People see sufficient wealth as access to opportunity, and they see a lack of wealth as vulnerability. It’s why the nation’s wide racial wealth gaps are such a major concern.

But closing the various gaps is extremely complex because wealth isn’t just one thing. It’s several often interrelated things.

This episode looks at various components of wealth, some of which are controversial. For example, are inheritances a creator of the gaps, or is their influence overestimated? Conversely, is the importance of labor earnings underappreciated? And what about past and present discrimination? Or personal choice? How do they play in?

It starts with this fundamental question: Are we measuring wealth correctly?

JAY LINDSAY:

The Black statesman and orator Frederick Douglass had just been named president of the Freedman’s Savings and Trust Company. And he, along with everyone else, knew the bank was in deep trouble.

Freedman’s Savings was established near the end of the Civil War to provide financial services to former slaves and Black war veterans, and their families.

The bank thrived at first, holding millions for tens of thousands of depositors, many of whom trusted it to protect the first wages they’d ever been paid.

But by the time Douglass took over in 1874, the bank was badly weakened by overexpansion, a worldwide financial panic, corrupt trustees, and racism.

In a letter to depositors, Douglass hoped to inspire confidence in the institution. And he made a case for the bank’s importance by referring to the importance of something it both created and held – wealth.

Here’s what he wrote: “The history of civilization shows that no people can well rise to a high degree of mental or even moral excellence without wealth. A people, uniformly poor, and compelled to struggle for barely a physical existence, will be dependent and despised by their neighbors, and will finally despise themselves.”

Douglass added this:

“The mission of the Freedman's Bank is to show our people the road to a share of the wealth and well-being of the world.”

Like Douglass, people connect wealth and well-being. They see sufficient wealth as not just access to things we need, but also to opportunity.

And they see a lack of wealth as vulnerability – to the unpredictability of economies, to the struggles and despair Douglass refers to.

It’s why the nation’s wide and persistent racial wealth gaps are such a major problem. Here’s Boston Fed researcher and assistant vice president BETH MATTINGLY:

BETH MATTINGLY:

The takeaway for me is that these gaps are large and relentless. Have they gone up, have they gone down? That's not the key takeaway for me. For me, it is the magnitude and the persistence, and that despite efforts that may help individual and families, aggregate change has eluded us, aggregate progress has eluded us.

JAY LINDSAY:

I’m Jay Lindsay, and this is Six Hundred Atlantic, a podcast produced by the Federal Reserve Bank of Boston. This season, we’re looking at racial disparities in the U.S.

The Boston Fed’s Research Department devoted an economic conference to these racial gaps, and we’re following their lead and exploring them further. Among the most important and intricate disparities are the wealth gaps.

We use the plural “gaps,” because there are wealth gaps of varying sizes between the races. There are also racial gaps between various components of wealth, such as savings, incomes, or home ownership and appreciation.

Wealth isn’t just one thing, it’s several, often interrelated things, and that makes closing the various gaps extremely complex.

Here’s Boston Fed economist Jeff Thompson, who organized the conference:

JEFF THOMPSON:

What is wealth? Well, wealth is the sum of the value of all of the assets you hold whether that's housing, real estate, stocks, retirement plans, any inheritances or gifts that you might have received in the past, art, auto. And it's minus all the debts you hold, right? Your mortgage, your credit card debt.

So, it's just a compilation of a huge number of underlying pieces. And each of those pieces themselves is important and complicated.

JAY LINDSAY:

In this episode, we’ll look at a few aspects of wealth discussed at the conference, some of which are contested or controversial.

For example, inheritances. Are they a creator of the gaps, or is their influence overestimated?

And then there are labor earnings. Everyone knows they matter, but do people fully understand their importance?

What about past and present discrimination? Personal choice? How do they play into the wealth households can accrue?

Mattingly believes that, as complicated as closing racial wealth gaps is, it’s essential to keep pressing to figure it out.

BETH MATTINGLY:

It's a matter of equity, it's a matter of respect, it's a matter of fairness. Things that our nation values.

The disparities are large, they're replicated over generations and there is huge momentum behind them. So, if we don't change how we've done things, and how we do things, and provide different opportunities and different pathways, we're going to keep doing what we've always done.

JAY LINDSAY:

We start with a fundamental question: “How should we measure wealth?”

One aggregate measure is “market wealth.” It’s the difference between the sale value of a household’s assets minus its debts.

