Ellora Derenoncourt on the US Racial Wealth Gap

This Social Science Bites podcast offers a dollop of good news and heaping helping of bad. The good news is that since the end of American Civil War the economic condition of Back Americans has improved, using as a comparison the presumed status quo population of white Americans. According to Princeton University economist Ellora Derenoncourt, this “wealth gap” has fallen from 60-to-one to six-to-one in the intervening 160 years.

While that’s heartening, as Derenoncourt details for interviewer David Edmonds, that six-to-one gap hasn’t budged since the 1950s. The academic, the founder and faculty director for Princeton’s Program for Research on Inequality, breaks down that stall using historical data, parsing out differences between classes and also discussing the difference between income and assets.

“Income,” she notes, “has its own growth process, and income between the two groups has been converging over the last 150 years, and savings from income helped Black Americans accumulate some wealth, driving the racial wealth gap down.” But as incomes came closer, accumulated assets and the wealth derived from that have only inched closer, driven in part by generational wealth, especially in housing.

“[F]or most Americans, housing is their wealth,” she explains. “And we can keep going down the distribution to ask, ‘“’When is it the case that white Americans at this point in the distribution are mostly renters versus homeowners?’”’ That’s where we’re going to start to see these dynamics of the wealth gap shift.

Derenoncourt closes with some policy ideas that could accelerate closing the gap, including the politically hot topic of slavery reparations.

To download an MP3 of this podcast, right-click on the link. The transcript of the conversation appears below. 

David Edmonds: The income gap between whites and Blacks in America has been declining, so you might expect average African-American wealth to be catching up with average white wealth. But as the Princeton economist Ellora Derenoncourt explains, that’s not what’s happening. Ellora Derenoncourt, welcome to Social Science Bites.

Ellora Derenoncourt: Thanks so much for having me.

David Edmonds: We’re going to discuss today the race wealth gap in the United States. You’ve particularly researched the gap between the white population and African-Americans. Simple question to start with, how big is that gap today?

Ellora Derenoncourt: That gap, when measured as the ratio of per capita white wealth to per capita Black wealth, is around six to one today, meaning that Black Americans hold, on average, about 17 cents for every dollar of white wealth.

David Edmonds: Now it’s important that we’re talking about wealth rather than income. So for the non-economists among us, can you just explain what the difference is?

Ellora Derenoncourt: Absolutely. So it’s useful to think about the processes that generate wealth versus income. Income is something that arises from, potentially, earnings of individuals or transfers from social programs. It’s something that’s generated anew with each person, individual income. Wealth, on the other hand, is something that accumulates over generations, and I think that’s a critical difference. So of course, income and savings from income are inputs into wealth, but so is past wealth and the returns on past wealth, and that’s really the key difference.

David Edmonds: So that takes us to history. Let’s go back in time and see how this gap evolved. It obviously doesn’t make much sense to talk about the gap in times of slavery, but do we have data post-Civil War? Do we have good data from that moment onwards?

Ellora Derenoncourt: So data really is the key question here in researching the racial wealth gap over the long run. We have known that the gap has been around six to one for at least 40 years, but then there have been questions about what it was before that, before the advent of modern survey measures of wealth with also demographic information. Now it turns out that you can actually look at the Black-white wealth gap. Very historically in the United States, using Census data. The Census in the late 19th century had questions on wealth and the earliest post Civil War measure is from 1870 where we know that the wealth gap was more like 20 to one.

David Edmonds: So do they ask people to catalog all their assets? How do they do it?

Ellora Derenoncourt: So at that time in the United States, very comprehensive property taxation was common at the local state level, which means that we actually had a lot of information on wealth, because assessors were going around and assessing not just real estate, which is the remnant of the property tax today that we still have in the US, but also other forms of personal property. So you can imagine assessors actually walking into homes and assessing the silverware or the furniture and other items that are considered everything else that contributes to one’s personal property, beyond real estate in the home you own.

David Edmonds: And so how have you established this 20 to one figure? Have you taken a snapshot of African-Americans and compared that with a snapshot of the white population?

