Missing Everything Important About The Racial Wealth Divide

The current issue of The New Yorker has an article by James Surowiecki on the subject of "The Widening Racial Wealth Divide."  Surowiecki's article is in turn substantially based on a recent (August) Report from a couple of left-side think tanks, the Institute for Policy Studies and the Corporation for Enterprise Development.  In addition to Surowiecki's New Yorker article, the IPS/CFED Report got substantial coverage over the past couple of months from many of the usual "mainstream" sources.    

The headline out of both the Article and Report is that the "racial wealth divide" in the United States is not only large, but growing.  Note that this is about "wealth" rather than "income" -- a variation on the usual "income inequality" theme that gets the lion's share of the attention from the likes of Obama, Clinton and de Blasio.  According to the Report, the average black household in the U.S. has wealth of $85,000, while the average white household has wealth of $656,000.  That's a difference of almost a factor of eight, and is indeed large -- far larger than the approximately 40% income differential between the races.  IPS/CFED choose a 30-year period for comparison -- 2013 against 1983.  Back in 1983, they report that the average black household wealth was $67,000, while average white wealth was $355,000.  Thus, while both have grown, the gap has "widened."  

The numbers, say IPS/CFED, are derived from the Surveys of Consumer Finances (SCF) for 1983 and 2013.  These surveys, done only once every three years, come not from my usual whipping-boy the Census Bureau, but rather from the Federal Reserve Board, of all places.  Here's the 2013 version.  Just checking to see if I can find one headline number from the IPS/CFED Report in its stated source, it quickly emerges that the think tanks have made a large and rather debatable adjustment in order to maximize the size of the reported wealth divide.  A chart on page 12 of the 2013 SCF gives "mean net worth" in 2013 for "White non-Hispanic" and "Nonwhite or Hispanic" as $705,900 and $183,900 respectively -- rather different from the $656,000 and $85,000 from IPS/CFED.  The Fed's reported "divide" is a factor of under 4, rather than the almost 8 from IPS/CFED from the same data.  Still large, but how did it get doubled?  Looking for an explanation I go all the way to the end of the Report and find this in a brief paragraph headed "Methodology":

The main difference in this framing from the standard SCF definition of net worth is the exclusion of consumer durable goods (i.e., automobiles, electronics, furniture, etc.). This definition is rooted in the idea that wealth should be readily converted to cash (i.e., fungible), and durable goods are not.    

With that Surowiecki and the think tanks then turn to what they believe to be the causes of the wealth disparity.  Note that the FRB's Survey of Consumer Finances reports do not address the issues of causation in any way -- the SCFs are just dry collections of data.  In other words, when Surowiecki and IPS/CFED start talking about causes, they are purely making it up.  

So, guys, what are the causes?  You won't be surprised to learn that the causation theories of these people consist largely of blaming the evil successful people, while completely missing obvious recent policy changes -- like the explosion in food stamp and Medicaid usage during the Obama administration -- that have intentionally driven down the already modest wealth of relatively low-wealth people. From Surowiecki:

[T]he wealth gap between black and white Americans is much bigger than the income gap, thanks to a toxic combination of institutionalized discrimination, persistent racism, and policies that amplify inequality. . . .  [D]iscrimination, though no longer legal, is still pervasive. It holds down black incomes and has a huge impact on homeownership—which Shapiro identifies as “the largest driver of the racial wealth gap.” Only forty-one per cent of black Americans own their homes, compared with seventy-one per cent of whites, and black homeowners earn a much smaller return on their property.

But after talking so confidently about this "pervasive" "institutional discrimination," Mr. Surowiecki does not provide a single significant current example.  He does, however,  talk of long-ago federal policies that were in place from about the thirties to the sixties:

Beginning in the New Deal and on into the postwar years, the federal government invested heavily to help ordinary Americans buy homes and go to school, via programs like the Federal Housing Administration and the G.I. Bill. That fuelled an economic boom and fostered the growth of a prosperous middle class. But black Americans received little of this assistance.

The closest Surowiecki comes to giving a present-day instance of real racial discrimination comes with this howler:

As Asante-Muhammad [one of the authors of the IPS/CFED Report] told me, “White people still do not generally want to live in a neighborhood that’s more than twenty to twenty-five per cent black.” That means fewer buyers, which holds house prices down. Shapiro has found that housing segregation costs black families tens of thousands of dollars in home equity.   