In a report released just prior to the conference, Thompson and his Federal Reserve colleague Alice Henriques Volz calculated average market wealth per household by racial group, projected to when the head of household is 62.

Their work indicates Asians are, by far, the highest-wealth racial group in the U.S., with projected average market wealth of $1.23 million.

That’s followed by whites at $927,000, Hispanics at $226,000, and Blacks at $145,000.

But that’s without including what Thompson and Volz argue is a key source of wealth that’s often ignored in calculations: projected defined benefit pensions. These pensions pay recipients a particular amount on a regular schedule throughout retirement.

Defined benefit pensions are common in the public sector, which Thompson notes historically has strong concentrations of Black employees.

Thompson says wealth surveys don’t ask about pensions because people struggle to put a dollar value on them in the years before they retire. He adds that many people don’t realize defined benefit pensions are so common.

JEFF THOMPSON:

That's a mistaken impression that a lot of people have. But defined benefit pensions account for 15% of household assets.

JAY LINDSAY:

He and Volz calculated the impact of defined benefit pensions by adding them into a wealth measure they call “private wealth.”

After this calculation, wealth increases for all groups, though their ranking remains the same.

Asians have the most projected private wealth, with about $1.5 million. That’s followed by whites with about $1.2 million, Hispanics at $393,000, and Blacks with $326,000

Under this measure:

• The wealth gap between Asians and Blacks falls from about 8.5-to-1 to 4.5-to-1.
• Between whites and Blacks, it drops from over 6-to-1 to less than 4-to-1.
• Between whites and Hispanics, the gap decreases from more than 4-to-1 to just over 3-to-1.

Cleveland Fed economist Dionissi Aliprantis says it’s clear that defined benefit pensions are significant enough to affect people’s spending and saving decisions.

DIONISSI ALIPRANTIS:

I'm probably going to change my behavior today if I know that I have this wealth in the future. If I know that I have this defined benefit plan, I'm probably going to save in a different way. You know, just in terms of understanding people's behaviors, and how households or individuals are thinking about their own wealth, I think it's really important to include it.

JAY LINDSAY:

Still, huge racial wealth gaps persist, no matter who is measuring them, or how.

Harvard sociologist Alexandra “Sasha” Killewald said when she thinks about the endurance and complexity of the gaps, she thinks about a series of bathtubs with different faucets pouring into them. 

A bathtub’s water level is a person’s wealth level, and the different faucets represent the different wealth sources.

SASHA KILLEWALD:

And we can imagine trying to equalize the flow from any one of those faucets to try to equalize the level of water in the bathtub. But any one faucet alone can't make up for the fact that all the other faucets are still flowing unequally. And so, when we think about what it would really take to get to greater equity in wealth, we have to target all those different faucets.

JAY LINDSAY:

Of course, the starting water levels in the metaphorical bathtubs matter, too.

Killewald says today’s wealth gaps can’t be separated from slavery and other past injustices that left many so far behind. But she says discrimination is happening right now, as well, and she cites the phenomenon of “downward mobility” as proof.

Downward mobility is ending up in a worse socioeconomic position than your parents. Killewald says her research shows that Black Americans are far more likely to be “downwardly mobile” than whites – even if they both begin with the same resources. 

SASHA KILLEWALD:

That to me, really points us to this inequality that we're re-creating fresh in each generation.

JAY LINDSAY:

Inheritances, and the advantages they offer those that receive them, are frequently cited when we talk about our country’s rigid wealth gaps. But Thompson says they simply aren’t a big factor in the disparities. Just a third of households even receive an inheritance, and most times it’s relatively small.

JEFF THOMPSON:

Your typical household is getting nothing in terms of inheritances. So, if you want to talk about the rich getting richer, then, yeah, let's talk about inheritances. But the differences between your typical white and your typical Black family, it's almost entirely unrelated.

JAY LINDSAY:

A better place to look may be “in vivo” transfers of wealth between families – that is, transfers that happen while they’re all still alive. It’s not as direct as a massive bequest, but researchers say the opportunities they provide may have a much broader impact. Here’s Mattingly:

BETH MATTINGLY:

So, it's really all of the things that wealth allows families to do that can be transmitted. You know, if you have a kid who's really interested in playing the violin, they can rent through the school, and take lessons at school, and play in an orchestra, perhaps.