Ellora Derenoncourt: So in our study of white to Black wealth ratio, we actually go back to pre-Civil War, because around 10% of Black Americans were free even before the Civil War. So the earliest number that we can directly use data on individuals to compute comes from the 1860 census, and there, the wealth gap was more like 60 to one, because 90% of Black Americans were enslaved and as property themselves, had no legal right to own property. From there, you can already see the massive jump of Black wealth after emancipation, once some accumulation begins to happen in the newly freed Black population.

Our study looks at specifically the growth in Black wealth versus the destruction of wealth in the enslaved. Abolition in the United States was not accompanied by payment to former slave holders, so there was an entire category of wealthy people that actually disappeared. So there are two pieces moving here. One is that most Black Americans suddenly are able to legally accumulate property, and white slave holders lose their slave wealth. Now, which of those contributed to that big drop of the wealth gap from 60 to one to more, like 20 to one? Most of it is coming from new accumulation of wealth by Black Americans. Some of it, around a quarter, in a rough calculation, could be attributed to the disappearance of wealth in people.

David Edmonds: Right. So it goes from 60 to one to 20 to one to today, six to one. And I want to ask you, what’s happened from the 20 to one to the six-to-one period? But again, you can’t have gone through millions and millions of households. You must have just looked at a few thousand to get a general picture.

Ellora Derenoncourt: Well actually, we have access to, as researchers. So the US Census becomes declassified after 72 years. So we have access to what we call the complete count, historical US Census; we have data on everyone, and so those numbers are based on the entire population. It is important to account for the enslaved, because under slavery, Black Americans were not enumerated individually by the Census, but counts of slave holdings were, so we actually make sure to go back and count how many enslaved Black Americans there were in 1860, attribute zero wealth to that group to get an accurate picture of the wealth ratio for the whole population.

So we are able to use this very complete data in the 19th century, but unfortunately, the US Census phased out questions about personal property and wealth generally by the early 20th century. So we have this gap, that ends up being about 100-year gap, in information on wealth by racial group. And that was the goal of my team. We tried to fill in that missing set of years for the racial wealth gap. And the way that we did that was to make use of the fact that, again, most states taxed wealth and had very good records of their revenues and the assessed wealth in those states.

And there were six states in particular in the US South that not only reported on assessed wealth for their populations, but also reported it separately by racial group. Those states were a mix of — so they’re all in the South — but upper South and lower South, and the vast majority of the Black population in the US at this time was located in the South. So what we do is we use information on the growth in Black wealth in these states to extrapolate to the nation as a whole for Black Americans. And then we use existing estimates of national wealth to compute non-Black wealth and Black wealth, and then take the non-Black population and the Black population and estimate the racial wealth gap. What we are able to do is fill in the period post 1870 through the 1920s using this approach, and what we learn is that by around the 1920s,1930, the wealth gap further declines to around 10 to one, and then we’re able to extend measures from the 1940s onwards using, actually historical versions of a modern survey that is the bread and butter of wealth studies today, the Survey of Consumer Finances. It turns out that the Federal Reserve was actually conducting this survey all the way back in the late 1940s, and they became kind of this lost resource. Researchers had to go back and use very old data that was in out-of-date formats and bring it back into modern, digitized form in order to study wealth for this period. And so once that data is revived, we can actually extend our analysis and cover the late 1940s all the way to the present.

Now what we learned from that is that this six-to-one number that we’re living with today that’s not only been true since the 1980s it’s been true since the 1950s. So we’ve had this wealth ratio of six to one for over 70 years.

David Edmonds: So that’s very dramatic. Before I ask you about the last 75 years, as it were, where it’s been relatively stable. This decline from 20 to one to six to one — how do you explain that? And was there a period post-Civil War when that decline was at its fastest?

Ellora Derenoncourt: Absolutely. So one of the lessons of our paper is that the fastest convergence in wealth between Black and white Americans occurred in the first several decades after emancipation. You can see that from the numbers that I’ve given you so far. So how is that possible? It’s coming from that rapid growth in Black wealth, which was starting out at such low levels that if you add a little bit, that represents substantial growth, right, compared to the white population that had a larger base level. And yes, they’re accumulating wealth, but the growth rate is not as much. So the wealth ratio between the two populations is going to rapidly decline in that initial period.

