Examining Common Misconceptions About the Racial Wealth Gap

The team at Duke University’s Samuel DuBois Cook Center on Social Equity undertook a meta-study to identify commonly held beliefs about racial wealth inequality in the United States. Why do so many of us get it wrong?

Our assessment of both technical research papers and popular commentaries leads us to conclude there are four key misconceptions Americans often have about the wealth disparity between Black and White citizens.

Americans Confuse Wealth with Income

First, Americans frequently confuse wealth with income. Wealth, or net worth, is the stock of personal property, composed of the value of assets like land, financial assets, retirement accounts, homes, and businesses minus the value of debts, including mortgage payments, student loans, and credit card obligations. Income is a flow of resources primarily composed of earnings, transfer payments minus the value of debts, and interest on assets. Wealth provides the superior gauge of opportunity and economic security for individuals and families, particularly since higher levels of net worth insulate them from the effects of unanticipated losses in income due to joblessness, catastrophic illnesses, or other emergencies.

Americans Underestimate the Size of the Wealth Gap

Second, Americans generally believe the racial gap in wealth is far smaller than its true value. Research conducted by Yale psychologists Michael Kraus and Jennifer Richeson demonstrates Americans typically estimate blacks have $90 in wealth for every $100 held by whites, while the actual figure is closer to $10 per $100. This, of course, explains the urgency of addressing racial inequality in wealth.

Tracking the Wealth Gap Requires More Than Ratios

Third, Americans can be misled by inadequate measurements of the gap over time. For example, President Biden recently said the racial wealth gap is the lowest it has been in 20 years. It is true that the ratio of white to black wealth has fallen somewhat over the past two decades, but the dollar amount of the gap has surged upward. The dollar value better captures the gulf in resources, opportunity, and financial security. 

To illustrate, between 2019 and 2022, the white–black ratio of average wealth fell from 6.9 to 1 to 6.5 to 1, but the money value of the difference in wealth rose from $841,000 to $1.15 million, a 37.5% increase. Accounting for inflation, it still constituted a 21% increase.

The gap per person amounts to approximately $400,000. The total gap overall is approximately $16 trillion.

Popular measures like the provision of $25,000 as a down payment on a home will make a little headway with a gap of this magnitude. With median home prices in many urban areas in the vicinity of $500,000-$600,000, any homebuyer would have to come up with substantially more money to make a meaningful down payment. Plus, they still would have to meet a mortgage, probably amounting to $4000-$5000 monthly for the median home. The typical black household has a monthly income of about $4500.

Piecemeal and uncoordinated state and local efforts parading under the label of reparations hold no greater promise for closing the racial wealth gap. The combined budgets of all state and local governments amount to less than $5 trillion; as noted above, the amount required to close the racial wealth gap is at least $16 trillion.

Economists Measure the Median Instead of the Mean

Finally, disproportionate attention frequently is given to the racial wealth gap at the median instead of the mean. The gap at the median is measured by the difference in net worth between black and white households at their respective distributions of wealth. The intense concentration of wealth at the upper end of the distribution means that calculating the dollar value of the disparity at the median will necessarily be substantially lower than the disparity calculated at the mean since the latter reflects households with wealth levels at the upper end of the distributions.

What This Means for Policymaking

Given that 97 percent of the nation’s personal wealth is held by households with a net worth above the median, a focus on the median gap fails to capture vast amounts of wealth. Further, the staggering concentration of wealth above the middle or 50th percentile households is not merely due to a handful of white billionaires at the very top of the wealth spectrum. One-quarter of white households have a net worth of approximately $1 million, compared to only four percent of black households. For the wealth gap measure to be truly meaningful, it should be calculated at the conventional average or mean, making closing the gap a much more urgent task for policymakers and others.

Adjusting the mean difference in black and white wealth by household size yields a per-person gap of about $400,000. Out of around 47 million black Americans, 40 million or so are descendants of persons who were enslaved in the United States. Thus, the total sum required to eliminate the racial wealth gap is in the vicinity of $16 trillion. 

Policymakers would be wise to consider that any effective policy for closing the racial wealth gap must mobilize, at minimum, sufficient resources to meet these high targets.

Find the full study here.

 

Support for this research project was provided by the Robert Wood Johnson Foundation’s Policies for Action program. The views expressed here do not necessarily reflect the views of the Foundation.

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