In 2022, white residents of the Greater Boston area had about 19 times as much wealth as Black residents, $214,000 to $11,000, according to the Urban Institute. While the gap is particularly large in this part of the country, it's an issue across the US. In 2019, Black Americans held just $0.17 on average for every white dollar of wealth.
Much has been written about the racial wealth gap, but how has it evolved since emancipation? Why has it been so stubbornly persistent over the past 160 years? And what role does this country's original sin of slavery continue to play in its perpetuation?
The Princeton University economist Ellora Derenoncourt, PhD '19, takes these questions on in "The Wealth of Two Nations," a paper published last year in the Quarterly Journal of Economics. Beginning with the Civil War, Derenoncourt and her coauthors chart the way the racial wealth gap narrowed, stalled, and started to widen again in recent years. She writes, "While policies that address racial gaps in savings and capital gains can be a complement, only the redistribution of large stocks of wealth, like reparations, can immediately reduce the racial wealth gap."
This month on Colloquy: the history of the racial wealth gap.
This transcript has been lightly edited for clarity and correctness.
Your paper emphasizes the outsized role played by slavery in determining the speed of convergence between Black and white wealth. I wonder if you could talk about how these initial conditions set the table for a racial wealth gap that endures to this day.
It's helpful to begin with some of the basic facts that emerged from our new time series, which is that the white-to-Black per capita wealth ratio, that's the key statistic that we're interested in and that we measure over a 160-year period. In 1860, so that's before Emancipation, before the end of slavery in the United States, the gap was something like 60 to 1, for Black Americans, on average, holding just $0.02 for every dollar of white wealth. And bear in mind, of course, that at that point in time, 90 percent of Black Americans are enslaved.
The gap then falls to about 20 or 23 to 1 in 1870. And we document that that fall, most of it can be attributed to new wealth accumulation by the emancipated Black population as opposed to the elimination of slave wealth as a category of wealth, which is another outcome of the Civil War in the US. That reduction in the gap continues for another few decades.
And then the gap reaches pretty much the gap we have today by 1950. So it looks like a hockey stick if you lay it on its side, where convergence is rapid initially and then slows down. And taking a step back, we realized the most convergence that we've had in the racial wealth gap in the US happened in the first 50 years after Emancipation.
That's really striking and puzzling because that same period we associate with a very strong backlash and reaction against Emancipation and the Reconstruction Era that followed the Civil War. Indeed, that was the period where Jim Crow was established. So that raises this question of, how do we make sense of that?
And so it's useful to have a benchmark. What would be the path of convergence if Black and white Americans faced equal opportunities for wealth accumulation after the Civil War? And how do we compare that to what we see in the data? By "equal opportunities for wealth accumulation," we mean, concretely, equal savings rates and equal capital gains rates, or that the amount by which your wealth appreciates each period is the same for the two groups.
And that thought experiment, we feed into it the initial gaps after slavery, so that gap of 23 to 1 in wealth, and initial gaps in income. And we let the clock run. It tells us that we would have a gap of about 3 to 1 today, just from the initial conditions alone. Of course, in reality, convergence has been even slower. And we can attribute that to differences in the opportunities to accumulate wealth, even after Emancipation.
This is fascinating to me and counterintuitive for some of the reasons that you touched on in your response. I tend to think of the years, say, following the 1954 Brown v Board of Education desegregation decision and then the Civil Rights Act of '64, Voting Rights Act of '65, and then especially federal minimum wage law as a time when Black Americans had more opportunity to improve their standard of living and build wealth. But you're telling me that it stalled during that time, really after the 1950s. So what happened?
So again, it's useful to think about that benchmark where we say, what if we set certain things equal but leave the initial conditions as they are in wealth and income? And what we learn from that exercise is that we've set ourselves up for this hockey stick shape of convergence, where things move quickly initially, and then they slow down. And that quick initial movement really comes from Black wealth levels being so low, they almost have nowhere to go but up. They grow quite rapidly. They grow at faster rates than white wealth. But as Black wealth accumulates, then that growth naturally slows.
And it's helpful to come back to those parameters of wealth accumulation, the savings rates and the capital gains rates, to understand the dynamics a bit. As wealth grows, the importance of income and savings in contributing to wealth actually falls over time. And capital gains rates become more important because you imagine now your wealth is growing, and that wealth is going to appreciate by this capital gains rate factor, whereas the role that income plays is through savings. So you put some away each period, but you have this bigger and growing stock of wealth that's replicating itself. It becomes its own monster. And that comes back to these capital gains rates.
So I think in your paper, you mentioned that is it two-thirds of the wealth that's held by Black families is in the form of home ownership.
