An author of a new study explains why, and how to restore fairness to a system that favors the wealthy.
In 1999, when Sheryl Breslin's daughter entered kindergarten, she was already playing with a medical kit and expressing a desire to be a doctor. Sheryl, like all parents, had high hopes for her child and had saved $1,000 for college. She wanted a nice home and wanted her daughter to go to a good college, "somewhere she can stay on campus."
Sheryl, who worked with the disabled, lived in an apartment and was proud that she paid her bills on time. In 1999 she did not need, and nor did she have, any credit cards, explaining, "I don't like credit cards, 'cause then you owe a lot of people."
Fast forward to May 2010, and Sheryl's American dream is slipping away. Over the decade, her expenses kept going up, but not her income. She has run out of money. She has nothing in her checking account and $30 in savings. Sheryl uses credit cards as her safety net, charging essentials at the month's end, when her income runs out. She now owes $1,200 on two credit cards. It seems as if she's paying more for everything -- rent, groceries, clothes and a growing daughter -- along with the excessive interest on her credit card debt. Everything has increased, except her income.
Unfortunately, the difficulties faced by Sheryl, a pseudonym I've used to protect her identity, are not unique. A new study (PDF) by the Institute on Assets and Social Policy at Brandeis University finds that her story of lost wealth and growing debt mirrors the struggles of many African-American families, a situation that will not change until we fix the policies that have created it.
The study followed the same group of families for 23 years, from 1984 to 2007, and discovered that the gap in wealth between white families and African-American families more than quadrupled during that period, from $20,000 to $95,000. Looking at financial assets excluding home equity, the study found that the median value of wealth held by white families increased from $22,000 to $100,000 during the period, while black families saw very little increase and had a median wealth of $5,000 in 2007.
The greatest wealth produced went mainly to the highest-income whites. For the highest-income earners among whites, wealth grew from $68,000 in 1984 to $238,000 in 2007. For middle-income white families, wealth grew from $19,000 in 1984 to $74,000 in 2007.
Among high-income African-American families in similar income brackets as high-earning whites, wealth shrank from $25,000 in 1984 to $18,000 in 2007. Middle-income whites had less wealth than high-income African Americans in 1984, but by 2007 they had amassed four times as much wealth.
This is not a story of productivity rewarded but, rather, one of how policies that reward those who already hold wealth and make huge salaries drive greater wealth inequality at the expense of creating opportunities.
The 1980s marked a new era of public policy that favored those with the highest incomes and greatest wealth, resulting in extreme income and wealth inequality. In following the wealth trajectory of typical families from 1984 through 2007 as the Great Recession began, the study showed that wealth inequality grew rapidly while squeezing opportunities from families like Sheryl's.
That, coupled with persistent discrimination in housing, credit and labor markets, meant bad news for African Americans when it came to accumulating wealth.
Instead of privileging inheritances, great fortunes and speculation, policymakers need to reconnect achievement to wealth to reward achievement, innovation and productivity. There is no evidence that taxing financial gains at lower rates than wages increases innovation or productivity. Nearly half of the pension-contribution and mortgage-tax deductions go to the wealthiest, not to those with retirement and housing needs. In addition, the voracious reduction in tax rates at the highest incomes has hugely benefited a small group while driving income and wealth inequality to extreme levels.
We should care about extreme wealth inequality because small amounts of financial resources can touch and transform the lives of families and communities. The broken chain linking achievement to reward means that many families have little financial security to smooth over a health crisis or the temporary loss of a job. The financial stress heightened by the recent recession is not just yesterday's news story -- it is the fabric of everyday life for most American families, particularly African-American ones.
A chance at getting a higher education, anchoring a family's security through homeownership, starting that business -- these are the opportunities squeezed from Americans by policies that distribute wealth to the already well-off.
Today Sheryl continues to dream of owning a house and sending her daughter to college. When we check in with her in 10 years, will we find even greater wealth inequality, or will opportunity have triumphed?
Thomas Shapiro, Ph.D., directs the Institute on Assets and Social Policy at The Heller School, Brandeis University, and is the author of The Hidden Cost of Being African and co-author of Black Wealth/White Wealth.