Really??  This guy writes for the New Yorker and yet seems unaware that whites are currently, and have for a decade and more, been moving in large numbers into formerly majority-black neighborhoods in New York City like Harlem in Manhattan, Fort Greene, Bedford-Stuyvesant and Bushwick in Brooklyn?  That process of "gentrification" has made millionaires and near-millionaires out of thousands of formerly not-well-off black homeowners -- a process that the official New York groupthink somehow finds to be evil.  See Spike Lee's rant on the subject at my post here.  Well, which is it -- gentrification is happening and is evil (Lee and NY groupthink), or gentrification is not happening but would be good if it happened (Surowiecki)?  This much I know:  gentrification is happening, at least in large swaths of New York City.  Surowiecki seems to know neither the facts nor the official party line.

Now, turn your attention away from both Surowiecki and the IPS/CFED Report and look at the underlying 2013 SCF survey.  You will be struck by one very noticeable thing that neither Surowiecki nor IPS/CFED discuss:  net worth for blacks and Hispanics, and indeed for the entire bottom 20% of the wealth distribution, has been declining dramatically in the most recent years.  This isn't just a widening of the "divide" between wealthier and less wealthy even as both see growth in wealth; no, the levels of wealth at the bottom, already low, have actually dropped in absolute terms.   

We know this because the 2013 SCF shows the results of both the 2013 survey and the prior version of same, which was three years earlier in 2010.  And in that three year interval there was a dramatic worsening of the wealth situation not only for blacks and Hispanics, but also for the entire lower 20% of the wealth distribution.  According to the 2013 SCF, during the 2010-2013 interval, the mean net worth for Nonwhites and Hispanics went down from $189,000 to $184,000; the median net worth for Nonwhites and Hispanics went down from $22,000 to $18,000 (almost 20%!); the mean net worth for the bottom 20% of the wealth distribution went down from $82,000 to $65,000 (more than 20%!); and the median net worth for the bottom 20% of the wealth distribution went down from $7,000 to $6,000.

Thus while the IPS/CFED Report shows black and Hispanic wealth increasing somewhat in the 1983-2013 period (although more slowly than the rate of increase for whites), they don't mention that even that modest progress stopped and went into reverse in 2010-2013.  These were three years of supposed economic recovery.  Now, what occurred in the the three-year interval 2010-2013 that might have such noticeable negative effects on the modest wealth of people at the bottom of the wealth distribution, including blacks and Hispanics?  The G.I. Bill?  The FHA mortgage program?  "Pervasive institutional discrimination"?  

These were of course the early years of the Obama administration.  And the thing that happened in those years that obviously had a dramatic effect on the wealth of those at the bottom of the wealth distribution was the explosion in means-tested government handout programs, most notably food stamps and Medicaid.  The Obama administration set out aggressively to increase the enrollment in food stamps, and drove it up from about 27 million in 2009 to 48 million in 2013.  But enrolling in food stamps requires a family first to get its assets down to near zero.  Here is the USDA's page on eligibility requirements for the "SNAP" (food stamp) program, which states off the bat that someone seeking the benefit must get so-called "countable resources" under the very low figure of $2250.  

Medicaid enrollment also rose dramatically from 2010 to 2013 (although not as dramatically as enrollment in food stamps), going from 50.5 million to 55.0 million according to data from KFF here.  (The bigger explosion in Medicaid occurred after the full implementation of Obamacare began in 2014.)  Medicaid also requires prospective beneficiaries to come close to zeroing out their assets.  Here is a government website describing the (highly complex) eligibility criteria.

So in the 2010 to 2013 period, the government was aggressively luring some tens of millions of new beneficiaries into handout programs that required prospective beneficiaries to somehow spend down or get rid of whatever assets they had.  Is this enough to swing the numbers for reported wealth of the bottom 20% of the wealth distribution -- consisting of only about 30 million total households?  Absolutely it is.  

A couple of questions:

  • Did nobody realize that hugely expanding programs like food stamps and Medicaid with very low asset criteria for eligibility was going to have a strong negative effect on the already modest wealth of the less wealthy?
  • How can people like Surowiecki and these think tanks talk about alleged "causes" of the racial wealth divide like the G.I. Bill and alleged refusal of whites to move into largely black neighborhoods, while at the same time completely missing the hugely obvious fact that the main cause of widening and perpetuating the wealth divide is gigantic government handout programs that have the decreasing of the wealth of the less wealthy as a principal feature of their design?