That's right. Housing wealth makes up about two-thirds of Black wealth portfolios.
So is that the reason for the issue? Black folks have most of their money and most of their wealth in assets like savings accounts and real estate that tend to or have historically had lower returns than, say, equities?
So if we look at the timing of this divergence that we observe in the racial wealth gap, it does start around the 1980s, when stock markets started to do really well. Now, housing markets also do really well, but stock prices appreciate about five times as much as housing prices in that same 40-year period. And that means that that take-off in wealth that is enjoyed by owners of stock equity, that's going to disproportionately accrue to the average white American as opposed to the average Black American, who, again, holds most of their wealth in housing.
And we do a little exercise in the paper just to confirm this, which is if we take portfolios and fix them to their 1980 composition and say, let's just allow house prices to grow, what would happen to the racial wealth gap? It would actually have fallen over this time period. And that, again, has to do with who's going to benefit most from house price growth? And it's the average Black portfolio.
If we repeat that exercise but then fix housing and let stocks only appreciate, then we see that we can more than 100 percent explain the divergence that's occurred in the last 40 years. So it absolutely does come back to these portfolios.
So when you say that Black Americans have not had access to the kinds of capital gains rates that other Americans have had access to, is that because they don't have access to things like retirement accounts, which, I take it, is the way that most folks accumulate wealth and equities?
So there are teams of researchers studying racial differences and access to good retirement accounts, racial differences, even in returns within an asset class. So there's work that documents that even within housing, Black returns aren't as high as white returns.
But the problem goes a bit further back. We're talking about the accumulation of these disparities over time. Initial conditions and initial very explicit exclusion from capital markets or even equal participation in labor markets under Jim Crow placed Black Americans on a trajectory that ensured that they would be low wealth today. And being low wealth, white or Black, is associated with holding very little wealth in equity. So that is the fundamental issue as opposed to some kind of innate not wanting to hold wealth and equity, although there are, again, scholars who look into those more behavioral questions.
Now I'd love to talk just a little bit about possible remedies that you propose in your work. So you argue that policies that redistribute large stocks of wealth, like reparations, could immediately reduce the gap in racial wealth inequality. I'd love it if you could take some time and just walk us through how that might work.
Our paper isn't a paper about optimal reparations design. It's more to get people to understand the level of investment we need to make progress on this kind of disparity. I will say, at least thinking about what the potential effects could be, there are some debates about what would happen. There are studies of the impacts of lotteries on people's future trajectories in terms of income and other outcomes that suggest that large shocks like that to your wealth end up being quite transitory.
But maybe what we'd really like evidence on that we don't have is what would be the impact of a reparations policy specifically? And there actually are one-off cases in US history. For example, in the territory that's now Oklahoma, there used to be the Cherokee Nation, which actually joined the Confederacy during the Civil War. There was slavery within the Cherokee Nation.
And upon rejoining the union through a treaty after the war ended, agreed to actually a form of reparations. The formerly enslaved within the Cherokee Nation received land and capital to work on farms, their own farms. And there is one economic study of the impact of that on racial wealth differences and on the kinds of choices, that farmers within the Cherokee Nation who received this redistributive-- who were the beneficiaries of this policy, that they changed actually their investment decisions. Rather than just continuing to grow staple crops, they grew fruit trees, which reflected security in one's property. It's going to take a while to reap the benefits, but it is a more lucrative crop.
So this is just one example, that reparations could have the effect of not just changing wealth levels, but also some of the investment decisions that people make that could then have knock-on effects, again, when we think about those parameters of wealth accumulation. So if you move into higher-return-yielding assets, you're going to experience higher capital gains rates.
You emphasize also the need for policies that address racial gaps in savings and capital gains. And this goes back to what we were talking about earlier with Black Americans not having access to the kind of investment instruments and to the kinds of returns that white Americans had, particularly since the 1980s, when there's a big run-up in the stock market that starts. I'd love you to talk a little bit about what those policies might look like and also why you assert in the paper that without redistribution, those policies would have only a transient effect on the wealth gap?
So remember our handy little thought experiment where we said, let's set savings rates and capital gains rates equal across the two groups in 1870 and let the clock run, knowing that there were these initial gaps? And that left us with a wealth gap today of 3 to 1. And if one were to look even further out, another 200 years, the wealth gap in this, again, thought experiment, this idealistic scenario, falls to around 2 to 1, meaning we're just on a multi-century path to convergence because of the size of those initial gaps.
Let's take some examples. Financial literacy program—encouraging people to invest money in the stock market or to save more—those are proposals that act on these parameters and try to close differences in savings rates and capital gains rates. But closing those differences, that just means we get back on our multi-century path to convergence. It doesn't mean we converge.
