Changing policies is easy compared to changing values and behaviors.

I have argued frequently that we should be focusing as much attention on helping the poor improve their productivity (income generation) as on simply protecting them from poverty (income transfer) and that much of the basis for improving productivity is related to values and behaviors (culture) as it is about specific skills and knowledge. We see evidence for this in the dramatically different life outcomes experienced by different ethnic emigrant groups. There is little evidence to support that the system is discriminatory based on color but much evidence to support that the system discriminates based on values and behaviors.

A report from the Urban Institute this past Spring provides further evidence supporting my argument. It also is an excellent example of the causal density and complexity of life outcomes. The report examines trends in wealth versus income.

From Less Than Equal: Racial Disparities in Wealth Accumulation by Signe-Mary McKernan, Caroline Ratcliffe, Eugene Steuerle, and Sisi Zhang.

Policymakers often focus on income and overlook wealth,1 but consider: the racial wealth gap is three times larger than the racial income gap. Such great wealth disparities help explain why many middle-income blacks and Hispanics
haven’t seen much improvement in their relative economic status and, in fact, are at greater risk of sliding backwards.

Wealth is not just for the wealthy. The poor can have wealth too—and that wealth can accrue over time or provide collateral for borrowing, giving families a way to move up and out of poverty. A home or a car can offer benefits far beyond their cash value. And even a small amount of savings can help families avoid falling into a vicious cycle of debt when a job loss or financial emergency hits.

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There is extraordinary wealth inequality between the races. In 2010, whites on average had six times the wealth of blacks and Hispanics (figure 2). So for every $6.00 whites had in wealth, blacks and Hispanics had $1.00 (or average wealth of $632,000 versus $103,000).2

The income gap, by comparison, is much smaller. In 2010, the average income for whites was twice that of blacks and Hispanics ($89,000 versus $46,000), meaning that for every $2.00 whites earned, blacks and Hispanics earned $1.00.

Its worth reading the details. There are a lot of subtleties embedded in this issue.

I think one of the inferences is about the habits of saving and the effectiveness of financial decision-making. For example, everyone took a hit during the financial crisis but different groups were affected by different magnitudes. As the report indicates, some of this was owing to the difference in asset profiles. But what else is going on here? Lots of basis for speculation but concrete answers would be preferable. The fact that wealth accumulation gaps increase by age suggest that there is more than just asset profile at work. Likely it has to do with savings rates but that isn't addressed.

The authors of the report seem to endorse that there are two separate issues 1) differences in wealth accumulation and wealth management habits/decisions between the groups and 2) that there are likely federal policy issues that have specific and unintended negative impacts or trade-offs.

Families of color were disproportionately affected by the recession. However, the fact that they were not on good wealth-building paths before this financial crisis calls into question whether a whole range of policies (from tax to safety net) have actually been helping minorities get ahead in the modern economy. More fundamentally, it raises the question of whether social welfare policies pay too little attention to wealth building and mobility relative to consumption and income.

Because Hispanics and blacks are disproportionately low income, their wealth building is strongly affected by policies aimed at low-income families. Right now, safety net policies emphasize consumption: the Supplemental Nutrition Assistance Program and Temporary Assistance for Needy Families, for example, try to ensure that families have enough food to eat and other basic necessities. Many safety net programs even discourage saving: families can become ineligible if they have a few thousand dollars in savings. Wealth-building policies, on the other hand, are delivered as tax subsidies for homeownership and retirement. Since families of color are less likely to be able to use these subsidies, they benefit little or not at all.

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A common misconception is that poor or even low-income families cannot save. Research and evidence from savings programs shows they can. When we examined families living below the poverty level, we found that over a decade more than 40 percent were able to increase their net worth and save enough to escape asset poverty—in other words, they had enough assets to live at the poverty level for three months without income (about $3,000 for an individual and $6,000 for a family of four).

The federal government spends hundreds of billions of dollars each year to support long-term asset development. But these asset building subsidies primarily benefit high income families, while low-income families receive next to nothing. Reforming policies like the mortgage interest tax deduction so it benefits all families, and helping families enroll in automatic savings vehicles, will help improve wealth inequality and promote saving opportunities for all Americans.

There is no easy answer to a very complex issue. Where the authors focus on what aspects of federal policies might need to be adjusted to achieve better wealth accumulation results, I suspect that those adjustments might have a negative impact on poverty protection. More critically, the evidence advanced in the report seems to indicate that the biggest issue behind the wealth gap is cultural (habits of saving and risk management) rather than anything related to policies. Policies are hard to change but it can be done, but changing policies is easy compared to changing values and behaviors.