Why the US must tackle the racial and ethnic wealth gap

Last week, economists, advocates, and organizers from across the country joined each other at the Center for Global Policy Solutions’ Color of Wealth Summit to examine wealth inequality and economic growth in the United States through a racial lens. A recent essay by Federal Reserve Bank of St. Louis economists’ Ray Boshara, William Emmons, and Bryan Noeth does an excellent job of illustrating the problem.

The essay shows that minorities—African Americans and Hispanics in particular—tend to hold their wealth in illiquid assets (or those assets that can’t be turned quickly into cash and have lower asset diversification) compared to whites and Asians. They also find that African Americans and Hispanics were more likely to have high levels of debt relative to Asians and Whites. Their findings, while not entirely surprising, are incredibly important for future U.S. economic stability and growth.

These disparities could stem from a number of causes, including disparate access to financial services, low wages for African American and Hispanic workers, and the relative lack of intergenerational wealth transfers. But the implications for individual African American and Hispanic families, as well as for U.S. economic growth and stability more broadly, cannot be overstated.

For these individual households, lower asset diversification means they are less able to smooth their consumption during economic shocks that affect their primary investment—their housing. Writ large, what happens when a large number of American families can suddenly no longer afford to spend their incomes on the goods and services that keep our economy running?  According to economists Atif Mian at Princeton University and Amir Sufi, at the University of Chicago, these kinds of disparities in wealth and debt accumulation, especially prevalent among communities of color,led to the Great Recession of 2007-2009.

In their 2014 book “House of Debt,” Mian and Sufi show that counties with the largest decline in total net worth due to falling housing prices cut back most on spending. Those were the households that probably did not hold other assets that could quickly be turned into cash. Essentially, their research shows that families who hold more debt are less likely to spend money to help sustain or grow the economy.

Prince George’s County in Maryland is an all too real example of the economic consequences of plummeting housing prices that have failed to rebound. The predominantly black suburban county near Washington, D.C. is recovering from the housing crisis more slowly than nearby mostly white communities.

By 2044, however, more than half of the U.S. population is expected to belong to a minority group. Policymakers would do well to consider the effects on the U.S. economy if large swaths of U.S. families are constrained by limited diversification and high levels of debt.  Efforts to end still pervasive racial and ethnic discrimination in pay and hiring, increase access to quality financial tools, and forgive high levels of debt amid sharp economic downturns may be critical to future economic growth. ​

This article is published in collaboration with The Washington Centre for Equitable Growth. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Jessica Fulton is the Policy Outreach Manager at the Washington Center for Equitable Growth.

Image: Morning commuters are seen outside the New York Stock Exchange, July 30, 2012. REUTERS/Brendan McDermid.