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Political Science Quarterly
Volume 114 No. 4 (Winter 1999)
Getting Into the Black: Race, Wealth, and Social Policy
By Dalton Conley
DALTON CONLEY is associate professor of sociology and director of the Center for Applied Social Science Research at New York University. He is author of Being Black, Living in the Red: Race, Wealth, and Social Policy in America and the forthcoming ethnographic memoir, Honky.
Wealth ownership is the socioeconomic measure that displays the single greatest racial disparity in America today. Blacks own, on average, one-twelfth the amount of property as whites, and this gap in net worth continues to grow even in the post-civil rights era. The importance of this asset inequality cannot be understated. If one takes an intergenerational view and measures class by going beyond labor market measures to include property ownership, then many dynamics previously seen as rooted in an alternative or "underclass" culture among African Americans should in fact be viewed as a result of economic inequality. In many instances, the effects of race are dramatically obscured by the impact of class dynamics and economic resources.
For example, if we simply contrast blacks and whites without regard to socioeconomic background, we find that African Americans are more likely to drop out of high school and less likely to complete college, that they are employed for fewer hours and earn less money per hour than whites, that they have lower levels of wealth, and that they are more likely to have a child out of wedlock or to use welfare as young adults. But if we statistically compare blacks and whites who are similar in terms of their individual characteristics (age, gender, number of siblings, and, in some analyses, education and income levels), their family backgrounds (parents' age, whether they grew up in a female-headed household or one that used welfare), and their class origins (parents' education level and occupational prestige, as well as their family's permanent income, net worth, and types of assets), we find that these racial differences change significantly in magnitude and sometimes even in direction. For instance, when class background is equalized, blacks are just as likely as whites to have completed college. When we take into consideration parental assets, we find that the black-white wealth gap among young adults disappears. Racial differences in the chance of using welfare among this age group also vanish.
In certain analyses, race remains a significant predictor of life outcomes, sometimes in the same direction we would expect from anecdotal evidence or summary statistics. For instance, even when we control for class background, African Americans still tend to be employed for fewer hours and are still more likely to have children outside marriage--although these differences are greatly reduced in magnitude. For other outcome measures, race has a counterintuitive net effect when class differences are taken into consideration: in certain class-based models, black workers who are employed full time enjoy a wage advantage over whites; additionally, net of family background, the latest cohorts of African Americans are more likely to graduate from high school than are their white counterparts.
While the impact of race varies depending on which outcome we examine, in almost all instances socioeconomic variables have a much greater impact in predicting outcomes than does skin color or racial identity for young adults who have grown up since the landmark civil rights legislation of the 1960s. These findings represent both good and bad news for policy makers, since money is a lot more transferable than race. But the important racial gap in wealth that stems from generations of black-white inequality is not easily remediable, because it largely results from past dynamics rather than from a dearth of "equal opportunity" in the post-1960s world. If wealth differences could be rectified by providing equal access in housing and credit markets, a policy solution would be clear. But class differences that result from the wealth of one's parents are not so easy to redress.
Racial Policy in the United States
Over the course of the twentieth century, African Americans have occupied a precarious position in the realm of social policy. The origins of the American welfare system lie in the Social Security Act, signed into law by President Franklin D. Roosevelt in 1935. This piece of legislation bifurcated the welfare state--not coincidentally--along racial lines. One part included insurance-like programs geared toward workers who had "paid" for their benefits over the course of their working careers. Programs of this type include Old Age Insurance (Social Security), unemployment insurance, and Medicare health insurance (which was added during the 1960s). These programs became sacrosanct, with almost unanimous support because of their universal nature. But they were not so universal when it came to African Americans. To a great extent, blacks were initially excluded from these programs, because the programs did not cover the agricultural or service industries in which African Americans were predominantly represented. These industries were excluded in part as an attempt to keep southern Democrats in the New Deal coalition. 1
The other half of the New Deal system consists of what we commonly call welfare. Under the assumption of full employment--upon which the New Deal architects based their legislation--this portion of the safety net would serve only those who could not work, such as widows or the disabled. Since full employment was never achieved, however, either through the free market or by government fiat, welfare programs ended up as the source of support for the chronically poor. Aid to Dependent Children (ADC), which later became Aid to Families with Dependent Children (AFDC) and is now Temporary Assistance to Needy Families (TANF), is the main income-support component of welfare. As a result of economic inequality, blacks find themselves overrepresented among the recipients of TANF and Medicaid (the health insurance component of welfare that was added during the 1960s). These welfare programs--nonuniversal and disproportionately nonwhite--have always been the target of political budget cutters and the site of highly moralistic political debates.