A key contribution is savings from income. Income has its own growth process, and income between the two groups has been converging over the last 150 years, and savings from income helped Black Americans accumulate some wealth, driving the racial wealth gap down.

However, I mentioned these two components feeding into wealth accumulation. There’s what you save from your income, and there’s how your past wealth accumulates and returns on past wealth, and that ends up being kind of like two competing dynamics in wealth accumulation. As wealth levels grow, the return on existing wealth becomes more important relative to the return, or the savings, from income. And what that means is that, you know, we reach a point where convergence dramatically slows down. If Black Americans and white Americans had what we call, in our study, “equal opportunities of wealth accumulation,” they save at the same rates, they experience the same returns on wealth, we would see continued convergence through the present. We wouldn’t be stuck at that six to one number, but instead we are, and I’m happy to speak more about why.

David Edmonds: So although income gaps have continued to narrow, wealth gaps since the 1950s have been stable, and the reason is that the non-Black population have greater assets, which have been accumulating value faster than the income gap has narrowed.

Ellora Derenoncourt: Exactly. So as past wealth becomes more important in the wealth accumulation dynamics, and that’s a natural process as wealth levels rise, relative to savings from income, then you’re going to see convergence slow down naturally. And that’s this hockey stick-shaped conversion. So it’s kind of remarkable that if you model these two populations almost like separate nations. Then you think about the convergence in resources of one versus the other, they have followed exactly that pattern with this additional nuance that we are no longer kind of on a convergence path. We’re stuck.

David Edmonds: And if we were to drill down a bit deeper into the numbers, and were to compare working class whites with working class Blacks, or middle-class whites with middle-class blacks, would we get exactly the same pattern?

Ellora Derenoncourt: We get actually different patterns. So of course, focusing on per capita or average wealth misses any differences along the distribution, and we know that the average can be skewed or highly influenced by the tails. And in the case of wealth, average wealth is highly influenced by the upper tail. That might lead you to think that the average wealth gap might be overstating gaps between Black and white Americans, right? This six to one number. But it turns out that the median wealth gap, so that’s more thinking about the middle class and the middle of the population is even larger. It’s more like 10 to one. Now, why is that? In a separate study, this same group of co-authors and myself, we looked at these gaps along the distribution, and the key question here, if we think again going back to 1860, 90% of black Americans are enslaved. 90% of the population has zero wealth. The median certainly has zero wealth. That means that the racial wealth gap at the median is infinite.

When did Black Americans at the median come into some positive wealth holding ends up being the key question for the median wealth gap, and our study suggests that that’s around World War Two, or just after World War Two. So we go from a gap that’s infinite to some very, very high number, and today, again, following this sort of convergence pattern, we’re at a gap of around 10 to one, and have been for several decades,

David Edmonds: If I’ve interpreted that right, the gap between middle-class whites and middle-class Blacks in wealth terms is even larger than six. To one, it’s 10 to one. We’ve been talking about averages and aggregates. Does that mean that the gap between working-class whites and working-class blacks is less than six to one?

Ellora Derenoncourt: Not necessarily. It becomes a little hard to trace out these gaps as you go further and further down in the distribution, you have fewer people, just mechanically. But we do know, for example, that if you look at who owns homes and who doesn’t, there are major gaps. For example, the median Black household doesn’t own their home, whereas that’s true for white Americans at the median, and that’s the most important asset outside the top. So for most Americans, housing is their wealth. And we can keep going down the distribution to ask, “When is it the case that white Americans at this point in the distribution are mostly renters versus homeowners?” That’s where we’re going to start to see these dynamics of the wealth gap shift.

David Edmonds: I see. Very interesting. Now I’ve noticed that during the course of this conversation, both you and I have talked about, first the White, Black gap, and then the black, non-Black gap. And those are not exactly the same, because the non-Black gap can include Latinos and Asian Americans. I’m just wondering whether those populations confuse the situation at all.

