Abstract
Using data on household balance sheets from the Survey of Consumer Finances and data on macroeconomic rates of return from Jorda et al. (2019) we construct two alternative series for household rates of return by race from 1989 to 2016. Our estimates suggest a persistent racial gap in the rate of return on assets between 1 and 4 percentage points. The gap in returns remains even after conditioning on demographic factors, labor market factors, credit history, portfolio composition, household attitudes toward savings, financial literacy, and inheritance---suggestive of a role for discrimination. Recentered influence function (RIF) decompositions indicate between 40% and 53%---1.2 to 1.6 percentage points---of the difference in median returns between Black and White households is unexplained by observable characteristics. A standard Oaxaca-Blinder decomposition suggests that differential rates of return can explain up to 14% of the racial wealth gap at the mean. Finally, our data on differential rates of return allow us to effectively rule out explanations for the racial wealth gap based on myopia or excessive time preference. Given observed series for consumption and rates of return, a standard lifecycle model requires Black households to discount the future less than White households in order to match the data.
Highlights
A large literature documents a significant, persistent gap in median networth between White and Black households in the United States (Blau and Graham, 1990; Altonji and Doraszelski, 2005; Hamilton and Darity, 2010; Williams, 2017; Darity and Mullen, 2020)
Oaxaca-Blinder decompositions indicate that differential rates of return may explain up to 50% of the racial wealth gap
Our data on differential rates of return allow us to effectively rule out explanations for the racial wealth gap based on myopia or excessive time preference
Summary
A large literature documents a significant, persistent gap in median networth between White and Black households in the United States (Blau and Graham, 1990; Altonji and Doraszelski, 2005; Hamilton and Darity, 2010; Williams, 2017; Darity and Mullen, 2020). Racial differences in access to sources of wealth are not limited to the past: Black and Latino mortgage applicants are rejected more frequently than Whites (Munnell et al, 1996; Charles and Hurst, 2002), and Black-owned firms are more than twice as likely to be denied loans as Whites with similar credit scores (Blanchflower, Levine, and Zimmerman, 2003) Given these and other considerations, Darity and Mullen (2020) argue that “[W]ealth is the best single indicator of the cumulative impact of White racism over time” (p.31). Given observed rates of return, the model suggests that non-White households must discount the future less than White households in order to match observed patterns of consumption across race in the Consumer Expenditure Survey (CEX), effectively ruling out explanations of the racial wealth gap based on myopia or excessive time preference. A simple welfare exercise suggests that policies aiming to equalize rates of return—such as Hamilton and Darity (2010)’s Baby Bonds proposal—are welfare improving
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