My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Wealth inequality and race

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

–JOHN MAYNARD KEYNES

BRITISH ECONOMIST (1883-1946)


I recently came across an article from Bankrate that caught my eye because it was about wealth inequality, specifically the divide between the wealthiest Americans, almost all of whom are white, and the rest of the population. Did you know that White families have nearly eight times the wealth of the average Black family and five times the wealth of the average Hispanic family? The first half of the article – “Combating the racial wealth gap: 7 money moves for individuals of color” – provides context for why we are where we are today as far as wealth inequality. The second half of the article contains suggestions from the author, Sarah Foster, for helping minorities and others on the wrong end of the inequality scale to consider for improving their wealth over time.


Before diving into this complex topic, let me provide some thoughts for context, starting with the pandemic. The reaction by many governments and central banks around the world in 2Q20 to soften the pain of the self-induced recession caused by the onset of the pandemic was to turn on the fiscal and monetary taps full blast. Although this was effectively the playbook of most major countries, the US has perhaps been the most prolific user of stimulus tools. So far, the US has unleashed $5.2 trillion of fiscal stimulus in three separate rounds since March 2020, whilst the Federal Reserve has held short-term bank borrowing rates near 0% and has released massive liquidity into financial markets through quantitative easing. Since the onset of the pandemic (March 2020), the balance sheet of the Federal Reserve has nearly doubled, to $8.2 trillion. The unprecedented amount of fiscal and monetary stimulus has certainly been effective in guiding the US economy back to growth, with the size of the US economy in 2Q21 finally returning to its size before the pandemic (4Q19). Aside from concerns with the US deficit, which has reached post-WWII highs as far as debt-to-GDP (circa 127%), monetary stimulus in particular has caused a sharp rise in the prices of risk assets, including most notably stocks but also – especially in the early stages of the recovery – corporate bonds. Both the S&P 500 and the DJIA are at record highs for example, appreciating nearly 100% since touching pandemic lows in March 2020. This has been great news and “easy money” for those folks with money invested in stocks, whether held individually or through tax-advantaged vehicles like IRAs and 401ks. Fortunately, the percentage of Americans that own stocks has increased fairly significantly over the years, from 32% in 1989 to 53% in 2019 according to USAFacts. Even so, similar to real estate, more than two-thirds of the stock market value is held by the top 10% of income earners, as you can see in the table below (source: FRED).

As you might expect, appreciation in financial assets like stocks, owned disproportionately by wealthier families, has exacerbated the inequality gap.

Wealth inequality cuts much deeper in at least two respects. Firstly, wealth disparity has been growing generally, not only in the US but also in other developed countries. This relates to a combination of i) families’ “base” assets and inheritance (meaning the more you have to start with, the better off you and your heirs will be), and ii) favourable government (especially tax) policies that have effectively given advantages to the wealthy. This is a big can of worms to open, and it is not the focus of this article. Rather, I am writing this article to profile the unfortunate role that race plays in wealth inequality. From the time the US was colonised until today, there have been numerous reasons that people of colour and other minorities have been less able to accumulate, retain and grow wealth (compared to white people). I hardly find the facts debateable because the history is well documented, and the results today as far as wealth distribution speak for themselves. The graph below from a recent study by the Federal Reserve entitled “Disparities in Wealth by Race and Ethnicity in the 2019 Survey of Consumer Finances” (entire article is here), clearly depicts the issue with wealth inequality between White, Black and Hispanic Americans.

This graph shows that the average White family has five times as much wealth as the average Hispanic family and nearly eight times as much wealth as the average Black family, the result of hundreds of years of bias towards those with existing wealth and in favour of the white status quo. This wealth gap will need to be addressed, again not the topic of this particular paper although there are plenty of ideas as to how to do this that have been researched. For example, the Brookings published an article entitled “Closing the racial wealth gap requires heavy, progressive taxation of wealth” by Vanessa Williamson in December 2020 that is worth reading, obviously setting forth the author’s view that a wealth tax is absolutely imperative on the richest of the rich Americans to help close the wealth gap.


Addressing the wealth disparity in America will take many generations to address though, which brings me back to the very good article directed by Bankrate, which I referenced at the start of this article. “Combating the racial wealth gap: 7 money moves for individuals of color” by Sarah Foster. After Ms Foster sets forth the history and causes of why we are where we are today, she provides advice directly to Black Americans as to how they can improve their financial security and increase their wealth. Please give this article a read!

 

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