At the same time that welfare became implicitly racialized, a semi-explicit racial policy was emerging in the form of affirmative action. I call this policy "semi-explicit," because it is not really a coherent policy as much as it is a series of executive orders and Supreme Court rulings that hold together as a federal statement about race. The seeds of affirmative action were planted by Executive Order 8802, signed by Franklin Roosevelt, which "outlawed segregationist hiring policies by defense-related industries that held federal contracts." 2 As Manning Marable describes, President Harry S Truman later directed the Bureau of Employment Security "to act positively and affirmatively to implement the policy of nondiscrimination." 3 Not until the Kennedy administration, however, was the actual phrase "affirmative action" used in Executive Order 10925. Surprisingly, it was under the Republican Nixon administration that affirmative action became particularly aggressive. In 1969, the federal government instituted what later became known as the Philadelphia Plan. This was the first program that specified explicit quotas for minority hiring. It targeted federal contractors and resulted in the percentage of racial minorities in the construction industry rising from 1 percent to 12 percent. Richard Nixon also tried to promote minority business ownership through set-asides of government contracts for minority-owned businesses. His administration also placed Federal Reserve funds in black-owned banks. 4
Targeted goals for minority representation--that is, quotas--were struck a serious blow by a 1978 Supreme Court ruling, however. In the Bakke decision, Justice Lewis Powell wrote that it was unconstitutional for the University of California at Davis to set aside sixteen slots for minorities in its medical school although the university was in fact permitted to use race as a factor in its admissions policy. 5 A series of court decisions following Bakke further curtailed affirmative action. The most serious challenge came at the state level in the form of California's Proposition 209, the California Civil Rights Initiative (CCRI). This ballot measure, which passed 54.6 percent to 45.4 percent in November 1996, banned the use of race or gender preferences in state employment, contracting, and education. It has so far withstood court challenges.
The consequences of this initiative were felt almost immediately. In the state's premier public law school, Boalt Hall School of Law at the University of California, Berkeley, admissions of African Americans dropped by 80 percent to a paltry fourteen offers following the passage of Proposition 209. Reports from other campuses suggest that black and Latino enrollment has decreased across the entire University of California system. The effect of Proposition 209 on hiring has yet to be detailed. While nationwide public support for affirmative action varies depending on how survey questions are worded, it is clear from events in California that the policy as it now stands will not stand for long. Even its supporters concede that it needs reform, for it tends to provide the most help to upper-class and middle-class members of minority groups, the individuals within those groups who need it least. 6
As indicated by welfare's recent reincarnation, if affirmative action is to survive at all, it will likely be in a different form, under a different name. One alternative to the current policy, which has also been suggested elsewhere, is class-based affirmative action. 7 Such a program could maintain set-asides for certain government contractors, demonstrate preferential hiring practices, and facilitate quotas for college admissions; but these decisions would be based on socioeconomic background rather than on race. In trying to remedy the situation at the University of California, for example, officials have now added a questionnaire regarding class background to the admissions packet for law school; it is yet unclear how much of an impact this change will have on the composition of the student body over the long run.
But to be successful in achieving its goal of fostering racial and class equality, such a policy must entail a very specific type of class-based affirmative action. Given the mountain of evidence documenting the importance of wealth in the conception of social class and its particular relevance to issues of racial inequality, any policy that is designed to address the issue of social class must not rely solely on the traditional measures of socioeconomic status (income, occupation, and education) but must take assets into account. A composite of income and wealth could be constructed by "annuitizing" family net worth (converting it from a stock to an income flow using a specific formula involving the interest rate). By adding this figure to annual parental income, for instance, institutions might be able to construct an appropriate measure on which to judge the resources a student brings to college. Policy makers must, however, be alert to the dangers of using only income, educational, or occupational measures of social class in a system of class-based affirmative action, for this would result in a situation that merely reproduces, if not exacerbates, existing inequalities between African Americans and whites (as well as within those two communities). In lieu of class-based affirmative action, another alternative might entail race-based asset policy.
Race-Based Asset Policy
In the wake of the urban riots of the late 1960s, a thirteen-year-old African American boy told a reporter in Detroit, "There's nothing the matter . . . that money can't solve." 8 There is much wisdom in the diagnosis offered by this adolescent. In order to fully understand the impact of property ownership on a community, it might prove worthwhile to imagine what could have happened during the hot summers of 1965 in Watts or 1968 in Detroit if the majority of businesses in these areas had been black-owned--or, for that matter, what might (or might not) have occurred in Los Angeles in 1992. Although this link between civil unrest and property ownership is pure speculation, perhaps it merits serious consideration.
During the late 1960s, Detroit's automobile industry provided the highest average wages for African Americans anywhere in the United States--yet the city proved to be one of the urban areas most devastated by the civil unrest of the period. 9 This juxtaposition may point to the inadequacy of focusing exclusively on wages and labor market issues when trying to assess the economic situation of African Americans (or any group in society). Would a community have set fire to businesses or homes owned by its brothers and sisters? Whether or not this inverse association between entrepreneurship and civil disorder exists, many commentators in the 1960s and 1970s certainly pointed to the important role of wealth in determining the quality of life in minority communities. "By the highest estimates," according to William K. Tabb, writing in the late 1960s, "blacks service 10 to 15 percent of the black market. . . . While estimates vary, blacks are represented one-tenth as often in ownership roles as their numbers would warrant if ownership was . . . randomly distributed without regard to race." 10 ]
Even in the case of New York, which was relatively more equitable than other cities, black business ownership was limited to small-scale enterprises. "One million blacks live in the New York City ghettos of South Bronx, Harlem and Bedford-Stuyvesant," wrote Theodore Cross in his 1969 book Black Capitalism, "yet those slums are presently operating only twelve registered Negro-owned businesses hiring ten or more people. The most deprived and undeveloped economies of Latin America have greater elements of entrepreneurial affluence." 11 Medium- and large-scale businesses are the types most likely to raise the economic prospects of many members of a community; businesses hiring fewer than ten individuals are most likely family-owned and family-operated and thus have limited ability to provide direct employment opportunities to others beyond immediate kin.
