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The racial wealth gap shows how markets can fail because they don’t always treat everyone equally. For example, in the past, Black families were often kept out of programs that helped people buy homes or build wealth, like the Homestead Act or the G.I. Bill. Today things like unfair loan practices or lower pay for the same work make it harder for Black families to catch up. People also sometimes wrongly believe that success is only about working hard, which ignores the unfair rules that existed before.

The standard equilibrium model assumes that everyone has an equal chance to succeed and that markets are fair, but the racial wealth gap shows this isn’t true. Things like discrimination in jobs, unfair loans, and lower home values in Black neighborhoods mean the market doesn’t work the same for everyone. These problems make it impossible for the market to reach a fair balance because the starting point isn’t equal for all groups.

The standard market equilibrium model doesn’t always work because it assumes everything is fair and equal, but that’s not true in real life. For example, discrimination in housing or jobs creates unfair advantages for some and disadvantages for others. This could lead to externalities, like less money for schools and neighborhoods in poorer areas, which hurts everyone in the long run. Also if big companies or banks have too much power, they can set rules that keep things unfair, making it harder for the market to balance itself.

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The racial wealth gap is a long-standing issue shaped by historical policies and systemic inequities, and it continues to affect millions of families today. Black and Hispanic families, policymakers, financial institutions, and society as a whole are key stakeholders in addressing this challenge. Policies like baby bonds, fair lending practices, and improved access to education and homeownership can create pathways to wealth-building for those who have historically been left behind.

The data clearly highlights the persistence of this gap, with white households consistently holding significantly more wealth than Black and Hispanic households. This disparity not only reflects economic inequality but also raises important moral questions about fairness and justice. Programs like HUD and baby bonds are steps in the right direction, as they help reduce barriers to wealth accumulation for marginalized groups.

Economic principles such as risk aversion, diminishing marginal utility, and externalities provide valuable insight into this issue. Lower-income families, particularly those from marginalized groups, often face higher levels of financial instability, making them more vulnerable to economic shocks. This underscores the importance of policies like baby bonds, which provide a financial safety net and reduce the risks associated with poverty. Additionally, the principle of diminishing marginal utility supports redistributive policies like progressive taxation, as reallocating resources to those in need can generate greater overall social welfare. Addressing externalities, such as the societal costs of underinvestment in low-income communities, is another key consideration in designing effective policies.

Moving forward, actionable steps include scaling up asset-building initiatives, enforcing anti-discrimination laws, and increasing access to education and job training for underserved communities. These policies not only address inequality but also improve overall economic efficiency by ensuring that more people can contribute to and benefit from the economy. Policymakers must also focus on addressing systemic inequities that create externalities, such as inadequate funding for schools and neighborhoods, which harm society as a whole.

While eliminating the racial wealth gap entirely may not be achievable in the short term, these strategies represent meaningful progress toward a fairer and more inclusive economy. Addressing the inequities of the past requires intentional, sustained efforts to empower communities and create opportunities for generational wealth. By applying economic principles and prioritizing equity, we can lay the groundwork for a future where economic success is more attainable for everyone.

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Risk Aversion:

This reflects individuals' tendencies to avoid uncertain outcomes. The article highlights how lower-income households are more vulnerable to economic shocks, such as those caused by the Covid-19 pandemic. This connects to risk aversion as these households have limited financial buffers, highlighting the importance of government interventions like stimulus checks to stabilize consumption.

Diminishing Marginal Utility:

As wealth increases, the additional satisfaction gained from each dollar diminishes. This principle justifies redistributive policies, such as progressive taxation, where higher-income households pay more taxes, redistributing resources to those in need. The article ties this concept to the pandemic by showing how financial assistance provided critical relief to disproportionately affected low-income groups.

Progressive Taxation:

Higher tax rates on wealthier individuals are designed to reduce inequality, which was made worse during the pandemic. Redistribution policies aim to enhance social welfare by targeting resources toward groups with the highest marginal utility.

Income Redistribution Policies:

These policies, like stimulus checks and unemployment benefits during Covid-19, help mitigate financial instability. The article demonstrates how such measures support vulnerable groups, maintaining economic stability and addressing inequality.

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Billions in aid has been dispensed, and the social safety net has been reinforced. Will there be more ambitious steps to address longtime inequities?