Ellora Derenoncourt:  Absolutely. So this is a critical measurement question, and for the historical time period that we were focused on, really the best we could do was to create these estimates of Black wealth and then use national estimates of wealth to kind of difference out and measure non-Black wealth. Now in this period, historically, so we’re talking late 19th, early to mid-20th century United States, the non-black, non-white population is extremely small. After the borders open up to more countries in the 1960s, we get a growth in exactly the non-Black, non-white segment of the population. So fortunately, at that point, we have enough data to separate out these different groups. And although our main measure, just for consistency, continues to be the non-Black to Black ratio, when we focus specifically on the white to Black ratio in the years where we can separate out these other groups, we actually get even larger gaps.

So this suggests that the other groups that make up American society have wealth that’s somewhere in between. We did focus specifically on some of these other groups in the more recent data, but I would argue that an area for future research is to try to construct some of these measures going back historically, people have tried. It’s just really challenging, both because of changing racial classification and measurement in the US and the lack of comprehensive wealth data.

David Edmonds: OK, let’s talk a little bit about what’s to be done. Is the market going to sort this out? Do we just need to be patient. Is there something we can do in the property market, for example, because that seems to be the key ingredient here to the wealth gap.

Ellora Derenoncourt: Yeah. This is a great question. It’s useful to come back to this underlying model that helps rationalize our data and the shape of convergence and also why we’re not seeing convergence any longer. So again, there are these two key components, the degree to which existing wealth grows due to returns on wealth, and this savings component that’s driven and determined more by income dynamics. We know that the relative role has changed with respect to income versus past wealth, and past wealth is more important, so this piece of returns on existing wealth, or capital gains, is now the current driver of the racial wealth gap.

Now where do differences in capital gains come from? Essentially, what we show in our study is that the different portfolios of wealth for the average Black household and average white household can pretty much tell us why we’ve seen not only no convergence, but actually a widening of the racial wealth gap. To put it very simply, Black Americans are much less invested in stock equity, the average Black portfolio is much more exposed to housing markets, and white portfolios have a mix of stock business and housing. Stock markets have appreciated about five times faster or greater than housing markets. So that growth in the stock market, the takeoff that has been experienced in the last several decades, really pushed average white wealth up relative to average black wealth.

If we were to let the market run its course, we will see widening racial wealth gaps for this same reason. And so in the paper, we talk about well, if policymakers had a goal of racial wealth equity or closing the racial wealth gap, which is a phrase that you do here in the policy sphere, that would either require very aggressive policies on these determinants of wealth, so capital gains rates differences, or savings differences, or income growth differences, and we cite some numbers in the paper. Imagine that black Americans saved 30% of their income every year, or experienced income growth rates of 8% a year. That’s thinking comparing again, across countries, China, experienced income growth rates like that in the 2000s and by contrast, if we instead think about the origins of this slow convergence path that we’re on, which is the fact that most Black Americans at the eve of the Civil War had nothing, this comes back to debates about reparations.

So if we dealt with the wealth that you know, many argue Black Americans were owed eve of the Civil War, that type of scale would actually equalize wealth differences between Black and white Americans. And so I think that needs to be part of the conversation.

If I were to summarize, if we let the market do its thing, the wealth gap is going to increase if we take seriously the types of policies, financial literacy, or focusing on labor market gaps that do get discussed in terms of closing the wealth gap, it would take much more aggressive versions of those policies to make a difference. And then finally, if we start to think seriously about reparations, now we’re talking about eliminating racial wealth gaps.

David Edmonds: I’m guessing that the political climate at the moment is not conducive to talking about reparations. You say that you often hear people talking about the objective of narrowing the race wealth gap. I’m guessing that too is no longer a part of the conversation.

Ellora Derenoncourt: I think there are still a lot of people for whom it is an important policy issue. It’s true that, you know, it depends on the political regimes that are in place in terms of the feasibility of different policies. I think our role here is more to keep the connection between the data and policy efficacy alive, and to point out that when it comes to wealth specifically, we can’t ignore the history. If we do as a society want to address this, maybe not particularly right now, but in the future, then we need to reckon with the historical forces determining the wealth gap today.

David Edmonds: Ellora Derenoncourt, thank you very much indeed.

Ellora Derenoncourt: Thank you so much for having me.