Can Financial Reform Narrow the White-Black Wealth Gap?
The passage of banking reform by Congress promises greater protection for consumers against predatory practices. But there's much more needed to address the historic imbalance, says one economic expert.
TR: What are your feelings about prepaid debit cards such as Russell Simmons' RushCard, which won't be regulated as harshly as some wanted?
DC: In theory, prepaid debit cards are great because they're a way people can control spending and what they're paying. But when they're laced with hidden fees--as they often are--you've got a problem. The biggest hidden fee is that people almost never spend their prepaid debits down to zero. So the companies then take that cash and pocket it. For instance, if you have a $100 debit card and you buy something that costs $92.98, the card will then turn down any transaction over $7.02. If you can't spend it down, what the company does then is keep that seven bucks, along with whatever fees they charged you to use the card in the first place. All these things are good in theory, but it's how the laws structure the market that can be bad. I would also say that what we need is more competition in those markets. Visa and MasterCard appear to have an incredible dominance over that market. I know other companies like Discover and American Express have tried to penetrate that market, but it's been difficult.
TR: Is financial regulation really going to change things?
DC:I think it's always going to be the case that the rich are going to get richer and the poor are going to get poorer. And yes, you can slow down that process--and financial regulation will help slow that process--but everything is a double-edged sword. If we're more cautious in the credit markets, it's going to be harder for minority businesses to get loans in the inner city, and it's going to be harder for first-time home buyers. On the other hand, I don't think the regulations themselves are going to really dent the asset gap. I think you need something more proactive. You need some much more dramatic policy endeavor if you actually want to reduce it, but this may help reduce it in some way.
TR: What sort of ''dramatic policy endeavor'' would you enact to close the black-white wealth gap?
DC: I would do something that really fosters savings among low-wealth folks, regardless of race. That will inherently--because of the wide distribution--reduce the black-white gap, while also reducing low-wealth Hispanics and low-wealth whites. I would provide some sort of major endowment at birth that all Americans get, say $10,000--and then a lifetime savings matching policy. For low-income folks, they'd get a very high match, maybe two to one. For people further up the ladder, they'd get no match.
DC: Has this type of policy worked anywhere else?
The British had it, though their new government just got rid of it. They had Blair's baby bonds, where every kid got ₤500 at birth and then another ₤500 or ₤1,000 when they turned age five. Parents could then contribute to it and the government would match it. They also had something called the Saving Gateway that was a tax-free savings account for all Brits. Both those policies just got canceled by the Cameron-Clegg government, which is really unfortunate, because none of the kids are old enough to redeem them to go to college or whatnot, so we have no idea if they would have worked.
TR: Is the only answer real, unvarnished reparations?
DC: The most explicit way to take care of the black-white wealth gap is reparations, but I don't see that as politically feasible. So I think the way to do things is to make sure we're racially progressive but through color-neutral mechanisms. If we address things that way, it would inherently help African Americans disproportionately without ever having to be explicit, because the disparity is so great; anything you do that's slanted toward low-wealth households is going to favor black households.
Cord Jefferson is a staff writer for The Root. Follow him on Twitter.