The wealth gap has been one of the most persistent and unaddressed problems in the history of the United States. In fact, according to The Harvard Business Review, the gap hasn’t narrowed significantly in 50 years. Also, the gap is even worse when considering black and white business owners, which is where one might expect the gap to narrow itself.
According to the Federal Reserve Board’s Survey of Consumer Finances (SCF), the median white American income was about 70% higher than African Americans’ in the year 2010. Whites also have a net worth that is 7.9 times greater than blacks. Credit Suisse and Brandeis University’s Institute on Assets and Social Policy studied the issue for The Harvard Business Review and found that the gap exists for wealthy blacks as well.
Studying the wealthiest 5% of the black America, researchers concluded that black people have earned about 60% of what whites have earned over the last 50 years.
Here’s another way of looking at it. If you’re white and have a net worth of about $356,000, that’s good enough to put you in the 72nd percentile of white families. If you’re black, it’s good enough to catapult you into the 95th percentile.
They couldn’t compare the top 1% of whites to the blacks in the same income group, mainly because there are only 12 black families in the top 1%. They then compared the top 5% of blacks with the top 5% of whites. The income level necessary to reach the top 5% of African Americans is much lower than that of whites, about $356,000 per year. For whites, the number is over $1.5 million.
According to researchers, there are some similarities between rich whites and rich blacks: They are older, college educated, married, and either retired or running their own businesses. Most of them hold the bulk of their financial assets in their retirement accounts.
But there are some interesting differences in how they spend their money.
– Wealthy blacks tend to invest heavily in safe financial assets, like CDs, savings bonds and life insurance policies. Whites aim for the stock market, which is where the bulk of American wealth exists today.
– Wealthy blacks hold more of their wealth in real estate than wealthy whites. Much of this is in the primary residence.
– Wealthy black Americans are less likely to hold equity in business assets (9% vs. 37% for whites). Basically, wealthy whites are investing far more in their businesses than wealthy blacks. This translates to whites investing $468,000 in their businesses vs. just $68,000 for blacks. So, while wealthy blacks have a high rate of entrepreneurship, they are not as quick as wealthy whites to invest their money into their own companies.
The general conclusion of the study is that African Americans are more conservative in their investment strategy than whites. The authors say that this might be driven partly by the risk of confronting economic downfalls. African Americans have less of a family and community cushion in the event that they run into financial troubles, which can lead them to be extremely cautious about investing.
Another possible explanation has to do with inheritance. Only 7% of African Americans benefit from an inheritance vs. 36% for whites. Also, white family inheritances tend to be 10 times bigger than black families on average.
What is less easily explained away is the much lower rates of business equity among black business owners. Since both the wealthiest black people and similarly wealthy white people are equally likely to be running their own business, why does the white group have so much more equity?
One possible explanation floated by the Credit Suisse/Brandeis researchers is that whites have more access to start-up capital when they found their businesses, which translates into greater business success down the line. (This hypothesis is based on findings by economists Robert W. Fairlie and Alicia M. Robb.)
Lessons from this story:
1) Wealthy blacks lag behind wealthy whites primarily because for hundreds of years, whites have stolen wealth from black people and continue to deny us access to capital. Many blacks in the south, for example, had their land stolen from them by racist whites who lived above the law and would either kill blacks to take their property, jail them or run them off of their territory. To this day, this land is worth billions, if not trillions, of dollars and this property is in the hands of whites. The government has yet to remedy the wrongs done in the past.
2) Black Americans should realize that one important pathway to building wealth is to get away from the addictive temptation of working for white people. The best way to get rich in America is to a) own your own business and b) get involved in the stock market. Start small and never fall for the get-rich-quick mindset being promoted in media. When you are an owner, you can get ahead in a capitalist society. You can never achieve equality by begging someone else to give you an opportunity. That’s just a fact.
3) When you begin to invest and own, always remember that freedom is not free. If you aren’t willing to invest in yourself, then don’t expect anyone else to invest in you. So, when you start your business, reinvest a large percentage of your profits, invest part of your paycheck from your job and never fall for the temptation to spend the bulk of your money on expensive consumer goods that will leave you looking good but feeling enslaved. Those who build empires invest in them. There’s no way around that.