Consequences of this lack of business ownership extend beyond employment opportunities. Because of a dearth of businesses serving ghetto areas, black residents pay higher prices for consumer goods. "As blacks become the dominant residential group (succession), the business community will generally decline in absolute size," notes Karen Stein in the Journal of Consumer Affairs, "due to the loss in white-owned businesses and the difficulties inherent in establishing black-owned businesses." 12 The decline in the number of competing enterprises leads to a situation of oligopoly and thus to higher prices for consumers, through the laws of supply and demand. "Hindered by poor transportation systems to outlying shopping centers and a low level of automobile ownership," Stein continues, "the poor are restricted to shopping in their immediate neighborhood." 13 In addition, local merchants often offer credit, which can prove to be a crucial factor in shopping decisions for people in precarious economic circumstances. 14 This scenario is eerily similar to the situation of sharecroppers trapped by their reliance on credit a hundred years earlier in the South. Thus, a dearth of community business proprietorship, a low incidence of family vehicle ownership, and a lack of cash on hand all interact to hurt the efforts of urban black consumers to make it on their given income levels.
In the wake of the urban unrest of the late 1960s, there was much talk of fostering "black capitalism." As described by Tabb, "black capitalism includes programs for minority group members in financing and marketing, and in bolstering self-confidence and business skills." 15 Underlying such proposals to foster entrepreneurship in the African-American community is the assumption that a lack of human capital (in this case, business acumen) causes the lack of black business ownership. If society could only teach African Americans about credit markets and give them a dose of "self-confidence," the problem would be solved, dictated the logic of the time.
Black capitalism programs never took off, however. Instead, "community development" became the most prevalent strategy to foster black wealth accumulation during the 1970s. In this strategy, a nonprofit group called a community development corporation (CDC) acts to attract capital and "funnel it to individual businesses privately or cooperatively owned." 16 Today's equivalents are the community development banks that form part of the "enterprise" or "empowerment" zones proposed by Jack Kemp, former HUD (Housing and Urban Development) secretary (and 1996 vice-presidential candidate) and implemented on a limited basis by George Bush (and continued by Bill Clinton). The enterprise zone strategy works by giving economically depressed communities special tax incentives and a limited amount of capital, in some cases, to foster business development. But this approach does not discriminate between seeding capitalism within the community and luring it from elsewhere. This is a result of the single-minded obsession with creating jobs, rather than fostering business growth, in the black community. Thus, in the end, it is a job-growth program, not "black capitalism."
"In the past, we have made only passing efforts to build wealth and equities in the ghettos of America," summarizes T. L. Cross. "Influenced by reformers such as Jacob Riis, we have taken profits out of the slum when the real objective should have been to build profits into it." 17 He argues that the insistence on control of capital by nonprofit organizations such as CDCs has been a guarantee for failure and, furthermore, sends the wrong message and fosters inappropriate skills in the community. For example, with respect to housing policy, Cross writes, "We have insisted that Federal Housing Administration projects for low-income housing be owned by nonprofit churches or charitable corporations. Real estate entrepreneurs, with the agility to make low-cost housing actually work, have been charged by Congress with unconscionable profits." It is worth noting that the same federal agency ran programs to promote suburban (predominantly white) home ownership after World War II, with no such stipulations on the management of credit and capital. In these programs, Federal Housing Adminstration and Veterans Administration loans went through commercial banks, thus providing a measure of profit and business development as a side benefit to the intended goal of promoting homeownership. "Speculation, the essential lubricant for production of wealth in the normal economy," continues Cross, "has been banished by law from Federally subsidized real estate projects in the slums. To keep the 'quick buck' speculators out of low-income housing, we have adopted strict and impractical safeguards against corruption, which assure us that the legitimate wealth-makers will not participate." 18
A more radical policy alternative to fostering black capitalism, perhaps inspired by the Nation of Islam and separatist movements of the 1960s, calls for reparations for African Americans. Typically, reparations, such as those paid by Germany after World War I, consist of cash payments made by the losing side to the winning side after a war, as compensation for the losing side's "guilt." The argument for paying reparations to African Americans became particularly refined during the 1970s. One researcher used 1790-1860 slave prices as proxies for the value of slave capital. He then annuitized the prices into an income stream to which he applied compound interest, calculated since the slavery era. The figures he generated under different assumptions ranged from $448 billion to $995 billion at the time he wrote (the early 1970s), "a range which, coincidentally, would encompass the indemnification being demanded by the black nationalist Republic of New Africa (RNA), a prominent black separatist group." 19 However, the RNA demanded $400 billion in addition to five southern states: Alabama, Georgia, Louisiana, Mississippi, and South Carolina (which this researcher estimated to be valued at $350 billion at the time).
