On the issue of economic inequality, Americans are of two minds. On the one hand, we value opportunity over security, balancing a meager safety net (compared with other developed countries) with the promise of upward mobility for those with ability, gumption, and tolerance for hard work. The idea of opportunity itself suggests variability of outcomes, so inequality in income and wealth does not so much disprove the idea of equal chance for everyone as validate it. As a result, Americans are probably more immune to class resentment than any other people on earth. On the other hand, when economic inequality appears as a symptom of social inequality, as when women and minorities systematically earn less as a function of second-class status, it strikes at the very heart of the opportunity-for-all ethos. Just as offensive, in some ways, to the American sense of right and wrong is the idea of an inequality so immutable as to trump opportunity altogether–a permanent stratification that defies effort, making class a preordained status.
If those twin dangers–discrimination and permanence –could make economic inequality un-American, Thomas Shapiro’s research on racial discrepancies in assets, rather than income, should be disturbing. The sociologist, now at Brandeis University’s Heller School of Social Policy and Management after long tenure at Northeastern University, says issues of inequality–race, class, and gender–were his “passion” even when he was in graduate school, in the 1970s, but at that time the study of social stratification “had come to what looked like a dead end.” That, he says, was because all that social scientists could analyze were what he calls “labor market factors”–that is, jobs and income. “What was left out was a notion of family wealth, of property,” he says. That gap was filled in the mid-1980s, when the first national data on family assets and liabilities were collected. Shapiro, working with an African-American former grad-school classmate, Melvin Oliver, mined that data in Black Wealth/ White Wealth, a 1995 book that established assets as what Shapiro calls “a fundamental axis of inequality, specifically of racial inequality, in the United States.” Black Wealth/White Wealth showed that even when education, occupation, and income are equal, blacks remain far behind whites in wealth accumulation, a continuing legacy of racial discrimination.
But Shapiro felt that the numbers, while persuasive, didn’t go far enough in demonstrating how this disparity in economic means perpetuates itself, even when disparities in the means of wealth accumulation–education, jobs, homeownership, all of which blacks were shut out of in the past by forms of discrimination that are now illegal–have narrowed. In order to get beyond the facts of wealth distribution and into the mechanics, Shapiro knew he would need more-detailed knowledge of household financial management than he could get from national surveys. So he set out to interview nearly 300 families (in the Boston, Los Angeles, and St. Louis areas), half of them black and half white, of various income levels, all with school-age children, to see how they use their assets to preserve and advance their economic status–or not.
The result is Shapiro’s The Hidden Cost of Being African American: How Wealth Perpetuates Inequality, which was published in January. Title notwithstanding, Hidden Cost is as much about class and its reproduction, from generation to generation, as it is about race and its continuing cost, social and economic. That’s because Shapiro finds that most families living with the material comfort and range of opportunities normally associated with middle-class status have obtained them the old-fashioned way: inheritance. But Shapiro is not talking about trust-fund babies here. Rather, he finds that it is with modest gifts at opportune moments–going to college, buying a first home, enrolling a child in private school–as well as in bequests, that previous generations use the fruits of their own life’s work to safeguard a middle-class existence for offspring who have not yet earned it on their own. The lingering legacy of racial injustice, says Shapiro, can be seen in the absence of assets (or in the diminished value of those assets) available for passing down to boost young black families up the economic ladder or prevent them from dropping down a rung.
Shapiro’s schematic diagram of class transmission also raises questions about the distribution of opportunity beyond race. If assets, even in small amounts, have become a necessity for economic advancement, is equality of opportunity meaningless without equal access to the assets that can transform lives? Shapiro thinks so. In a visit to his office on the Brandeis campus in Waltham, I asked Shapiro about assets, asset policy, and opportunity. The following is an edited transcript of our conversation.
CommonWealth: A friend of mine who was at the time a graduate student in the field defined sociology as “documenting the obvious.” That’s not the most flattering characterization, but I think true enough, in the sense that what sociology does is take everyday experience and judge how typical it is, what it tells us about society as a whole. You make the simple point that most of us don’t get to middle-class status, particularly at a young age, without help from family, usually from parents. It may be paying our college tuition so that we avoid the burden of college loans, or lending us, usually with no expectation of actual repayment, money for the down payment on a first house, or simply helping out during a rough patch and being able to maintain a lifestyle that at that particular moment you can’t really afford on your own. But what’s wrong with getting a little help from your friends–and especially your family?
