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Eliminating the Racial Wealth Gap Would Pay Dividends Across the Entire Economy

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Events of the past year and half have exposed disturbing truths about systemic racism and its far-reaching effects

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For many, 2020 was a wakeup call, but for millions of Black Americans, structural barriers to prosperity have been a living reality for centuries. Discriminatory practices and policies make it harder for Black families to purchase homes, obtain loans, build businesses, access quality education, and earn a fair wage.

Individually and together, these factors set them behind and drive the persistent racial wealth gap. But the impacts of the wealth gap extend beyond the communities that suffer directly. On the whole, racial inequality has broader devastating effects on the U.S. economy, holding back GDP to the tune of trillions of dollars lost. Luckily, this damaging trend can be reversed.

Rising awareness of racial inequities, a motivated citizenry and public sector, and the growth of Community Development Financial Institutions (CDFIs) can expand access to key factors, like homeownership, that can help close the wealth gap and inject trillions into the economy.

The wealth gap between Black and white Americans is stark, persistent, and growing. Inequities exist across wages and income, employment, homeownership and access to health care, banking, lending, and education. By damaging Black communities, these gaps limit overall economic growth. According to research by Citi1, allowing racial inequalities to persist has shortchanged the U.S. economy by up to $16 trillion over the past 20 years. The wage gap alone has robbed Black families of $2.7 trillion in income that could have been injected into the economy through consumption or investment. Facilitating access to higher education for Black students could have increased lifetime incomes between $90-$113 billion. And expanding access to affordable housing credit 20 years ago would have initiated 770,000 new Black homeowners, with combined sales and expenditures adding another $218 billion to GDP.

If we closed existing gaps in wages, housing, education, and business investment immediately, we can add an estimated $4.8 trillion more to the economy through 2025. That equates to an additional 0.4% GDP growth in the U.S. year over year. Other analyses agree. According to research conducted by McKinsey2, closing the racial wealth gap could lead to U.S. GDP that is 4-6% higher by 2028 than it would be otherwise.

Closing the gap in homeownership alone would cut the wealth gap significantly and help set Black families up for the same wealth generation opportunities afforded to whites. Owning property is widely recognized as a gateway to intergenerational wealth, but structural barriers rooted in segregation and racist policies hold potential Black homeowners at arm’s length. The income and wealth gap play a major role in the low rate of homeownership for Blacks, but other related factors like reduced access to credit and financial services, predatory financing, and limited development in Black neighborhoods are major barriers between creditworthy Black families and the ability to purchase a home. Redlining policies of the 1940s gave way to segregated cities today where lower-income neighborhoods suffer from poor schools, scarcer business and employment opportunities, and banking deserts where investment in the local community via mortgage or business lending is scarce. Discrimination in home appraisals, further devalues Black neighborhoods, hurting local investment and equity building opportunities for homeowners. The impacts of these inequalities are cyclical, dragging each new generation into precarious economic and social circumstances, with little opportunity for upward mobility.

By expanding homeownership to more Black families, we can make exponential strides towards closing many of these gaps. According to a study by Clever3 , equalizing homeownership rates between Black and white families would cut the average racial wealth gap by over $40,000. Eliminating racial discrimination in appraisals – where the average difference between Black- and white-owned homes is nearly $100,000 – would help bridge the opportunity gap in Black-majority neighborhoods. This is where CDFIs are ripe to make impact. Defined by their mission-driven business model, CDFIs specialize in delivering affordable credit and financial services to Black, Latinx, and underserved communities where the gaps discussed in this article are most prevalent. By stepping foot in these communities and developing innovative products that support key wealth building opportunities, like homeownership, CDFIs have the potential to mitigate and help solve some of the biggest structural issues that fuel the wealth gap and allow it to thrive.

Clearly, it’s in the best interest of all Americans to eliminate the racial wealth disparity. By allowing structural barriers to persist, the entire economy loses out on trillions of dollars in GDP growth. Demand for change ignited by the events of summer 2020 and the disproportionate damage to Black communities wrought by the COVID-19 pandemic should be a catalyst for renewed investment in underserved areas. CDFIs are a valuable resource and the best possible investment banks, businesses, impact investors, and regulators can make in eliminating the barriers to homeownership that fuel the growing racial wealth gap. They have the infrastructure and mission to initiate meaningful changes that will benefit the entire U.S. economy - now is as good a time as ever to right generations of wrongs.

Reverend Everett Bell Jr. is the Chair of The Change Company CDFI, LLC Community Board (changellc.com) and Senior Pastor at Bethel African Methodist Episcopal Church in Monrovia.

1 citivelocity.com/citigps/closing-the-racial-inequality-gaps

2 mckinsey.com/industries/public-and-social-sector/our-insights/the-economic-impact-of-closing-the-racial-wealth-gap

3 listwithclever.com/research/2021-housing-inequality-report/#insights

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