In discussing the movement for reparations, Robert Browne laid out a more general framework for calculation of the "proper" amount: "The development of a minimal reparations formula, then, must encompass at least three elements . . . a) a payment for unpaid slave labor prior to 1863; b) a payment for underpayment of black people since 1863; and c) a payment to compensate for the black man's being denied the opportunity to acquire a share of America's land and natural resources when they were widely available to white settlers." 20 Implicit in these arguments is the assumption that the major problem in wealth accumulation by African Americans lies in the past exploitation of black labor and past obstacles to equity accumulation and inheritance.
During the 1970s, the implementation of a reparations plan was discussed in terms of direct cash payments to those of African ancestry, similar to the model of reparations for Japanese Americans interred during World War II (with the obvious distinction that while the payments for Japanese Americans were made only to those who were actually alive during the period, payments to African Americans would necessarily be to the descendants of black slaves). Such ideas have even been advocated by conservative pundits as a method of abrogating a societal responsibility to continue affirmative action policies in education and the labor market. As Charles Krauthammer argued in Time magazine, "It is time for a historic compromise: a monetary reparation to blacks for centuries of oppression in return for the total abolition of all programs of racial preference. A one-time cash payment in return for a new era of irrevocable color blindness. Reparations focus the issue most sharply. They acknowledge the crime [slavery]. They attempt restitution. They seek to repay some of the 'bondsman's 250 years of unrequited toil."' 21 Krauthammer's call for reparations appears to be motivated solely by guilt over white enslavement of blacks in the antebellum South and thus does not acknowledge the extent of racial oppression and economic disenfranchisement since that time in the areas of property accumulation and labor market relations.
In a cautionary note regarding such a reparations strategy, Tabb observes that "the demand for further redistribution of resources from the larger society to the black minority depends to a large extent on the degree of solidarity in the black community." 22 This solidarity is limited by the internal class cleavages that exist among African Americans, particularly since the distribution of income and wealth is more uneven in the black community than it is among whites. Therefore, the focus on race-based redistribution "has led to a deemphasis of class differences internal to that community." 23 These class differences are important to the issue of reparations for the same reason they are important to affirmative action as it currently stands: well-off individuals would stand to gain as much as impoverished ones. Although this might be an improvement over current policy, in which middle-class African Americans benefit to a greater extent than working-class and poor individuals, it still ignores the particular needs of the most disadvantaged. Further, while the black capitalism programs of the 1970s focused on developing business skills within the African- American community without facing up to the reality of a severe deficit in financial capital, a simple reparations strategy commits the opposite error. Simply giving cash payments to Americans of African descent ignores the social and human capital needed in order to put that money to work within the community. Such a flood of money would create a situation of anomie (normlessness) and would not necessarily lead to more stable community development. Instead, programs are needed that bring both financial and social capital into the black community.
Returning to the example of urban civil unrest, we might pose another wealth-based question: If residential integration were a reality, would there have even been a ghetto to be looted? How likely would riots have been if the African-American community had been dispersed evenly among whites and other races, constituting 10 to 20 percent of each neighborhood? Even without residential integration, if the majority of African Americans had owned the homes in which they resided, how likely would a riot have been, thereby lowering the property values of the resident-owners? The answer to all these questions is that if owning businesses and homes were a part of African-American life, the risk of civil unrest would be dramatically lowered. The counterpoint to this conclusion is that as long as African Americans face major institutional obstacles to property ownership, the risk of such conflict remains.
As in the case of business proprietorship--where increased competition for small-business formation from new immigrants may keep rates of black business ownership low--obstacles to black home ownership may be more formidable now than they have ever been. While interest rates are lower than they were in the 1970s and early 1980s, housing price inflation during the 1980s priced many middle-class African-American families out of the market. "Thus," as Melvin Oliver and Thomas Shapiro explain, "in a housing market where access to housing is becoming more and more difficult because of price inflation, younger middle-class blacks may be entering the market later and at a much lower level than their white counterparts." 24 Even if they do manage to acquire a home, it may be at a lower equity level, since African Americans have fewer assets to begin with, resulting in smaller down payments.
Further, "because homes in all-black areas increase in equity at a slower rate than comparable homes in white neighborhoods [or may even decrease in value], young blacks may not receive the same rate of return and thus secure the wealth accumulation of similarly situated whites in all-white neighborhoods," according to Oliver and Shapiro. 25 Their prognosis is grim as well: "Forced to buy housing in black neighborhoods because of racial discrimination or lower housing prices, the black middle class actually falls farther behind in the search for true economic security." 26 In other words, incentives to increase black home ownership will do little to narrow the racial gap in net worth if African Americans cannot buy their homes in racially integrated neighborhoods.