Shapiro: First, as a sociologist, I don’t want to defend my profession by answering the claim that we’re documenting the obvious. But let’s look at the racial wealth gap. I think it is obvious, certainly a commonsense notion, that white families have more wealth than black families. That’s the commonsense part. For me, the sociological part is, first, to say, is that empirically true? And what is the extent, what’s the magnitude of it? What I was able to show in this book was that the average African-American family has 10 cents of wealth for every dollar of wealth that the average white family has. Now that, to me, is a humongous gap and it cries out, among other things, for explanation. Traditionally, what we have done [to understand inequality] has been to look at income. When we look at income, we have great data that’s released every year by the Bureau of Labor Statistics and the Census Bureau that tell us that the average African-American family earns 58, 59, 60, or 61 cents for every dollar that the average white family earns. Ten cents on the dollar [in assets] versus 60 cents on the dollar [in income] is a very different yardstick in thinking about inequality. I don’t want to say that we’ve become complacent as a society, but we’ve all become so accustomed to that yardstick. It’s a very different fact when we say [the economic disparity between blacks and whites is] 10 cents on the dollar.
CommonWealth: And it’s not just that inequality is far greater than it might appear when you just look at income. You also argue that wealth is different than income, that we use assets in ways that are different than the ways we use income. Indeed, you suggest that having fewer assets may be more disadvantageous than having less income in terms of the options available to you.
Shapiro: Wealth is a special form of money; it’s different than income. Families think of it differently and they use it differently. In a nutshell, most of us use the income we get from our paychecks or social assistance or whatever to survive. We use it to pay our rent, pay our mortgage, buy food, keep clothes on our back, buy heat in places like Boston, which is very expensive. But we usually don’t think of income as getting-ahead money. Income doesn’t feed dreams. Income doesn’t launch social mobility. That’s what most families use wealth for, wealth being a stored-up reserve of financial assets that families consciously use for either safety-net purposes or getting-ahead purposes. That is, when the time comes to think about a business opportunity or a job move or somebody needs higher education or somebody’s medical insurance has run out–those are the kinds of special purposes that wealth is used for in most families, as opposed to income.
CommonWealth: In essence, income is the fruit that comes from getting ahead–you get ahead, your income rises. But it’s the assets that allow you to do that getting ahead. They give you leverage to take advantage of opportunities you hope will increase your income on a permanent basis.
Shapiro: It does, in many cases.
CommonWealth: You’ve coined the term “transformative assets” for those bits of wealth that are used for the particular purpose of generating a next step up the economic and social ladder–buying your first home, moving to a community you want to live in, opening a business, which you know is a risky proposition and you need to guard against the possibility of failure. I was struck, in reading story after story in your book of how transformative assets from relatives helped families get ahead, that it’s often not a lot of money, but it’s really important money. It’s a kind of money that allows families to obtain something for themselves and for their children that they couldn’t do on their own.
Shapiro: Intellectually, I thought I had an understanding of that going into this project. But it really was a cumulative discovery, a pattern that developed in the way I think about it. I knew going in, for example, that half the businesses in the United States are capitalized with $5,000 or less. I knew you can go to community college for about $2,500 a year. We know there are low-income housing programs around that allow one to put down as little as $5,000 and buy a home. For those of us in the middle class who have fairly decent incomes, that doesn’t sound like a lot of money. And it’s not a lot of money. But it is critically important for the average American family to have that kind of nest egg because it really can leverage for them the kinds of opportunities that are going to make their lives better. So it’s very significant to them.
Now, I came up with the term transformative assets because, as a sociologist, there’s a context for that. The American experiment, the American Dream, the American ethos, is really built around the notion that people can succeed on their own skills, on their own merits, on their own achievements, regardless of background. That’s how we were founded as a nation. We won’t talk about the historical contradictions around that, but that’s the real promise of America. Embedded in that foundation is the notion of merit and achievement, which comes, for the most part, from people’s earnings in the labor market, their skills or creativity, in starting a business, how smart they are, and certainly a little amount of luck thrown in. The notion of transformative assets is something beyond that, something outside the process of merit and achievement. I was seeing it in the families I talked to–families anchored in middle-class status, but, you know, it was obvious that they couldn’t pay for the house they were living in out of their earnings; their earnings aren’t bad, but that’s not the community they should be slotted into. How are they there? How is their kid in this school? How are they pursuing this kind of business opportunity?
