadn't been seen since the Roaring Twenties. Data showed that the top 3% of the distribution held over half of the overall wealth in the nation.
According to Forbes, in 1982 the “poorest” American that was put on the Forbes 400, a list of the wealthiest people in the nation, had a net worth of $80 million. The average member of that list held a net worth of $230 million. In 2016 you need a net worth of $1.7 billion to be on the same list and the average member had a net worth of $6 billion which was over 10 times the average amount from the list in 1982.(inequality.org) This is a prime example of the rich getting richer. A real life example of this concept is Donald Trump. In 1982 Donald Trump had a net worth of $200 million, and now, as of 2018, Donald Trump now has a net worth of $3.1 billion. Although this is the case for the rich, it is not the same case for average American families of the 21st-century. Between the years 2000 and 2011 most households in the US saw their net worth fall. Average families make up about 70% of the US population while the people on the Forbes 400 list make up less than 1%. The wealth gap in the United States is immense is going to continue to flourish.
The topic of race is not a new issue in America. In addition racial bias being shown in law-enforcement and in the justice system it has also been connected to economic inequality and the racial wealth divide. Data from Forbes shows that for every dollar that the median African-American household makes, the median white household brings in $19. The racial wealth gap is due to historical injustices that date all the way back to slavery and can also be traced to other grievances such as segregation and redlining. The injustices of the past also affect today due to money being passed down across generations and wealth accumulating over time. In The Son Also Rises, Gregory Clark says, “the residual evidence of wealth remains for 10 to 15 generations”. Most families in the United States are only four generations removed from slavery and only one generation removed from segregation, it is only surprising that the wealth gap is not greater. Another factor in the wealth gap in America is taxes, low inheritance, and estate and capital gains. Also what minimal taxes exist for the wealthy are smothered with loopholes. According to a study done by the Institute for Policy Studies, in 2010, the richest 400 households in America took 16 percent of the capital gains, which was 300 million dollars each, but paid the same tax rate as an average worker making 80,000. At the same time, a loophole allowed the wealthiest Americans to avoid 100 billion dollars in estate and gift taxes since the year 2000.
A study from Forbes shows, the people who make up Forbes 400 list of the richest Americans have as much wealth as all of the African American households in America put together plus one-third of America's Latino households. (inequality.org) In other words, 400 people have as much money as 16 million African-Americans and 5 million Latino households. The enormous distribution difference between whites and minority races impact them by not giving the families the money they need to do endeavors such as build up savings to finance their children’s college tuition, provide financial security in times of unemployment, and have comfortable retirement savings and inheritance to children.
According to a report by the Institute for Policy Studies, the top 100 corporate CEOs have a total of $4.7 billion in their retirement funds. In order to reach that amount you would have to add up the retirement savings of approximately 60 percent of African American families. In other words, 100 CEOs have the same amount of retirement savings as 11 million African American families. (epi.org) The racial retirement savings gap is a reflection of the larger problem of institutionalized racism in America. This is prevalent in smaller categories such as education and employment. Another factor it plays into is wages. According to a report by the Institute for Policy and Studies, black men only make 75 cents compared to the dollar of their white counterparts. Also studies show that white families’ total wealth, which includes property, savings, and investments has risen 84 percent which is three times that of the African American population. (epi.org) This can be due to the homeownership differential between blacks and whites. According to a report by Harvard University’s Joint Center for Housing Studies, nationally, in 2016, only 42.2 percent of African Americans owned homes compared to 71.9 percent of whites, and residential segregation within communities means that African Americans and Hispanics who do own homes, their houses are worth less and are much less valuable that the homes of whites. Also many banks are buying foreclosed houses and renting them out. This in turn means that the income of African Americans is turning into the wealth of already rich bankers instead of wealth for themselves.
The main step to reducing the wealth gap is to build wealth throughout a lifetime, but a big reason why minorities have a hard time building wealth is because they do not start with a building block of wealth. Individuals that start their life with little to no wealth obviously are in a worse position to build wealth as opposed to those individuals who start out with help. Those who start out with nothing often end up stuck at the bottom of the wealth distribution for their lifetime, and they end up leaving their children in the same predicament, and the cycle continues. More than half of white families end up with more wealth than their parents, while only 23 percent of African American families are able to do the same. This leaves African Americans in a cycle which is going to be hard to break, which derived from slavery and segregation. According to Jeffery P. Thompson, head of the National Bureau of Economic Research, white families are twice as likely to gain an inheritance from their parents. Furthermore, when black families do gain an inheritance, the white families’ inheritance will be three times greater. In other words, even those African American families who inherit wealth from their parents, the racial inheritance gap is much larger, compared to the white families who inherit money. Dr. Darrick Hamilton, Professor of Economics and Urban Policy at The Milano School of International Affairs, and William Darity Jr., Professor of Public Policy at Duke University, have concluded that, “inheritance, bequests an in-vivo transfer account for more of the racial wealth gap than any other behavioral, demographic, or socioeconomic indicator.” White households often inherit more money than black households and they do it much more often. Being fortunate enough to be granted an inheritance from your parents should not be the determining factor in achieving financial stability, and in the end generational wealth.