This situation leads to an even grimmer reality. Much of the discussion of residential segregation focuses on the deleterious effects this pattern has on African Americans. Often left out of the debate, however, is the beneficial effect that segregation has for whites. Although the housing system is racially segregated in terms of choices, it remains one market system for blacks and whites, and thus housing value outcomes for whites are not independent of those for African Americans. Housing owned by whites is worth more precisely because it is not situated in black neighborhoods. Researchers have documented how black housing appreciates at a slower rate (or even depreciates) when compared to similar white housing, but little work has focused on systematic economic analysis of residential patterns to generate an overall estimate of the equity gained by whites as a result of segregation in housing markets (as, for instance, estimates of the value of slave labor have been generated).
Property has the particular attribute of quantifying the social value of ideas or objects. Reading a log of prices assigned to various objects can be viewed as akin to an archaeologist digging through strata of earth to follow the development of a civilization. In this vein, when a neighborhood's housing values precipitously decline as the percentage of black residents increases, the situation provides a record of the social value of "blackness" on the part of society. In this way, the social-psychological realm of racist ideology may be directly linked to the economic arena in the valuation of property.
This devaluation of black neighborhoods is partially a result of white fears of a decline in property values and the white flight that ensues. In other words, there is a loop: as long as whites are a significant majority and have the ability to decide where they will live, they will have an economic incentive to flee integrated neighborhoods, thus continuing the vicious cycle. Aside from any personal ideology, it is in the economic interest of white homeowners to sell off when they anticipate that the neighborhood has reached a racial tipping point, for fear others will make the same calculation and sell off first, causing a general loss of value before they have had a chance to sell (given that any rash of selling depresses prices). Soon, all the neighborhood residents also believe that they need to sell because they are anticipating that others will do so. This "expectation of expectations" is how German systems theorist Niklas Luhmann defines social structure. 27 Thus, both blacks and whites are trapped by this social structure into reproducing current residential patterns. As a result, even if African Americans were allowed equal access to the home buying market and if interest rates were prescribed by law to be the same for blacks and whites, African Americans would still be at a disadvantage in terms of housing values, since whites could still flee and thereby depress housing values for blacks. Remedies for this situation are difficult to come by. Politically, any policy limiting the market (restricting the ability of white homeowners to sell, for instance) would fly in the face of the notion of individual choice that is so central to American ideology; economically, it would not be in the immediate interest of whites, whose housing is generally worth more precisely because it is not in a black neighborhood. In this way, race and class can reinforce each other.
Currently, given the difficulties they face in purchasing homes, when African Americans do find a desirable community that will sell to them, large numbers of black potential homeowners are drawn to that area (in the long term, perpetuating the dynamic of race and property inequality). One recent study shows that blacks are reluctant to move out of predominantly white housing tracts and that new construction increases the likelihood of African Americans moving into a predominantly white development tract. 28 In other words, black families usually--and understandably--take whatever limited opportunities are available to live in integrated neighborhoods. Ironically, however, if white homeowners were given a guarantee that the percentage of black residents would not exceed, say, 15 percent in a given community, they might be less likely to flee, because they would not fear a complete racial turnover of the community. But such ironic constraints on the residential choices of African Americans are no more a feasible alternative than limiting the market decisions of whites. In short, the challenge is to achieve a balanced distribution of black and white residential patterns without resorting to draconian encroachments on the property rights of either group.
In this vein, there may be ways to structure incentives into the property tax code to foster integrated communities. For example, some policy analysts have proposed the development of "social insurance." 29 As applied to the issue of integrated housing, this form of insurance would protect property owners from any rundown in prices resulting from selling sprees as a neighborhood "tips" from white to black. With this insurance in place, the economic incentive to pull out when a neighborhood starts to integrate would be eliminated; ideally, the insurance "policy" would never need to be cashed in. The difficulty lies in the details, of course, especially the task of factoring out changes in prices that may be occurring as the result of other exogenous forces. In order to better develop policy options to address the racial gap in housing wealth, it might be useful to study communities such as Columbia, Maryland--an integrated community where owner occupancy is the norm--using ethnographic or other more detailed methodologies. It would be interesting to compare this community to ones that are predominantly white and ones that are predominantly black (such as Silver Springs, Maryland) where homeownership is also the norm to determine the relative effects of integration per se and those of property values on life outcomes.
While it is difficult to be optimistic about the possibility of change in the realm of race and real estate, another development initially appears more promising for the future of wealth equality. Specifically, as a result of rapid price gains in the securities markets, stocks now outpace real estate as the primary investment vehicle for American families. Although "there are no definitive current numbers about how many American households have more money in stocks than in real estate," according to Brett D. Fromson, "the value of stocks held by Americans now exceeds $5 trillion." 30 This 1995 statistic edged out the estimated $4.5 trillion that Americans held as home equity. These statistics may be misleading, however, since the distribution of wealth in liquid assets such as stocks is more unequal than that in real estate. Since a relatively small number of individuals own huge amounts of securities, the modal (most common) American family may still have a greater net investment in its home. Nonetheless, Fromson reports that many economists and market analysts agree that this represents a historic shift.
