Academic journal article Federal Reserve Bank of St. Louis Review

The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap

Academic journal article Federal Reserve Bank of St. Louis Review

The Political Economy of Education, Financial Literacy, and the Racial Wealth Gap

Article excerpt

This article examines the mismatch between the political discourse around individual agency, education, and financial literacy, and the actual racial wealth gap. The authors argue that the racial wealth gap is rooted in socioeconomic and political structure barriers rather than a disdain for or underachievement in education or financial literacy on the part of Black Americans, as might be suggested by the conventional wisdom. Also, the article presents a stratification economic lens as an alternative to the conventional wisdom to better understand why the racial wealth gap persists. (JEL J15, Z13)

Much of the framing around wealth disparity, including the use of alternative financial service products, focuses on the poor financial choices and decisionmaking on the part of largely Black, Latino, and poor borrowers, which is often tied to a culture of poverty thesis regarding an undervaluing and low acquisition of education.

This framing is wrong--the directional emphasis is wrong. It is more likely that meager economic circumstance--not poor decisionmaking or deficient knowledge--constrains choice itself and leaves borrowers with little to no other option but to use predatory and abusive alternative financial services.

To make this point, what better indicator of economic circumstance is there than wealth? Wealth serves as a primary indicator of economic security. Wealthier families are better positioned to finance elite, independent school and college educations, access capital to start a business, finance expensive medical procedures, reside in neighborhoods with higher amenities, exert political influence through campaign financing, purchase better counsel if confronted with an expensive legal system, leave a bequest, and/or withstand financial hardship resulting from any number of emergencies (Hamilton and Darity, 2009). Wealth provides financial agency over one's life. Simply put, wealth gives individuals and families choice; it provides economic security to take risks and shield against financial loss. It is analogous to what the Nobel Laureate economist Amartya Sen (2010) has referred to as a human capability approach to development.

Finally, wealth is iterative: It provides people with the necessary initial capital to purchase an appreciating asset, which in turn generates more and more wealth, and can be passed from one generation to the next.

The popularity of Thomas Piketty's book Capital in the 21st Century (2013) has brought considerable attention to the role of wealth in determining life chances and the growing worldwide problem of structural inequality that is locked in at birth as a result of laws, policies, institutions, and economic arrangement. In the U.S. context, data from the Federal Reserve's Survey of Consumer Finances indicate that in 1989 the top 10 percent ofhouseholds held about two-thirds of the nation's private wealth, and by 2013 this disparity accelerated with the top 10 percent now holding about three-quarters of the nation's private wealth (Bricker et al., 2014). Moreover, the bottom half of all households owns only about 1 percent--this provides a novel way of thinking about the 1 percent.

What is frequently overlooked in these disparities is that they are even more pronounced when race is considered. In fact, race is a stronger predictor of wealth than class itself. For instance, Blacks and Latinos collectively make up about 30 percent of the U.S. population, but collectively they own about 7 percent of the nation's private wealth (Bruenig, 2013).

Despite these enormous disparities, the public sentiment seems to be that the civil rights period has largely addressed major racial structural barriers. This sentiment is coupled with the notions that Blacks need to "stop making excuses" and, ultimately, "take personal responsibility" for their low socioeconomic position. It is this trope that particularly emphasizes a group-based underappreciation and underinvestment in personal and human capital development on the part of Blacks. …

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