Right now, we're actually diverging. And that's because of these very different capital gains rates on average between the two groups. So that's what we mean when we say in terms of actually achieving parity, these tools that only act on differences in capital gains rates and savings rates, they're actually quite limited because at best, they can bring us back to a multi-century path towards convergence.
Your research fills in 100 years of missing data on the national racial wealth gap, from the 1880s to the 1980s. Could you say a little bit about the methodology you used? I can't imagine that there were great records for the late 19th and early 20th centuries. Or were there?
Well, ironically, we actually have very good information about the wealth of the population if you go far enough back in time. The US Census started to record information on wealth in 1850, focusing just on real estate or real property. But in 1860, they added a question on personal property, which was really meant to capture everything else of value that the individual owned.
They asked this question again in 1870. And then, unfortunately, they stopped asking the question in the Census. So that's why we say this gap in our knowledge begins in the 1880s, after the Census question is no longer available.
But it turns out that there is another source for us that gives us pretty good insight into the wealth of the population, and that is actually an extensive set of very general property taxes that were levied throughout the US in the late 19th and early 20th century, really up until the Great Depression, when the tax started to get winnowed down. So this is actually the origin of what today we know of as the property tax, the tax on your home and its values. But it turns out that back in the day, an assessor would not only assess your house and the land but also walk into the house and assess the furniture, the silverware, et cetera. So again, a very similar concept of personal property, what was valuable that's owned by the individual.
At this time, these taxes were levied at the state and even local level. And they were very important source of government revenue. And there was very good record keeping.
So all states had essentially the equivalent of an IRS office, an auditor's office that would publish a report on assessed wealth for that state's population. And six states located in the US South actually published this information separately for their Black and white populations. So we're going to zoom into those six states and digitize all the data that was available. And it goes down to actually the county level. So we know the wealth of the Black population in a given county versus the white population in that county for these six states covering several decades, exactly after the Census collection ends and up to the 1920s or so.
What we're going to do--because that just gives us Black wealth in a concentrated geographic region, and we want to understand the evolution of Black wealth nationally--is we're going to actually look at the growth patterns of Black wealth in those six states, and then we're going to extrapolate from that to project how Black wealth would grow nationally. Now, at first, that sounds wild. How can you do that? It's a very limited set of states.
Well, there are a number of reasons why this actually works quite well. First, at the turn of the 20th century, 90 percent of the US Black population is actually concentrated in about 14 states. And these six states specifically, they include states like Georgia and Arkansas, Virginia, et cetera. They themselves contain about 40 percent of the US Black population. So they're very important in terms of at least the Black community in the US.
But beyond that, they actually reflected a mix of different kinds of economies, both the very agricultural, plantation-based economies-- so think of Georgia, Louisiana-- but also more mixed economies in more urban states, like Virginia. And we actually show in the paper that for the measures that we can look at-- for example, real property in the Census in 1870 and home values in the Census, again, in 1930-- the pattern of wealth growth on that dimension for the Black population in these six states is identical to the pattern nationally. And we do a number of exercises like this to establish that, actually, these six states can be the basis for understanding how Black wealth grew in the US during this critical period.
We've also posted the data publicly so that other researchers can play around with it and explore. And we hope it will be the basis not only for our own future projects, really diving into the regional variation that we see, but also, again, for other scholars who are interested in these questions.
So what do you hope policymakers and the public will take away from this research? What would you like them to take away from it?
I think another maybe first-order message from the paper is, again, realizing that the most progress we've made in racial wealth convergence occurred in the first 50 years after Emancipation, or that, essentially, one could say the most important policy was Emancipation if we look at the long-run picture. That tells us that we need a societal investment and commitment kind of on the scale of the movement that ended slavery to address the legacy and aftershocks that we very much still see in statistics like the wealth gap. But that's just a symptom of a broader legacy that hasn't been dealt with.
Considering the current economic and particularly political climate, what do you see as the challenges and opportunities for addressing this issue and closing the racial wealth gap in the near future?
So I actually see a lot to be hopeful about. In the past several years, not even that much time, we've started to see more discussion of reparations in policy circles. And we even have examples of states establishing task forces or commissions to study the question in earnest.
For example, the state of California has a committee studying reparations and putting forth proposals. And the state of New York, I believe there's a bill now just waiting for the governor's signature to establish something similar and to look at what is it at the state level.
Now, these are very interesting states to be first movers because, of course, their own history with slavery is very different from, say, the history of slavery in Mississippi or Louisiana. But they recognize that it really wasn't just slavery, but also the system of laws, and even beyond the law, societal practices that prevented Black economic progress that need to be addressed. And both California and New York have identified where in their state's history that is possible.
