The first post in a two-part series explores the potential of capital to undo the historical legacy of inequities.
Race is a complex issue that continues to drive many of the socioeconomic outcomes in the US. For example, if you are a person of color born in the United States, your zip code is more of a predictor of your success than any other factor. Because of persistent racial segregation, this means that a person of color born in a neighborhood with few opportunities for success has little chance of building a better life than his or her parents. According to the Federal Reserve, white families have about eight times the median wealth of Black families, and about five times the wealth of Hispanic families.
How could this be? We have been taught that, in America, our success depends on our hard work, not where we are born or our family. This narrative has taken hold more strongly in a post-Civil Rights era world, in which many (explicitly or implicitly) assume that racism is “over.”
All things equal, it’s harder for people of color to receive a loan, buy a house or start a business, among other life milestones.
While overt racism is less pronounced in our modern society, “in-group” thinking persists and drives a subconscious perspective of inferiority and superiority between races. This leads to decisions at a small and large scale that privilege white people over people of color. These subconscious forces impact all elements of our day-to-day lives. All things equal, it’s harder for people of color to receive a loan, buy a house or start a business, among other life milestones. This keeps the majority of people of color from immersing fully and benefiting from the economic activity of our society in the same ways that many white people have been able to throughout the history of this country.
The Brown family journey vs the Flynn family journey
Let me use a hypothetical example to illustrate what I mean. I’ll take this from Living Cities’ “Radical Collaboration for Black Wealth Creation” report, which proposed solutions for closing the racial wealth gap.
In this example, I’ll follow the trajectory of two people, one white and one Black: Frank Flynn, a white man, is a Korean War veteran. When he returns from war, he’s able to benefit from the GI Bill, with a guaranteed job, free college courses, and a low interest rate on a mortgage for his first home in a neighborhood that is likely to appreciate in value due to continued public and private investments in infrastructure.
Fred Brown, a Black man, also fights in the Korean War, but when he comes home, he’s excluded from many of the same benefits that Frank receives. He can only buy a home in a Black neighborhood that depreciates in value over the next several decades largely because of segregation and the disinvestment in communities of color. He isn’t able to go to college under the GI Bill because of his race, and remains trapped at a low-wage job. (Over the lifecycle of the GI Bill, over $30 billion in home loans were distributed to veterans; few Black veterans were able to access these loans due to discriminatory policies.)
Fast forward to the generation of Frank and Fred’s grandkids. Both their grandsons attend the same college, but have very different experiences. Jim Brown, Fred’s grandson, is the first person in his family to go to college. He takes out student loans and has to work throughout his time in college. Dan Flynn, Frank’s grandson, comes from a wealthier family, because Frank was able to accumulate wealth through his home and pass it on to Dan’s parents, who were able to grow the wealth further. Everyone in Dan’s family has gone to college, and he doesn’t need to take out student loans or work throughout to attend.
Given Dan’s wealthier social network, after college Dan lands a high paying job at a prestigious investment firm, while Jim lands a more modest paying job at a local business. Years later, both Dan and Jim decide to start their own respective businesses. Because of the high salary, connections and experiences created from working at a prestigious firm Dan is able to raise $2 million to begin his company. However, Jim acquired less individual wealth given the lower salary and student loans payments, making it harder to raise the necessary funds to start his business. He’s ultimately able to raise enough, but not as much as he needed.
Dan’s larger initial investment allows him to hire a talented team and spend significant capital on marketing. After he reaches scale, he sells the business and becomes a venture capital investor himself. While Jim enjoys the freedom of working on something he is passionate about, without greater investment he was unable to afford to hire the best talent, invest in marketing, or many of the other things that would make it easier for him to scale his business. Consequently, Jim was never able to grow beyond being a small business, limiting his own wealth and the wealth creating opportunities for his community.
We can go to the root cause of the issue…Equity of opportunity to build and sustain wealth.
The story of Dan and Jim shows how decisions made decades ago continue to handicap people of color. While Dan benefited from the generational wealth made possible by policies that benefited white people, Jim, on the other hand, was burdened by the legacy of these decisions, the difficulty of developing strong social networks outside of his own race, as well as the on-going choices people make that subconsciously assume Black people are a “riskier” investment than white people.
A new path forward
How can we break this cycle and help all people thrive in the American economy? We can go to the root cause of the issue, which put Jim and Dan on such divergent paths: Equity of opportunity to build and sustain wealth. My next post will go deeper into what can be done to fix this.