Credit card debt is especially harmful for African Americans who often deal with discriminatory borrowing practices. A recent study on credit card debt shows that African Americans on average pay a higher IPR that white borrowers. Higher education debt needs also to be addressed. A study by Demos suggest that “if the current borrowing patterns continue, student debt levels will reach $2 trillion sometime around 2022.” However, student loan debt is not distributed equally, but rather falls mostly on low income students and students of color. This is due to the government spending less money on higher education and is starting to place the burden on the students. Instead of this, the federal and state governments need to fund and invest in the next generation.
There are many factors that contribute to the racial wealth gap, and one big one is the income inequality. Although this is the case, saving is an important part of gaining wealth and maintaining financial stability. There is no doubt that there are other financial priorities that come before saving and it is often difficult to set aside money when it is hard to even make ends meet, but even setting aside small amounts of money is the beginning to building wealth. T. Rowe Price Group is an American publicly owned global asset management firm and they offer plans for minority families to build wealth.
The first step is to live off of 70 percent of income. In order to save for the future, families should make it a goal to only live off of 70 percent of their salaries and set the other 30 percent into savings. That 70 percent of income would go to other things such as car payments, rent, credit card payments, and day to day expenses. The next priority is to create an emergency fund. The reserve should be large enough to pay three to six months of expenses and bills. If starting for scratch it should take about two years to fully fund the emergency fund. Another priority is to get retirement funds prepared. Time, in this case, is helpful and the sooner saving is started the better. This will provide more flexibility in the future and a bigger cushion when retirement does come. Other big financial payments that require saving, such as college, have other ways to be funded. However, outside of a pension and social security, the only way to fund retirement is out of pocket and through personal savings.
Another solution to the wealth gap that has been previously proposed is the idea of a baby bond. A baby bond is an endowment given to Americans at birth and is maintained by the federal government until the age of 18. The bond works the same as Social Security and can be used in various ways in the future such as paying for college, buying a home, or starting a business. This idea of a baby bond has been introduced before by Hillary Clinton during her 2008 campaign. Although sum of $5,000 that she proposed is less than desired, the idea is something that has not been explored before, at least by the United States. Britain briefly experimented with a baby bond proposal although it later got terminated by Tory Austerity. Every newborn child was given a 250 pounds (about $346), doubled for poorer families, under the baby bond plan. The money was paid into the child’s trust fund and was held there until the recipient was 18. Then they were able to access it, however there were strict government controls on how they were able to use it. The money could only be used on “worthwhile” projects such as a deposit on a house, to further education or training, starting up a business, or longer-term saving.
A plan like this executed in the United States would be very beneficial, but the money would have to come from somewhere. The baby bond does not need to increase the deficit in the United States. A recent report by CBO, the Congressional Budget Office, says that tax credits right now mostly benefit the wealthy, which costs nearly $1 trillion per year. This money can be used to fund the baby bond program, and over time can get rid of the wealth gap. Dr. Darrick Hamilton, Professor of Economics and Urban Policy at The Milano School of International Affairs, and William Darity Jr., Professor of Public Policy at Duke University, suggest that a bond that goes up to $50,000 for the lowest wealth quadrant could close the racial wealth gap in three generations.
According to InCharge Institute of America, to start off, a strategy that is generally used to decrease debt is to get in the habit of paying with cash. This is a way to get a handle on how much money is actually available, how much of it is being spent, and where all of it is going. Another strategy is to only buy what is needed. Emotional and impulse spending are habits that lead to eventual debt. Also before making any big purchases, sleeping on it and giving it some thought is a good strategy to avoid impulse buys. Eating at home is another way to save money. An average household spends $100 a week on eating out. That translates into $5,200 a year. If that amount was put into a savings account for ten years with 5 percent interest it would equal $68,000 total. This, however, is unrealistic, but limiting fast food and dining out can save a lot of money in the long run. There is also professionals who provide debt relief solutions such as credit counselors and debt managers. These people provide a clear picture of the different financial options possible and make it easier for an individual to review all debt-relief alternatives. This in turn will lead to less money being spent to paying off debt and more money being put into savings. (incharge.org)
The wealth divide in the United States is tremendous and their are many factors that have contributed to this that date back decades. Although the problem roots years back its effects are still prevalent today. The enormous distribution difference between whites and minority races impact them by not giving the families the money they need to do endeavors such as build up savings to finance their children’s college tuition, provide financial security in times of unemployment, and have comfortable retirement savings and inheritance to children. The barriers that help to create the increasing wealth gap of blacks and whites must be addressed if progress is to made. Barriers such as poor saving habits, a lack of generational wealth, and debt are the very things that are holding African Americans back from decreasing the gap and in turn it is still increasing. Overall the wealth gap is a solvable problem and it will take time, but the first step needs to be made.