But if you can afford private lessons, they're going to get a leg up. If you can afford summer programs, they're going to get a leg up. There are so many ways that these resources can play out.

JAY LINDSAY:

Aliprantis agrees wealth transfers are important when considering what’s feeding wealth gaps. But he believes all else pales compared to labor earnings. He didn’t always think that.

Aliprantis recalls starting research on the mechanisms that sustain racial wealth gaps. He figured earnings, intergenerational wealth transfers, and different earnings from capital were roughly equal contributors.

But, according to his research, earnings are the biggest factor, and it’s not close.

DIONISSI ALIPRANTIS:

So, what I just said earlier, the raw flows are just so different and just so massive for earnings that it just outweighs everything else.

JAY LINDSAY:

Thompson agrees.

JEFF THOMPSON:

Really undergirding all of it is this lifetime stream of earnings. And I\it's the key. If you think about, “How do we unlock the key to higher streams of lifetime earnings for Black households or Hispanic households who currently have levels of wealth that are far lower than we want them to be?” It's finding ways to get households into those higher streams of lifetime earnings.

JAY LINDSAY:

One critical variable in that is time. Several basic demographic facts tie wealth directly to how much time a household devotes to work. That’s because more time equals more hours and years to accumulate income, to get promoted, to beef up pensions.

The typical white family – meaning they’re right in the middle of measures of wealth distribution – has 40.5 years of combined full-time work experience over their lifespan, while the typical Black family has 27.6 years.

This is linked to another stat: 60% of typical white households are married, compared to 24% of Black households. More working household members means more working time and more protection against tough job markets, lost working time due to illness, or child care concerns.

But Killewald said it’s not at all clear that marriage is a creator of wealth, rather than a sign of it.

SASHA KILLEWALD:

So, it has become – for not everybody, but for many people – more of this culminating event after you've achieved some other successes.

JAY LINDSAY:

In any case, Thompson said numbers like those don’t mean policymakers should be pushing marriage, or any other life choices, just because they may or may not help close racial wealth gaps.

But he adds personal choice is also an undeniable element of wealth.

JEFF THOMPSON:

The wealth that you accumulate over that lifespan will be a function of your own personal choices. You have power. You as a 17-year-old are partly choosing what your wealth is going to be when you're 65. But also, you know, was my grandfather a banker or was my grandfather a welder, right? So, there's personal choice and then there's just the accident of life, being born into different families. So, for all these reasons, wealth is hugely complicated to understand.

JAY LINDSAY:

Mattingly says a commitment to robust, deliberative research is the only option when approaching a matter as complex and controversial as closing racial wealth disparities.

She’s currently leading a three-year Boston Fed research project into wealth disparities in Greater Boston and around Massachusetts. She says it’s all about carefully building evidence policymakers can act on, because they do need to act.

BETH MATTINGLY:

Our economy will do better if individuals are able to realize their potential knowledge, able to realize the skills, able to contribute. And right now, these are barriers that are often insurmountable for people.

JAY LINDSAY:

When people talk about closing racial wealth gaps, “human capital” is a term that frequently comes up.

It refers to skills and knowledge that increase a person’s capacity to earn more money. And education is major source of it. But here we find another area plagued with racial disparities.

Differences in academic achievement across racial groups exist at all levels.

Ben Moynihan is executive director of the Algebra Project, which focuses on math literacy as a route to college success for low-income and minority youth. He doesn’t see urgency from the public to close these racial disparities in education. And he doesn’t understand why.

BEN MOYNIHAN:

So, you know, are we as a nation really ready to commit to educating all of the young people in the nation? Or are we comfortable saying that some children – other people's children – really do not need the same literacies or the same educational preparation that our children need?

JAY LINDSAY:

That’s next time on Six Hundred Atlantic.

JAY LINDSAY:

Thank you for listening to Season 3 of Six Hundred Atlantic. You can find interviews and our first three seasons and subscribe to our mailing list at bostonfed.org/six-hundred-atlantic. Listen and subscribe to Six Hundred Atlantic on Apple Podcasts, Spotify, Stitcher, and TuneIn.

The producers would like to thank our contributors for their time and insights. They are Dionissi Aliprantis, Sasha Killewald, Beth Mattingly, Ben Moynihan, and Jeff Thompson.

This has been “Enduring Divides,” the third season of the Boston Fed’s Six Hundred Atlantic podcast.