What Is The Racial Wealth Gap?

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The persisting wealth gap due to racial differences threatens economic security and questions whether economic growth is sustainable. It is often used as a measure of the stability or safety of an economy. Understanding the reasons behind this discrimination and designing policies to drive the country toward a secure future is necessary.

Key Takeaways

  • The wealth gap based on race is a monetary disparity-related problem affecting investment, savings, and growth.It has been widening considerably due to an imbalance in opportunity, access to useful resources, and proper support for growth.This persisting social problem has been threatening many countries’ economic stability and prosperity.It is necessary to understand the root cause of this discrimination and design policies to close the racial wealth gap and drive the economy toward a secure and sustainable future.

Racial Wealth Gap Explained

The wealth gap related to race or culture refers to the expanding inequality in wealth and assets families own due to income and opportunity discrimination based on race or ethnicity. Wealth accumulation allows people to lead a better and safe life, arrange for good education for the coming generation, and invest and save for unforeseen contingencies and retirement.

Fixing the racial wealth gap is very important because the wealth gap affects not only an individual or a family but the entire economy as a whole. Moreover, wealth accumulation depends on many factors, including government policies, income sources, inheritance, and education. But long-term studies and evidence show that there has always been a hue discrimination among various ethnic groups in the workplace, schools, colleges, and society.

Differences in wealth holdings decide how people tide over situations like a pandemic, inflation, recession, natural calamities, etc. Wealth accumulation not only contributes to economic stability but also helps in maintaining physical and mental health. People with a debt burden or lack of financial stability have weak psychological and physical health, a lower survival rate among the aged population, and more significant psychological problems.

Therefore, it is vital to identify ways to help close the racial wealth gap and lead the economy toward a better future.

Causes

There are various causes of the creation of the racial wealth gap over time, as follows:

  • Generations of homeownership – Discrimination while buying homes among different races and segregation in homebuying policies by the government have led to a vast wealth gap. Such procedures reduce the demand. On the other hand, people with easy access to property pass it on to the next generations, leading to wealth accumulation.A rise in income and employment – A surge in the amount and sources of income is a principal reason for the wealth gap due to discrimination in job-related training, hiring, promotion, employment benefits, and similar situations. Thus, some families can only arrange for basic needs, while some can save, invest and lead a luxury lifestyle using their excess funds.Financial inheritance – Families who inherit more from their past generations will be able to accumulate much more wealth than families who do not inherit, leading to a racial wealth gap over time.Access to higher education – Higher education is essential to do well in life and have financial stability because higher education gives the option to various income sources. These income sources, in turn, widen the wealth gap.Social factors – Social and cultural factors play a vital role in wealth discrimination. For example, singles may possess more wealth due to less spending than married people who need to spend on families. Again, a family may accumulate more wealth due to multiple earning members.

Statistics

A survey conducted by Federal Reserve Bank on the U.S. economy concluded that if identified on a racial basis, an American family’s financial assets are $184000, as per 2019 data, and for an African-American family during the same year, it is $38000. From this data, it can be said that the wealth gap due to racial discrimination is almost five times.

A study by Federal Reserve Bank also shows that even if an American family has no earning member, their family wealth is almost double that of an African-American family with multiple earning members. Moreover, observations over several years clearly show that this wealth gap has remained relatively the same over the last three decades if we consider that the study is made starting from 1990.

Chart

We can understand the concept through the racial wealth gap graph given below:

The chart above shows that even though the wealth level of African-Americans has increased to a certain extent after 2016, the gap between them and Americans remains almost the same because the wealth of Americans has also gone up after 2016.

Therefore, it is necessary to bridge this gap so that the racial wealth gap graph displays a substantial rise in wealth among the racially underprivileged category of people, leads the country towards steady economic growth, and reduces social and racial disparity to a large extent.

Effects

The effects of wealth discrimination based on race or ethnicity significantly impact society.

  • Poverty – Inequality in financial asset accumulation leads to a difference in economic conditions. An individual who does not have enough wealth may be unable to meet even the basic daily needs, leading to poverty.Health – Economic instability negatively affects health. People will not be able to afford good treatment because of physical and mental medical needs, which lowers living standards and affects the ability to lead a normal and healthy life.Social Crime – Social crime increases because, due to financial differences, one section of society leads an affluent life while another suffers.Access To Basic Amenities – Access to basic amenities, like food, clothing, shelter, and primary education, is also affected negatively because of a lack of affordability and discrimination in opportunity.Effect On Demand And Consumption – Lack of funds for meeting day-to-day needs leads to a lack of demand and lower consumption. For example, suppose people do not have the money to buy the things they need. In that case, there will be less demand in the market, resulting in less consumption.Saving And Investment – Income disparity will result in lower savings and investments because it is impossible to save or invest properly if the family cannot afford a healthy living standard. Thus, racial discrimination of wealth lowers savings and investment, which are crucial for the economic growth of a country.Social Bonding And Communication – Wealth disparity based on ethnicity and culture also results in social and communication gaps. As a result, people try to bond with financial communities of their level.A Rise In Heavy Debt – Lack of wealth also leads to the accumulation of debt burden because people need to take loans to meet their educational, medical, or financial needs but cannot pay on time.

How To Close?

There are ways and means to attain a solution to this problem, as mentioned below:

  • Easy lending policy – Homeownership has become the main reason for the wealth gap among different races. The best method of fixing the racial wealth gap would be to ensure fair and accessible lending policies. People from all races must get equal opportunities to own a house.  Reduce income disparity – Wealth accumulation also depends on a stable income that is enough to support a family. Therefore, an economy must strive to provide equal employment and retirement benefits to reduce the income gap.Access to higher education – Higher education offers varied income sources. The state should arrange for affordable higher education because it is an investment with substantial long-term benefits.Property inheritance – Property inheritance increases the wealth gap drastically. It is an income that is not earned based on merit. Therefore, it should be taxed based on its value, which will help divert idle resources toward building infrastructure and supporting groups in need, which is more beneficial for economic growth.

This has been a guide to what is the Racial Wealth Gap. We explain it in detail with its statistics, charts, how to close it, causes, and effects. You can learn more about finance from the following articles –

The wealth gap based on racial discrimination is shrinking due to the persistent effort of loan officers to push for loan approval at the earliest so that homeownership facility is equally given to all. In addition, they have designed a robust borrowing system that has made it possible for people to get loans based on credit score, not race and ethnicity.

The civil rights movement in America had seen endless efforts from African-American social activists to reduce social, economic, and political disparity. This movement led to a reduction in the gap to some extent. But later on, the movement stopped, and things remained the same as before. Thus, the wealth gap persists.

It is tough to close the wealth gap because of the unequal distribution of financial assets, which is the money inherited plus the interest on it plus the new savings from the rising income level. Americans have been enjoying a perpetual increase in savings.

  • EgalitarianismWealth TaxIncome Inequality