As part of the interview process, we conducted a nice inventory of the financial assets the families had, how they acquired each asset, and how they thought about it, what they were attempting to do with it. It became very apparent that most of the families, especially the middle-class families –some black middle-class families as well–at some point in the past had the benefit of some very important transformative assets from parents or grandparents, whether it was paying for college (we usually don’t think of that as an inheritance) or down-payment money for the first home. Other than a parent’s death, in American society there’s no larger trigger for the transfer of wealth between generations than the buying of a first home.
CommonWealth: And it is common. I could never have bought a home, certainly not at the age that I did, without help from family. But, as you point out, we don’t acknowledge the role of these helping hands in our mythology of self-made men and women. I was struck, in your interviews, by how often you really had to go back and probe to get families to recognize how much they had gotten thanks to others rather than by their own efforts. As you say, you don’t doubt that these families work hard and save as much as they can–it isn’t as if they’re all trust-fund babies who had life handed to them–but still it’s very hard for them to face the fact that what they have, they haven’t really achieved on their own.
Shapiro: Right, right. In the families I talked to, it was pretty common for significant financial assets, significant in terms of what they could help those families purchase, [to come from parents]. That was especially true for white families. For African-American families, it was a little out of the ordinary. When it did happen, it tended not to be financial assets that were passed along, but it was more in-kind services that allowed families to save money. Take, for example, a young family deciding they wanted to buy a home, to move to a safer community. What two families I talked to did was they moved back in with their parents for a couple of years, saved enough money for a down payment, put it in a special account. That was the deal: The parents said, you can live here rent-free as long as you use your savings to make a down payment on a nice house in a nice community.
CommonWealth: You also note that another sharp difference between white families and black is that, for white families in that kind of middle-income range, it’s common to be getting help from parents, but for black families in that middle-income range, they’re more likely to help out their parents or other family members than to get the benefit of their parents’ success.
Shapiro: That was a relatively new finding for me. I was a little surprised at the extent of it. In the book, I talk about one wife who calls her husband “the bank of Kevin,” because any relative who is in need of anything is always knocking on their door. Apparently they can afford it, and he’s got parents who need that help, whereas most of the white middle-class families I was talking to, they weren’t being asked, at least at this point, for that kind of financial help.
But I want to get back to the question you asked about what seems to be lack of recognition of where these transformative assets come from. This is something that I came to relatively late in my mining of the interviews. I came to it, frankly, with the help of one of my research assistants, who is more interested in the ideological aspects of this research. Among families who had inherited or were given significant transformative assets, there was and is a real reluctance to fess up to it, in a way. In their use of language –I was trying to listen to language very carefully–they were justifying it in the language of having earned it, going back to achievement and back to merit. We worked hard, we worked two jobs, we worked overtime, we had garage sales, we did this and that. Now, I have no doubt that they’re working very hard. My point is, I also have no doubt that there are other families just like them working just as hard, if not harder, but they don’t have access to those transformative assets that could anchor them in middle-class status or put their kids in a school they have more confidence in.
CommonWealth: The other racial difference that is striking–and heartbreaking–has to do with the most common way most middle-class families build wealth, and that is, buying a home. A home is the biggest investment most of us make in our lives, and it’s appreciation in the value of that home that is the most common vehicle for wealth accumulation. But you note that this is another place where African-Americans do not fare as well as white families. In fact, this is the source of the title of your book, because there is an actual price–you can put a dollar figure on it–that black families pay in appreciation in their homes they don’t get because of the neighborhoods they live in.
