The Roots of the Racial Wealth Gap

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(This blog post is part of a series. Read the previous post here.)

“The extent of and continuing increase in inequality in the United States greatly concern me…. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.”

Janet L. Yellen, Chair of the Board of Governors of the Federal Reserve System, October 17, 2014.

The racial wealth gap has been the subject of much focus lately. But where did it come from?

As Interise’s new issue paper explores, the racial wealth gap has its roots in many policies throughout US history. Policies like the Homestead Act of 1862, New Deal legislation, and the GI Bill of Rights helped to develop the white middle class by enabling them to build assets, but largely excluded African-Americans and other minority groups. For example, the GI Bill of Rights included paying for tuition and low-interest mortgages for veterans, but largely excluded African-Americans: of 67,000 mortgages insured by the GI Bill in New York and part of New Jersey, fewer than 100 went to minorities. African-Americans have also been subject to redlining and other discriminatory lending practices in their efforts to buy homes and accrue assets.

More recently, the housing crisis and the Great Recession had a disproportionate impact on communities of color that exacerbated the effects of these historical policies. Leading up to the Great Recession, lenders targeted minorities for predatory mortgages. High-income African-Americans were nearly twice as likely to receive subprime loans as low-income whites were, and black and Latino households were almost 50% more likely than white households to face foreclosure.

Today, anti-poverty policies include people of color, but have largely shifted away from asset development and towards subsistence. Those that do focus on asset development do not tend to benefit low-income families. For example, $300 billion in federal funds is spent each year on tax credits that help asset development. Over 90% of that amount goes to households that make more than $50,000 a year. $90 billion of that total amount goes to the mortgage interest and property tax deductions, which actually perpetuate inequality:

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Source: Laura Sullivan et al., Equitable Investments in the Next Generation: Designing Policies to Close the Racial Wealth Gap, report, Institute on Assets and Social Policy (IASP) and the Corporation for Enterprise Development (CFED), December 2016, 7, accessed July 26, 2017.

Why does this matter for small business? The next post in this series will focus on how the racial wealth gap has affected small business and explain why, in order to fully enable minority small business owners to reach their potential, and to build a more inclusive and equitable economy, policies will need to focus at least in part on the long-term and building wealth for people of color in general.