The heavy hand of a history studded by unfair housing, zoning and lending policies has prevented generations of Black families from gathering assets. Credit... Harold M. Lambert/Getty Images

Not since Lyndon Baines Johnson's momentous civil rights and anti-poverty legislation has an American president so pointedly put racial and economic equity at the center of his agenda.

President Biden's multitrillion-dollar initiatives to rebuild infrastructure in neglected and segregated neighborhoods, increase wages for health care workers, expand the safety net and make pre-K and college more accessible are all shot through with attention to the particular economic disadvantages that face racial minorities. So were his sweeping pandemic relief bill and Inauguration Day executive orders.

Yet as ambitious as such efforts are, academic experts and some policymakers say still more will be needed to repair one of the most stubborn and invidious inequalities: the gap in wealth between Black and white Americans.

Wealth - one's total assets - is the most meaningful measure of financial strength. Yet for every dollar a typical white household has, a Black one has 12 cents, a divide that has grown over the last half-century. Latinos have 21 cents for every dollar in white wealth.

Such disparities drag down the American economy as a whole. A study by McKinsey & Company found that consumption and investment lost because of that gap cost the U.S. economy $1 trillion to $1.5 trillion over 10 years, or 4 to 6 percent of the projected gross domestic product in 2028.

Mr. Biden started talking about the wealth divide on the campaign trail, calling on the Federal Reserve to take on a new role and "aggressively target persistent racial gaps in jobs, wages and wealth."

Vice President Kamala Harris and several Democratic senators have supported proposals targeted specifically at the gap - from increasing Black homeownership to establishing trust accounts for newborns (" baby bonds"). And senior economic advisers who have joined the Biden team, including Cecilia Rouse and Jared Bernstein, have talked about the need for programs that attack structural inequities, noting that disparities in income over time create more entrenched gaps in wealth.

Heather Boushey, a member of the White House Council of Economic Advisers, said the president's proposals were intended to work together to make sure that unexpected or temporary economic jolts - like the loss of a job - didn't snowball into a disastrous tumble.

"No one thing alone is going to check the box to close the wealth gap, but the combination of all these things together will make real progress," said Ms. Boushey, who has written frequently about the issue.

Government support is crucial, economists say, because there is so little that individuals can do on their own to close the wealth gap. The most surprising finding that researchers at the Federal Reserve Bank of St. Louis established after a decade-long study of inequality and financial vulnerability was that no matter what financial decisions you make or schools you attend, roughly 80 percent of those yawning disparities are determined by your skin color, the year you were born and your gender.

"There's a lot you don't control," said Ray Boshara, who headed the research effort. "These larger forces really have an impact on your ability to accumulate wealth."

Imagine playing a game of Monopoly with a set of rigged rules. Your opponent gets $2,000 in cash, rolls with two dice at every turn, and earns $200 every time he circles the board and passes "Go." You, by contrast, begin with only $1,000, roll with a single die and earn $100 at "Go."

At the game's end, you can hand off whatever cash and property you've accumulated to a friend or family member, and the next round just continues.

The rigged game helps explain the origins of the wealth gap. The heavy hand of a history studded by intimidation and terrifying violence, segregation and unfair housing, zoning and lending policies has prevented generations of Black families from gathering assets.

In the 19th century, when the government distributed the country's most realizable asset - land - during the Homestead Act, African-Americans were left out. In the 20th century, when the focus shifted to building a berth in the middle class through homeownership, African-Americans were again largely excluded from federal mortgage loan support programs and the G.I. Bill of Rights. Tax policies, in turn, favored the wealth-building strategies that were offered to whites.

Even New Deal assistance programs like unemployment insurance that were created to help people survive the Depression excluded agricultural and domestic workers, who were overwhelmingly Black.

Again and again, African-Americans were shut off from the capital that makes capitalism work.

"That's how we built the racial wealth gap," said William A. Darity Jr., an economics professor at the Sanford School of Public Policy at Duke University. "Unless you have a comparable program focused on building Black wealth, you're not going to do much about it."

Unequal outcomes in one generation turn into unequal opportunities in the next. Without assets, Black parents cannot offer as much financial support to help pay for their children's education, first home or efforts to start a small business.