Shapiro: It really gets into the dynamics of housing markets and mortgage markets and lending markets and brokers. There are two processes that are important to look at. One has to do with why it is that African-American homeownership is about 20 to 25 percent lower than white homeownership. Economists will tell us–and they’re partly right on this–that’s a function of different income levels: the higher the income, the higher the homeownership rate. So, one would think it would be the case that white and black families of roughly the same income would have the same homeownership rates. That’s not true, because of some of the things we’ve talked about already. How do you come up with the down-payment money? Where does that come from? It’s not just the earnings on the job and the paycheck. The median house price in the United States–don’t gasp, this isn’t Boston I’m talking about–it’s like $165,000. But for that average home, the family has to come up with somewhere around $16,000 to $19,000–5 to 10 percent down payment, plus closing costs. Most families don’t have that. About 30 percent to 35 percent of American families have zero or negative financial assets to start with. So, to get into that homeownership market, even if your income qualifies you, African-Americans are at a disadvantage [because they’re less likely to have assets from parents]. That, for me, is part of the hidden cost of being African-American. That’s a difference that comes from the past. Their parents were shut out of the Levittowns; their parents were shut out of FHA; their parents were shut out of GI loans; their parents were shut out of Veterans Administration [loans]. Their parents were zoned out and excluded and redlined out of the opportunity to build up that wealth in homes.
The second process is that, even in America today, residential segregation remains very high, no matter what part of the country you’re in. It’s high by economic [group] and it’s also intransigently high by race. Whites live together, blacks live together, and different groups in other parts of the country also tend to live together. Geographic space doesn’t get shared too often. We have made some progress towards residential integration; I don’t want to discount that. But the degree of residential segregation remains very high. Now, that creates a dual housing market. Say I own a home in a community in Boston that’s 80 to 90 percent white. When I go to sell that house, what determines what I can sell it for? Well, you have to look at who are the eligible buyers. The eligible buyers are going to be other whites and blacks and Latinos and Asians who have the earning power that can qualify them for the loan. So the only excluding lens for buying a home in the white community is the economic lens. But now assume that I’m African-American and I own a home in a community that’s 60 percent African-American or in transition to becoming more African-American homeowners than white homeowners. We now ask the question, who are the potential buyers for that home? We need to, unfortunately, exclude a large majority of whites. They’re not looking for homes in African-American communities, no matter how nice the homes are. One result is the price of that home will be lower. The difference in equity, the increase in value [between homes owned by whites and those owned by blacks] is, in my data set, on average $28,000. Homeownership creates wealth, for sure, but it creates $28,000 less wealth for the African-American homeowner than it does for the white homeowner. That’s a very important hidden cost of being African-American. Who do we blame? There’s no perpetrator here. It’s much larger societal dynamics that are at play. But there’s a clear victim, if I can get away with that term here. Somebody suffers.
CommonWealth: You argue that, in focusing the spotlight on assets as opposed to income in trying to understand inequality, public policy should take this asset approach as well, not only looking at income but also the acquisition of assets, particularly those assets that can help families advance economically and socially. You also argue that asset policy, as you call it, would be nothing new in this country, that historically there have been programs going back to the Homestead Act, as well as much more recent ones, that explicitly had as their purpose giving Americans an opportunity to build wealth.
Shapiro: That’s right. One could write a book about the amazing success story of asset policy for some groups in the United States. Those groups happen to be, for the most part, middle-class, upper-middle-class families and largely white. Yes, we can go back to the homesteading acts of the middle part of the 1800s in various states, the federal Homestead Act as well. One study projected that up to one in every four homeowners in the United States can trace their acquisition of property to the Homestead Acts. That really boggled my mind. Now, it may not be one in four, but the point is, it’s not something that we think about. Just before World War II, the Federal Housing Administration changed the rules on homeownership, probably forever. Prior to the FHA, if you wanted to buy a house you had to come up with about 90 percent of the purchase price in cash, then you got a short-term loan for the other 5 or 10 percent. The FHA reversed that, by guaranteeing banks that if a family went bust the FHA would pay up, in essence. But it also reversed the terms, so that we now buy homes with typically 5 to 10 percent down, and we finance the remaining 9095 percent over a period of 30 years. On a monthly basis, it comes closer to what some people would think of as rent money. That’s very important. Americans–I think I’m correct in this–I think America has the highest homeownership rate in the world. Certainly among the industrialized countries it does; Canada, I think, is a close second. We’re the biggest homeowners not because we love homes more than anybody else, maybe not even because we have more money than other societies–although we do have more money than most societies–but because of federal policies that reward families, that give incentives to families to buy homes. The home they buy, if it’s in a decent neighborhood–and most homes are–appriciates in value. The nest egg they accumulate is something they can leverage or pass on to their kids or whatever they want to do with it. It’s federal policies that provide incentives, tax incentives and others, that allow Americans to buy homes to the extent they do.