What does this mean for African Americans? On the one hand, stock certificates know no skin color. An African American's purchase of IBM or DuPont stock does not affect a white individual's decision about which security to buy (as purchases by blacks might have affected a white person's real estate decision). The anonymity of stock certificates means that there is much less potential for the emergence of a vicious cycle such as that encountered in the housing market. On the other hand, African Americans are currently much less likely to invest in the stock market, and those who do will generally reap lower returns in absolute terms since they are starting with less. Also, given the recent run in stock market prices, if blacks are to enter the stock market in greater numbers, they will be doing so at a time when prices may already be inflated. Therefore, they will find themselves in a precarious situation and at a disadvantage compared to whites, who have enjoyed a head start. Further, with limited assets to begin with, African Americans may be more hesitant to put their nest eggs in such risky investment instruments as common stock or corporate bonds.
Therefore, short of radical policy interventions such as reparations or government-dictated residence patterns, it is likely that the black-white asset gap will continue to widen. This is true because of the cruel fact that wealth begets greater wealth. Starting with a few hundred dollars at 10 percent compounded interest, an individual will end up with a thousand dollars after a decade or two. Starting with a thousand dollars, however, another individual will end up with several thousand dollars, and the wealth gap will have grown in absolute terms despite equal access to investments. (This calculation does not even take into consideration the greater yields available to individuals with more money to invest.) Thus, as long as the economy grows at a decent pace, thereby creating wealth for all Americans, the asset gap between blacks and whites will grow wider. This fact dictates an ultimate trade-off in policy choices. The more universal an asset development policy is, the more politically popular it becomes, but the less it will do to reduce racial inequalities in wealth (and therefore other outcomes).
An even more potentially dangerous situation may be engendered if the move to privatize Social Security becomes law. In an effort to increase the nation's personal savings rate (which hovers around 5 percent) and at the same time save the Social Security trust fund from bankruptcy as the baby boomers move into retirement, many conservative lawmakers are arguing for the conversion of Social Security from a defined-benefit program that invests in government bonds (debt) to a defined-contribution program that invests in the stock market (assets)--akin to a corporate 401k or Individual Retirement Account. A defined-benefit, or fixed-benefit, pension (Social Security's current structure) guarantees participants a set return during their retirement, in the form of a monthly check. Changing to a defined-contribution, or fixed-contribution, plan would mean that individuals contribute a set amount from their paychecks (as they do now) but that the returns they receive when they retire depend on how the investments performed during the interim. In essence, the transition to this new system represents a shifting of the risk from the government to the individual, albeit with the possibility of greater returns. Proponents argue that the average rate of return on the stock market would make the privatized system much more lucrative for the individuals regardless of whether they choose the investments themselves or whether the fund is administered by a federal trustee. These proponents also claim that the infusion of this new capital into the securities markets would stimulate the economy, creating jobs and better asset growth for all.
At least one scholar has argued that wealth inequality between blacks and whites is overstated when it does not take into consideration Social Security pension wealth. 3 By providing a better return to Social Security, a privatization plan might serve to help equalize wealth holdings between the races. On the other hand, such a fixed-contribution system might also put the retirement funds of many Americans for whom Social Security is their only pension plan (a group in which African Americans are disproportionately represented) at the mercy of the ups and downs of the stock market.
While this change would have important implications for racial differences in wealth holdings, it would have even greater implications for the class structure of the United States. The future economic well-being of workers--in terms of their retirement nest egg--would depend directly on the performance of the corporations in which their Social Security funds were invested. How can workers argue for an increase in wages if they know that their retirement fund (as reflected by the company's stock price) may suffer? This arrangement puts employees in the position of making a trade-off between future and current income. It also gives managers a rhetorical advantage in their efforts to keep wages depressed. This may already be taking place to a certain extent with the widespread investment in the stock market through private pension funds, but it would become all the more prevalent if the largest pension fund in the country (Social Security) became entwined with the stock market.
Some may argue that having the long-term economic interests of workers directly tied to the prospects of the firm helps to create common incentives for workers and owners and thus creates a more efficient site of production. They may also argue that workers would benefit by having greater control over the actions of corporations (through their privileges as shareholders). But a more pessimistic view holds that the current inequality of wages and asset ownership in the context of the modern corporation provides a gravely unequal starting position for workers and owners to voice their interests. Workers would be even more powerless in their negotiations with management for higher wages if not only their current standard of living but their future lifestyle as well depended on the largess of the corporation.