Black graduates, for example, have to take out bigger loans to cover college costs, compelling them to start out in more debt - on average $25,000 more - than their white counterparts.

Recognizing an uneven playing field is not as obvious as it might seem. The lopsided Monopoly rules were developed by social scientists at the University of California, Berkeley, nearly a decade ago as part of an experiment on money's effect on human behavior.

They found that winners consistently credited their hard-earned skills and smarts for their success rather than a skewed playing field.

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Research shows that outside forces prevent Black workers who are just as talented and hardworking from achieving the same success as their white peers. Credit... Harold M. Lambert/Getty Images

That all-too-human response clouds thinking about inequality, said Paul Piff, who led the research team and is now a psychologist at the University of California, Irvine.

Americans, much more than people from other countries, interpret "their advantages in terms of things they themselves have earned or deserved as opposed to thinking it's the result of an unfair world," Professor Piff said. "Then the inequalities you're seeing aren't unfair, they're just necessary outcomes of things that people did or didn't do," he said, so you are less willing to do anything about them.

Mr. Boshara at the St. Louis Fed said the implications were particularly pertinent in thinking about the racial wealth gap.

"People feel they've earned everything they have, but the evidence just doesn't support that," said Mr. Boshara, who is helping to lead a follow-up research initiative at the bank, the Institute for Economic Equity. "It counters the American narrative that everybody who has something made it on their own."

Challenging shibboleths about hard work and personal responsibility can meet resistance. People often take immediate offense, interpreting the argument as detracting from their own demonstrable hard work, skills and talent. What the research highlights, though, are the outside forces that prevent other individuals who are just as talented and hardworking from achieving the same success.

The same house in a Black neighborhood will fetch less money than it would in a white one. A Black worker with the same credentials as a white colleague will earn less. Even among college graduates, the Black jobless rate tends to be twice as high as the rate for whites. Such inequities operate like an invisible tax on African-Americans, a tax on being Black.

The pandemic has underscored how crushing unpredictable and uncontrollable twists in circumstances can be. When Congress approved the $1.9 trillion relief plan, Mr. Biden pointed out that millions of Americans were jobless and lining up at food banks "through no fault of their own."

"I want to emphasize that," he added. "Through no fault of their own."

The pandemic has hit African-Americans and Latinos hardest on all fronts, with higher infection and death rates, more job losses, and more business closures.

Proposals that confront the wealth gap head on, though, are both expensive and politically charged.

Professor Darity of Duke, a co-author of "From Here to Equality: Reparations for Black Americans in the Twenty-First Century," has argued that compensating the descendants of Black slaves - who helped build the nation's wealth but were barred from sharing it - would be the most direct and effective way to reduce the racial wealth gap.

Vice President Harris and Senators Bernie Sanders of Vermont, Elizabeth Warren of Massachusetts and Cory Booker of New Jersey have tended to push for asset-building policies that have more popular support. They have offered programs to increase Black homeownership, reduce student debt, supplement retirement accounts and establish "baby bonds" with government contributions tied to family income.

With these accounts, recipients could build up money over time that could be used to cover college tuition, start a business or help in retirement.

Several states have experimented with small-scale programs meant to encourage children to go to college. Though those programs were not created to close the racial wealth gap, researchers have seen positive side effects. In Oklahoma, child development accounts seeded with $1,000 were created in 2007 for a group of newborns.

"We have very clear evidence that if we create an account of birth for everyone and provide a little more resources to people at the bottom, then all these babies accumulate assets," said Michael Sherraden, founding director of the Center for Social Development at Washington University in St. Louis, which is running the Oklahoma experiment. "Kids of color accumulate assets as fast as white kids."

Without dedicated funds - the kind of programs that enabled white families to build assets - it won't be possible for African-Americans to bridge the wealth gap, said Mehrsa Baradaran, a law professor at the University of California, Irvine, and the author of "The Color of Money: Black Banks and the Racial Wealth Gap."

She paraphrased a 1968 presidential campaign slogan of Hubert Humphrey's: "You can't have Black capitalism without capital."

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Beyond Pandemic's Upheaval, a Racial Wealth Gap Endures

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Billions in aid has been dispensed, and the social safety net has been reinforced. Will there be more ambitious steps to address longtime inequities? Not since Lyndon Baines Johnson's momentous civil rights and anti-poverty legislation has an American president so pointedly put racial and economic equity at the center of his agenda.