Now, there’s one huge federal program–you might not think of it as a federal program –that lets you deduct the interest you pay on your mortgage right off your taxes. Now, that’s not a line item in the federal budget; that’s not something we have congressional hearings about like we do over food stamps or WIC or even arms budgets. That’s embedded, almost etched in stone, in the tax code of the United States. What that is essentially is a subsidy. The federal government, the taxpayer, is subsidizing my home. The wealthier you are, the higher up you are in the tax brackets, the higher the subsidy. On one level, it’s tremendously effective social policy. Here’s a program of the federal government that encourages families to buy homes, and we can make a really strong case that homeowners are more stable, their families are more stable, they accumulate assets and wealth, their kids do better in school, they’re tied to communities better, they participate in civic affairs more. So encouraging homeownership is a good thing. However, the way the FHA, the Federal Housing Administration, was applied, the way some of the other programs were applied, allowed for excluding whole groups of people–African-Americans for sure; in some communities they were Catholics; in some communities it was Jews and whoever else. But those programs provided the impetus–the reward system, the incentives–for many American families to acquire that second pillar of middle class status. The income pillar is one; the wealth pillar is the other. And the wealth pillar is usually provided by homeownership. For African-Americans, in particular, the wealth pillar is what’s missing.
CommonWealth: There are newer asset policies, things like 401Ks with deferred, tax-advantaged savings, and other proposals like medical savings accounts…
Shapiro: My pension, and your pension, and most people’s pensions, they’re all federally subsidized.
CommonWealth: Absolutely. So we’re continuing to expand asset policies, but these are not asset policies to help people who don’t have assets to get them. What would asset policy for the poor, to get them those middle-class assets, look like?
Shapiro: Let me just backtrack a bit here. In fact, current asset policies, which are for those who already have assets, act in such a way as to make inequality worse. So, while homeownership policies give Americans the highest rate of homeownership and make them an integral part of the American Dream, homeownership policies–and others, like retirement and pension policies and medical policies, in particular–function in a way that increases inequality, because they give subsidies to those who already have enough financial assets to participate in those kinds of programs. The intellectual puzzle here for me and others is this: If asset policies have been effective in helping to build a broad American middle class, and clearly are important to their stability and clearly important to their feeling a part of society, what is it we can do to bring asset policies to families who are asset-poor?
First off, what is an asset-poor family? We’re talking about 40 percent of the population. We’re not talking about the 12 percent of Americans under the poverty line [in income]. We’re talking about at least two out of every five families–and I view that as a very conservative definition, I really do. If we’re thinking about how you structure a way for asset-poor families to accumulate assets and use them for their own social mobility to become more self-reliant and independent and stable, then we’re thinking about a project that, minimally, is talking about two out of every five families in the population. At some point we’re going to have to think large here.
I can describe a number of demonstration, pilot projects, privately funded, foundation funded, philanthropically funded, that for the most part do not get any federal assistance. Because I sit on the research advisory board for this, I’m very aware of a demonstration program in 13 cities across the United States, where the point is to answer the question: Will poor families save money, given a high incentive? The incentive they have is that their savings, the money they put aside into a special account, is matched; I think the highest match is $8 for every $1 you put aside, up to certain limits. Well, the findings from this demonstration program are very clear–in fact, President Clinton’s second-to-last State of the Union speech cited some of the preliminary evidence, where he said some-thing like, we now know the poor can save. He then went on to propose something he called Universal Savings Accounts, USAs, but that didn’t see the light of day. But that demonstration program proved very effectively that, given high levels of incentives, yes, poor people will save. For the most part, these were families that probably shouldn’t be saving. But given the promise–assets fed their dreams–they figured ways of scrimping, saving amounts that might be enough of a nest egg to put down a first month’s and last month’s [rent] in a safer neighborhood. Or to get themselves into a community college or to provide some technical training that would get them that better job. It was that kind of asset they were building for themselves that would help them make a leap in social mobility. So that was very important.