Within this tricky context of the nature of wealth and inequality, a sound policy to foster property equity between the races is difficult to implement. The simplest idea would be to implement a national wealth tax. At the end of each fiscal or calendar year, each individual would use a checklist to assess his or her assets and liabilities and would be required to pay the government a certain percentage of that net worth if it exceeded a given deduction. These funds would be redistributed to the asset-poor. While tax-based transfers are the most efficient way to remedy inequities (and also have the benefit of being color-blind), they are also politically risky. Political scientist Harold Wilensky has demonstrated that voter uprisings against taxes--such as Proposition 13 in California--are most likely to occur with respect to property taxes. 32
Given these political risks, lawmakers may have to be inventive in developing asset-based policies. One place to start might be slackening the strict asset tests that current welfare policy enforces. If welfare recipients were able to save without being penalized for their asset accumulation, public assistance might come closer to serving the role for which it was intended: that of a temporary safety net. Likewise, by selling public housing to its residents (who are predominantly black) in a program not unlike the VA or FHA programs instituted after World War II, the government could create a whole new class of urban homeowners with a stake in the American dream. Another interesting idea that has been proposed is the creation of Individual Development Accounts (IDAs) that foster savings among the asset-poor (who are disproportionately minorities). 33 Perhaps tax incentives could be implemented for these parents to save for their children's future expenses in much the same way that IRAs now act for retirement savings.
In an even more aggressive option, the government could institute child development savings accounts (akin to Social Security), with the government acting as custodian until the child reaches age eighteen. The money would then be released only for educational or occupational expenses such as tuition, licenses, fees, or capital investments. If asset-based policy were geared directly toward children, it might become more politically palatable to lawmakers who prefer not to "reward" poor adults. It is important to keep in mind, however, that every policy intervention has unintended consequences. For instance, if the government saved for children, parents might be more reluctant to do this themselves.
The bigger challenge may lie in designing a program that will sufficiently entice economically disadvantaged families to participate. Experience has shown that fostering savings among the poor is not easy. In an impoverished area of rural Kentucky, a foundation sponsored a program that matched the savings of individuals by contributing $6 for each $1 the participants put up themselves. Only eight people chose to participate. The program administrator, Jennifer Hart, explained why so few individuals enrolled: "They don't think they have a future. If they did, they would think about it and delay instant gratification. But they have no reason to. And they can't. They can only think about how they are going to feed the children this week and pay the rent this month." 34 These are significant obstacles. Nevertheless, policies that encourage the values of savings and thrift might be able to garner support from the political right as well as the left. Self-sufficiency and equity accumulation are effective rallying calls in the search for racial equity.
Summary and Conclusions
The classical economist and moral philosopher Adam Smith recognized that social classes arose when humans were able to accumulate and store resources. Before this development--when people were hunter-gatherers, or even during the early agricultural stages of development when people could not preserve what they did not consume--humankind existed in a classless society (though there were other forms of inequality). When individuals became able to store resources, class inequalities were generated, along with a corresponding change in social relations. At the end of the day, not everyone was equal, and those who had more could preserve that advantage. In fact, the word "asset" comes from an Anglo-French legal term, aver assetz--to have enough. 35 Individuals traded these accumulated goods--these assets--for other goods or for a guarantee of remittal in the future when times were not so rosy, when they did not have enough. Since the genesis of social class through this act of accumulating and saving, property relations and labor market issues have been intimately linked throughout history. For example, in sixteenth-century England, the common grazing land was parceled into privately held farms, creating newly formed private property. This Enclosure Movement, as it was called, set the stage for the agricultural revolution and the development of new technologies such as the seed drill and the cotton gin. These changes generated new inequities as well. First, land was not distributed equally; second, once new technologies emerged as a response to this nascent private market in the agricultural arena, inequalities sprouted up with respect to who owned and distributed these new means of production and who could afford to use them. In this manner, changes in the organization of land ownership engendered changes in the way agricultural work was organized.
The same relation between property laws, technology, and the organization of work can be seen in the Industrial Revolution. Specifically, the introduction of limited liability in the form of corporations allowed the collectivization of capital, thus providing the appropriate legal environment. Corporations were given the same legal rights as individuals to enter into contracts and incur obligations. Most important, when people pooled their property in this way, they insulated themselves from the debts and responsibilities of these institutions, using the corporation as a "front" for their business. This is why the owners of Exxon, for instance, are not subject to liens against their personal fortunes in the wake of the Valdez oil spill. The main societal benefit of this protection is that, with limited liability, individuals are more likely to take risks with their assets, thereby stimulating the development and production of new goods and services. Even as changes in property law can spur the development of new technologies and inequalities, the emergence of new technologies, such as the printing press, also generate new forms of property, such as copyrights.
Although property has been central to the history of stratification, and although the founding fathers of the social sciences such as Adam Smith, Karl Marx, and Max Weber were intimately concerned with property analysis, the role of wealth has been largely absent from the empirical tradition of research on inequality. This is even more the case with respect to the debate over racial inequality. From the initial wresting of soon-to-be slaves from their families and possessions along the western coast of Africa, to the failed promise of land redistribution after Emancipation, to the dynamics of residential segregation and differential credit access that continue relatively unabated today, African Americans have been systematically prevented from accumulating property. The link between property inequity and racial division is not unique to this country or even to the Western world. Property law has formed the centerpiece of race-based policies in countries as disparate as Germany under the Third Reich (dispossessing Jews from their wealth) and imperial Japan (which barred burakamin from ownership for several centuries). It could be plausibly argued that unequal property relations are a necessary (but not sufficient) prerequisite for racial divisions.