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Behavioral Economics:

Financial security impacts individual decision-making, aligning with class principles. The article discusses how stability enables investments in education and health, improving long-term economic outcomes.

Uncertainty and Economic Shocks:

The pandemic can be seen as a case study regarding uncertainty, demonstrating the critical need for policies that buffer against economic shocks. Risk aversion and uncertainty highlight the rationale for interventions like unemployment benefits to provide security and stabilize consumption.

Externalities:

Income redistribution reduces societal costs, such as healthcare expenses and crime rates, showcasing how such policies generate positive externalities, which is a key economic concept.

Labor Market Dynamics:

Redistribution policies, such as progressive taxation, influence labor supply and demand. Reduced equilibrium labor quantities due to higher taxes tie into theories about labor market efficiency.

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This article examines the persistent racial wealth gap in the United States, highlighting its historical roots and ongoing impact on economic disparities between Black and white Americans.

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Historical Context:

The racial wealth gap has deep historical roots, with discriminatory practices such as redlining and mortgage discrimination systematically excluding Black Americans from opportunities to accumulate wealth.

Current Disparities:

White families have significantly higher median wealth compared to Black and Hispanic families.

Impact of Redlining:

Redlining, a discriminatory practice where banks denied mortgages to residents of certain areas based on race, has had long-term effects on homeownership rates and property values in Black communities, contributing to the wealth gap.

Economic Mobility:

Black individuals experience less upward economic mobility compared to their white counterparts. Studies show that Black children born to parents in the bottom income quintile have a 2.5% chance of rising to the top quintile, compared to 10.6% for white children.

Intergenerational Wealth Transfer:

The ongoing transfer of wealth from older to younger generations is expected to widen the racial wealth gap, as white families are more likely to receive substantial inheritances compared to Black families.

Policy Implications:

Addressing the racial wealth gap requires comprehensive policy interventions, including promoting fair lending practices, investing in education and job training programs, and implementing targeted initiatives to support wealth-building in Black communities.

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The first graphic visual depicts the median wealth of black, Hispanic, and white households over the last 30 years. This model is from the article and depicts white households earning significantly higher incomes than Latino or black households. Throughout the years there has been no change in the gap between median household wealth, the gap has remained persistent and unchanged, which suggests something needs to be done to target this gap. The model predictions align with the article's contents suggesting that there is going to be continual growth in the income wealth gap between races unless something is done.

The second graphic is a bar chart showing the racial wealth gap between Latinos, African Americans, and whites. It's meant to show household wealth by race per dollar of white wealth. It depicts that for every dollar a typical white household has, African American households earn 12 cents, and Latino households earn 21 cents, it was further shown that consumption and investment lost because of that gap cost the U.S. economy $1 trillion to $1.5 trillion over 10 years.

Overall: The article discusses several policies aimed at addressing and narrowing the wealth gap; however, achieving a near-perfect equilibrium, in which household incomes of all races earn similar wealth remains highly unlikely due to the persistent and compounding growth of wealth among white households over time in comparison to other races. Looking at the 2 graphic visuals gives a good representation of how significant the gap truly is between races within our country.

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Did you expect the wealth gap to be so extreme?

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A proposed policy from the article, is asset building policies. People of color, specifically black people have historically been barred from accessing programs that were created to build and uplift the suburban family. Programs like The Department of Housing and Urban Development have been created to undo some of that. The program offers support like mortgage insurance and rental assistance to help communities build their assets through home ownership.

Another asset building program that already exists on the state level is baby bonds. This program aims to provide children from low income families an investment that will grow as they age. When that child becomes of age they will have funds that can be used to help them achieve major milestones, such as buying a home or seeking higher education. This gives the child a boost in life that they would not have and sets them up to be on the same path as their wealthier counterparts.

Another possible idea was to build and fund programs that can encourage kids to go to college. Programs such as these already exist on a smaller scale and have been shown to provide kids with the resources that they need to get to college that they may not previously had access to. Whether it be through financial support like FAFSA, or providing low income students educational support like tutors, when children are given access to these programs, they are much more likely to get into college and succeed.

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Which of the policies mentioned do you believe would be most effective