There are a lot of other programs on the drawing board. At the federal level, there is something called the Assets for Independence Act, which is a program where the federal government matches the savings of eligible families. Another piece of legislation that would be much broader, but has not passed, is the Savings for Working Families Act, where there would be a match of savings, but the match comes, not from the federal government directly, but from the bank. In return, the banks get a tax break. It’s a policy tool that doesn’t come out of the budget side, but rather the tax-code side. The program closest to my heart, that’s about to start, is called Children’s Savings Accounts. It’s almost exactly like the program in Great Britain, part of Tony Blair’s last election manifesto, that journalists there dubbed Baby Bonds. At birth, children would receive, in a special account, a certain amount of money, to be determined. At signal events–like maybe entering kindergarten, graduating middle school, first summer job–the federal government would contribute more to the account. Parents could contribute and not have that money taxed. Employers, including summer employers, could contribute; foundations could contribute. A philanthropist could adopt a community, match accounts. So that by age 18, when that child starts to become an adult, they could use that money and the matching money for higher education. At age 21, it could be used for starting a business, continued higher education, homeownership, home repair, and then at some later age, it could be rolled over into retirement accounts or whatever.
CommonWealth: Unfortunately, most of these are still on the drawing board, rather than actually in place.
Shapiro: Most of them are on the drawing board, but not all. I think that more than half of the states have a program where there are state monies that are matching saving accounts. Now, they’re not doing it on an $8-to-$1 basis, and not everyone’s eligible.
CommonWealth: Reading your book also got me thinking about the estate tax…
Shapiro: I’m glad you called it the estate tax…
CommonWealth: …and not the death tax, right. But that brings up this whole issue of the attitude in America toward inherited wealth. Your book makes such a powerful case that intergenerational transfer of wealth–and we’re not talking, for the most part, about enormous fortunes, but the more incidental passage of smaller amounts of wealth–is really important for people as they try to get ahead. But we’ve never quite squared the idea that it’s a good thing to be able to pass something along to your children–we all hope to do that, as we all hope our parents will be able to do that–with the American mistrust of a permanent plutocratic class. I have to say, I’m not sure but what the concern about plutocracy is almost vestigial in American society. I’m not sure that there’s much passion left behind the idea that there should not be inherited fortunes passed along from generation to generation. But from your discussion, I found it intriguing to think about taxing inherited fortunes as a way to finance other sorts of asset policies. Perhaps, in fact, it’s most justifiable on the grounds that those who succeed in accumulating assets should, upon passing those assets to the next generation, help to fund opportunities for others who are less fortunate to develop that kind of asset base.
Shapiro: I think there’s some beautiful symmetry to that argument. You know, we had, last year, the book by Bill Gates Sr. and Chuck Collins, Wealth in Our Commonwealth, which tried to make that argument [for taxation of large fortunes]. Through my prism of looking at family financial assets and how they’re used, there’s a way of looking at American history as being a tussle between the deeply held values and beliefs around equality and opportunity as the core of the American Dream and the American ethic, on the one hand, and on the other hand, a belief that I would say is inconsistent with that, the notion of unfettered inheritance. For me, inheritance is the enemy of meritocracy. Now we’re in a position where that pendulum has swung virtually entirely to the unfettered-inheritance side, at the expense of meritocracy, at the expense of achievement – and, tragically, perhaps at the expense of democracy, as well. I try to frame the issue around seeing inheritance as an attack on equal opportunity, as an attack on meritocracy, and to think of the estate tax as a way to redress that imbalance.
The attack on the estate tax started before [George W.] Bush became president. It started gaining some steam in the Clinton administration. It’s something that goes across, not necessarily liberal and conservative lines, but Democrat and Republican. It’s almost a fait accompli. As of the year 2011, if there’s no positive action, there will be a permanent repeal of the estate tax, a piece of legislation that has been with us through Democrat and Republican administrations, liberals and conservatives, since 1912, I think that’s the year. It makes sense that the estate tax would come under attack at exactly a period when, for the first time in American history, the middle class actually has some wealth that it’s attempting to pass along. They think – they’ve been fooled into thinking – their wealth is going to be taxed. Under the current laws, their wealth would not be taxed.
What do we do about it? We could think about reforming the estate tax in a way that you exclude the first $3 million, the primary home – we could think about it in a way where there are really no farmers in Iowa that are going to lose their farms. Even the kinds of transformative assets that I have a problem with, intellectually, would be allowed. But whatever we decide to stick with as an estate tax, we could earmark those funds to help structure ways for asset-poor families to accumulate assets on their own. That’s the symmetry, the linkage, that one could build a stronger political base around.