Although race becomes insignificant in predicting a number of important outcomes for young adults when asset levels are included in causal models, wealth itself is nevertheless distributed unequally by race. Thus, one may conclude that the locus of racial inequality no longer lies primarily in the labor market but rather in class and property relations, which in turn affect other outcomes. While young African Americans may have the opportunity to obtain the same education, income, and wealth as whites, in actuality they are on a slippery slope, for the discrimination their parents faced in the housing and credit markets sets the stage for perpetual economic disadvantage.
On the policy side, it is important to shift the debate about race from the traditional focus on the labor market to one geared toward rectifying wealth differences. Wealth, not occupation or education, is the realm in which the greatest degree of racial inequality lies in contemporary America. The implications of this finding for social policy are twofold. The first possibility involves shifting race-based affirmative action policy from the areas of education and occupation to a focus on asset inequality. The second argues for a shift to a class-based affirmative action policy--that is, implementing educational, hiring, and contracting preferences that are based on class and not skin color; such a policy must, however, include net worth in its definition of class if we are to avoid worsening black-white inequities. The political obstacles to any such policy changes are great. But the potential benefits to society are even greater. *
Notes
Note 1: Theda Skocpol, Social Policy in the United States: Future Possibilities in Historical Perspective (Princeton, NJ: Princeton University Press, 1995), 219. Back.
Note 2: M. Marable, "Staying on the Path to Racial Equality" in G. E. Curry, ed., The Affirmative Action Debate (Reading, MA: Addison-Wesley, 1996), 4. Back.
Note 5: For a discussion of the Bakke decision, see L. Chavez, The Color Bind: California's Battle to End Affirmative Action (Berkeley: University of California Press, 1998). Back.
Note 6: For a discussion of the weaknesses of affirmative action, see G. C. Loury, "Performing Without a Net" in Curry, ed., The Affirmative Action Debate, 49-76. Back.
Note 7: For instance, see R. D. Kahlenberg, The Remedy: Class, Race, and Affirmative Action (New York: Basic Books, 1996). Back.
Note 8: T. L. Cross, Black Capitalism: Strategy for Business in the Ghetto(New York: Atheneum, Back.
Note 10: W. K. Tabb, The Political Economy of the Black Ghetto (New York: Norton, 1970), 33. Back.
Note 11: Cross, Black Capitalism, viii. Back.
Note 12: K. Stein, "Explaining Ghetto Consumer Behavior: Hypotheses from Urban Sociology," Journal of Consumer Affairs 14 (1980): 234. Back.
Note 15: Tabb, Political Economy of the Black Ghetto, 32. Back.
Note 17: Cross, Black Capitalism, 16 Back.
Note 19: R. S. Browne, "The Economic Case for Reparations to Black America," American Economic Review 62 (1972): 42. Browne discusses research conducted by J. Marketti at the Industrial Relations Research Institute, University of Wisconsin at Madison. Back.
Note 21: C. Krauthammer, "Reparations for Black Americans," Time, 31 December 1990, 18. Back.
Note 22: Tabb, Political Economy of the Black Ghetto, 33. Back.
Note 24: M. Oliver and T. Shapiro, "Race and Wealth," Review of Black Political Economy 17 (1989): 21. Back.
Note 27: N. Luhmann, Power and Trust(New York: Columbia University Press, 1979). Back.
Note 28: S. J. South and K. D. Crowder, "Leaving the 'Hood: Residential Mobility Between Black, White, and Integrated Neighborhoods," American Sociological Review 63 (1995): 17-26. Back.
Note 29: D. Kirp and E. Davis, "Nothing to Fear But Fear Itself: Insurance Against Social 'Bads"' (Goldman School of Public Policy, University of California at Berkeley, 1997). Back.
Note 30: B. D. Fromson, "Stocks Are Replacing Homes as the Primary Nest Egg for Many American Families, According to Economists and Market Analysts," Washington Post, 27 November 1995. Back.
Note 31: J. P. Smith, "Racial and Ethnic Differences in Wealth Transfer Behavior," Journal of Human Resources 30 (1995): S158-83. Back.
Note 32: H. L. Wilensky, The "New Corporatism": Centralization and the Welfare State (Beverly Hills, CA: Sage, 1976), 14-23. Back.
Note 33: M. Sherraden, Assets and the Poor: A New Direction for Social Policy (Armonk, NY: Sharpe, 1991). Back.
Note 34: M. Janofsky, "Pessimism Retains Grip on Appalachian Poor," New York Times, 9 February 1998. Back.
Note 35: Sherraden, Assets and the Poor, 96. Back.
*: This article is adapted from portions of Being Black, Living in the Red: Race, Wealth, and Social Policy (Berkeley: University of California Press, 1999). Back.