The Racial Gap In Economic Outcomes And What We Can Do About It

The pandemic and recent protests have drawn significant attention to racial differences in the US. These differences show up in every economic outcome: unemployment, income, and wealth. The differences are exhibited both when looking at national statistics and when looking at particular states, including ones that are politically in play. Let us take a look at a few indicators that show how African Americans and Hispanics have fared relative to Whites.

Unemployment rates for Blacks and Hispanics have worsened in some political swing states. In particular, from the last quarter of 2017 to the first quarter of 2020, the Black unemployment rate in Pennsylvania has increased by 2.2 percentage points to 10.2%. In the same period, the White unemployment rate has decreased by 0.1 percentage points to 4.0%. Ohio has also seen a similar increase in its Black unemployment rate, rising to 9.0% in the beginning of 2020 from 6.9% in 2018, while the White unemployment rate has decreased to 3.3% from 4.3% during the same period. The increase in unemployment for Blacks does not factor in the increase in the Black relative to White unemployment rate that has occurred because of the pandemic. As of August 2020, the national Black unemployment rate has been almost twice that of Whites. The areas with some of the largest gaps in unemployment rates between Blacks and Whites include Washington D.C. where the Black unemployment rate was 4.6 times the White rate, as well as Michigan and Ohio where the Black rates were each 2 times the White rates.

Income has also worsened in 2019 for Blacks and Hispanics relative to 2017. The Economic Policy Institute (EPI) has found that nationally, the median household income for Blacks was $46,073 in 2019. This income level is $29,984 less than the median household income for Whites: $76,057. This gap has grown since 2017, when the median household income for Blacks was only $28,680 less than the median household income for Whites. For Hispanics, EPI has found similar results. In 2017, the median household income for Hispanics was $18,363 less than the median household income for Whites. In 2019, this gap increased to $19,944. Currently the national Black median household income is only 59.6% of the national White median household income. For Hispanics, the national median household income is 74.1% of White household income. This gap is even greater in states like Pennsylvania and Ohio where the Black median household income is 57% and 55% of the White median household income respectively.

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Recent work by Morningstar has used the panel survey of income dynamics to look at wealth gaps and policy solutions that would help mitigate them. They found that the wealth gap when home equity is included is very significant: 94% between Blacks and Whites in 2017 and 88% between Hispanics and Whites in 2017. Excluding home equity leads to wealth gaps of 91% for Blacks and 85% for Hispanics. One solution Morningstar proposes is baby bonds, which they think could be administered based on income to mitigate gaps in wealth. They find that a baby bond program like the American Opportunity Accounts Act would reduce the nonhome equity wealth gap between Blacks and Whites by 68%. Similarly implementing a baby bond program can reduce the nonhome equity gap between Hispanics and Whites by 59%.

A variation of this program could be to apply baby bonds more aggressively in states that have greater gaps in employment and income. States that have shown stark differences in the race income gap, including Pennsylvania and Ohio, may need larger payments to close the income and wealth gaps by race. Baby bonds could also be used to provide income instead of wealth by having the wealth accumulated by age eighteen be turned into a stream of guaranteed income payments from the government instead of a lump sum wealth account. Such guaranteed income would help with emergency expenses. According to a report issued by the Federal Reserve Board of Governors, almost 4 out of 10 Americans would struggle to pay a $400 unexpected expense in 2019. As an example, a $50,000 wealth pot accumulated via baby bonds could turn into a monthly income stream of about $421 to $453 per month over 10 years.

Regardless of the means, some action is necessary to mitigate the extreme inequality of economic outcomes across the board between Whites and Blacks and Whites and Hispanics. Baby bonds is one idea and other innovative solutions are desperately needed to bring about economic change.

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