Saturday, December 3, 2022

Fed panel views increasing Black wealth as key economic driver

We all live in the same economy. There is not a black economy, white economy, Asian or Hispanic economy. If our economy grows faster, everyone should benefit, more or less.  Car dealers, furniture stores, and homebuilders will do more business.

So, if an expert says that one way to generate an extra trillion dollars a year in Gross Domestic Product is to close the wealth gap between black and white folks, that should provoke some thinking among business folks and policymakers. In North Carolina, it could mean an extra $30 billion in state GDP annually; basically, adding an extra Guilford County worth of output.

Recently, I listened to three knowledgeable folks — an economist, an economic development specialist and a banker — talk about the racial wealth gap, and the obstacles to reaching that trillion-dollar-a-year added potential.  They were on a panel sponsored by the Federal Reserve Bank of Richmond.  North Carolina is part of the Richmond Fed’s Fifth District, which also includes South Carolina, Virginia, most of West Virginia, Maryland and the District of Columbia.

The panelists were Kristen Broady, director of the Economic Mobility Project at the Federal Reserve Bank of Chicago; JP Julien of McKinsey & Company, leader of the McKinsey Institute for Black Economic Mobility; and Amir Kirkwood, CEO of Virginia Community Capital.

By itself, the income gap is still a problem. Black men make $17,000 a year less than all full-time workers. Black women make $10,000 less.

The wealth gap is bigger, hard to overcome and prevents a lot of potential small businesses from starting up and creating jobs.

What is wealth?

Wealth is the value of your financial assets (stocks, bonds, cash) and your non-financial assets (the equity in your home, your car, raw land), minus what you owe — your mortgage, credit card balances, and other debts.  It’s your net worth.

In 2019, the median white household had a net worth of $188,200; the figure was $24,100 for the median black family. One reason for the difference is inheritances:  30% of white households inherited in 2019 an average of $195,500. The comparable figures for black households were 10% and $100,000.

Another big source of folks’ net worth is their homes; 63% of Americans’ assets are in their primary residence, says Julien. “Traditionally, home ownership has been a big engine of wealth creation,” he says, because the equity can be tapped for funds to start up a business.

JP Julien

But that tends to favor whites.  As of the first quarter of 2022, the homeownership rate overall among households in the U.S. was 65.4%.  The rate for non-Hispanic whites was 74%. The Hispanic rate was 49.1%. The rate for blacks was 44.7% and it has been dropping over the past two decades.  In the ‘90s and into the 2000s, it was rising, reaching 49.7% in 2004.

A Zillow study of mortgage applications found that 19.8% of black applicants were turned down in 2020 compared with 10.7% of white applicants.

Kirkwood, the banker, says that one problem is the steady automation of the underwriting process. Data about an applicant is fed into algorithms and decisions are made. A banker more familiar with the community and “pattern of repayment of debt” would likely be more willing to lend, he says.

Broader problem

But the housing problem is broader than that. Entire neighborhoods can be undervalued.

“For a similar home — square footage, year built, number of rooms, similar neighborhoods — a home in a majority-black neighborhood tends to be worth 23% less relative to a white home,” says Julien.

Adds Kirkwood: “If you live in a community where underwriters and appraisers, who are hired by banks to value assets, devalue those assets because their perception of the community is less than its real value, then not only . . .  the African-American family that’s selling the house is not getting the full value, if it’s being transferred to another African-American household, they’re not going to see the incremental growth in that household.”

“So, the bank,” says Kirkwood, “has actually set up a situation where it’s contributing to devaluation of a community overall.

Amir Kirkwood

“So, if your source of equity in starting [a] business is your home, and you don’t have the ability to take value out of your home . . . then how do you create a small business that can generate retained earnings, ultimately create wealth? You don’t.”

Contributing to the wealth gap has been a decline in black-owned banks.  An FDIC survey showed there are 16 black-owned banks in the country, with assets of $4.8 billion. Wells Fargo, by comparison, has assets of $1.9 trillion.

Because funding is harder to get for black entrepreneurs, they tend to be over-concentrated in sectors that are less capital-intensive, says Julien. “People ask why there aren’t more blacks in energy and construction. These are capital-intensive. It requires capital to do that,” he says.

Most black-owned businesses are sole proprietorships in the service industry, according to Broady, with one or two employees.

Big impact

A lot of people in government and nonprofit organizations are working on economic development, trying to recruit companies to low-income communities, particularly in rural areas. This addresses the earnings gap if the jobs pay more than typical wages. But if we can close the wealth gap, the impact would be great.

Julien describes the impact on our economy of the wealth gap. “Having less wealth, you consume less, right? So, your ability to buy a home or transportation, you consume less. You, secondly, are able to invest less in investments we know support upward mobility, whether that is your own education, or a home. The last piece of it, also, constricts the ability of people to take risks.

“Our economy rewards smart bets that people place. So, whether that’s starting a new business or funding that early idea that you have or investing in an emerging market. There are these ways in which a lack of wealth and a lack of financial security that comes with that doesn’t allow you to take certain risks. And that limits our overall economic growth.”

Julien says eliminating the gap would add 5% to per capita GDP.  “To give you a sense, the U.S. economy grows by 2 to 5% in a good year.” He’s talking about additional growth, “not kind of keeping a fixed pie and redistributing it.” U.S. GDP is around $24.3 trillion.  A 5% increase would be $1.2 trillion more in goods and services produced by our economy.

There is no one thing that will do it. “Determinants of the racial wealth gap are very nuanced,” says Broady, “and sometimes we hear that pulling once on the levers will stop it. Pulling any of the levers could be meaningful.  Improving any of them is awesome and wonderful.  But just one of the levers is not going to solve the problem.”

Kristen Broady

One large lever is bank lending. Kirkwood’s bank is a community development financial institution, a lender certified by the federal government to provide services to low-income communities. “On the banking side, it can come from opening up the credit box,” he says, “opening up the assumptions around underwriting. Opening up the assumptions about how we perceive a community and utilizing data better to really get to the answer of the question, is my perception of risk equal to the reality of risk?”

“A lot of time, the perception of risk in the underwriting and credit models in the mainstream banking sector is not equal to the actual risk of the loans being made.  The banking sector as a whole is waking up to this,” he says.

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