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12/5/01: The following is taken from Dalton Conley's "Being Black, Living in the Red : Race, Wealth, and Social Policy in America" that gives an excellent synopsis of the race/class divide. Enjoy the Jones/Smith story.

Being Black, Living in the Red
Race, Wealth, and Social Policy in America

By Dalton Conley

Wealth Matters

If I could cite one statistic that inspired this book, It would be the following: in 1994, the median white family held assets worth more than seven times those of the median nonwhite family. Even when we compare white and minority families at the same income level, whites enjoy a huge advantage in wealth. For instance, at the lower end of the income spectrum (less than $15,000 per year), the median African American family has no assets, while the equivalent white family holds $10,000 worth of equity. At upper income levels (greater than $75,000 per year), white families have a median net worth of $308,000, almost three times the figure for upper-income African American families ($114,600).

Herein lie the two motivating questions of this study. First, why does this wealth gap exist and persist over and above income differences? Second, does this wealth gap explain racial differences in areas such as education, work, earnings, welfare, and family structure? In short, this book examines where race per se really matters in the post-civil rights era and where race simply acts as a stand-in for that dirty word of American society: class. The answers to these questions have important implications for the debate over affirmative action and for social policy in general.

An alternative way to conceptualize what this book is about is to contrast the situations of two hypothetical families. Let's say that both households consists of married parents, in their thirties, with two young children. Both families are low-income-that is, the total household income of each family is approximately the amount that the federal government has "declared" to be the poverty line for a family of four (with two children). In 1996, this figure was $15,911.

Brett and Samantha Jones (family 1) earned about $12,000 that year. Brett earned this income from his job at a local fast-food franchise (approximately two thousand hours at a rate of $6 per hour). He found himself employed at this low-wage job after being laid off from his relatively well-paid position as a sheet metal worker at a local manufacturing plant, which closed because of fierce competition from companies in Asia and Latin America. After six months of unemployment, the only work Brett could find was flipping burgers alongside teenagers from the local high school.

Fortunately for the Jones family, however, they owned their own home. Fifteen years earlier, when Brett graduated from high school, married Samantha, and landed his original job as a sheet metal worker, his parents had lent the newlyweds money out of their retirement nest egg that enabled Brett and Samantha to make a 10 percent down payment on a house. With Samantha's parents cosigning-backed by the value of their own home-the newlyweds took out a fifteen-year mortgage for the balance of the cost of their $30,000 home. Although money was tight in the beginning, they were nonetheless thrilled to have a place of their own. During those initial, difficult years, and average of $209 of their $290.14 monthly mortgage payment was tax deductible as a home mortgage interest deduction. In addition, their annual property taxes of $800 were completely deductible, lowering their taxable income by a total of 3,308 per year. This more than offset the payments they were making to Brett's parents for the $3,000 they had borrowed for the down payment.

After four years, Brett and Samantha had paid back the $3,000 loan from his parents. At that point, the total of their combined mortgage payment ($290.14), monthly insurance premium ($50), and monthly property tax payment ($67), minus the tax savings from the deductions for mortgage interest and local property taxes, was less than the $350 that the Smiths (family 2) were paying to rent a unit the same size as the Joneses' house on the other side of town.

That other neighborhood, on the "bad" side of town, where David and Janet Smith lived, had worse schools and a higher crime rate and had just been chosen as a site for a waste disposal center. Most of the residents rented their housing unit from absentee landlords who had no personal stake in the community other than profit. A few blocks from the Smiths' apartment was a row of public housing projects. Although they earned the same salaries and paid more or less the same monthly costs for housing as the Joneses did, the Smiths and their children experienced living conditions that were far inferior on every dimension, ranging from the aesthetic to the functional (buses ran less frequently, large supermarkets were nowhere to be found, and class size at the local school was well over thirty).

Like Brett Jones, David Smith had been employed as a sheet metal worker at the now-closed manufacturing plant. Unfortunately, the Smiths had not been able to buy a home when David was first hired at the plant. With little in the way of a down payment, they had looked for an affordable unit at the time, but the real estate agents they saw routinely claimed that there was just nothing available at the moment, although they promised to "be sure to call as soon as something comes up...." The Smiths never heard back from the agents and eventually settled into a rental apartment.

David spent the first three months after the layoffs searching for work, drawing down the family's savings to supplement unemployment insurance-savings that were not significantly greater than those of the Joneses, since both families had more or less the same monthly expenses. After several months of searching, David managed to land a job. Unfortunately, it was of the same variety as the job Brett Jones found: working as a security guard at the local mall, for about $12,000 a year. Meanwhile, Janet Smith went to work part time, as a nurse's aide for a home health care agency, grossing about $4,000 annually.

After the layoffs, the Joneses experienced a couple of rough months, when they were forced to dip into their small cash savings. But they were able to pay off the last two installments of their mortgage, thus eliminating their single biggest living expense. So, although they had some trouble adjusting to their lower standard of living, they managed to get by, always hoping that another manufacturing job would become available or that another company would buy out the plant and reopen it. If worst came to worst, they felt that they could always sell their home and relocate in a less expensive locale or an area with a more promising labor market.

The Smiths were different case entirely. As renters, they had no latitude in reducing their expenses to meet their new economic reality, and they could not afford their rent on David's reduced salary. The financial strain eventually proved too much for the Smiths, who fought over how to structure the family budget. After a particularly bad row when the last of their savings had been spent, they decided to take a break; both thought life would be easier and better for the children if Janet moved back in with her mother for a while, just until things turned around economically-that is, until David found a better-paying job. With no house to anchor them, this seemed to be the best course of action.
Several years later, David and Janet divorced, and the children began to see less and less of their father, who stayed with a friend on a "temporary" basis. Even though together they had earned more than the Jones family (with total incomes of $16,000 and $12,000, respectively), the Smiths had a rougher financial, emotional, and family situation, which, we may infer, resulted from lack of property ownership.

What this comparison of the two families illustrates is the inadequacy of relying on income alone to describe the economic and social circumstances of families at the lower end of the economic scale. With a $16,000 annual income, the Smiths were just above the poverty threshold. In other words, they were not defined as "poor," in contrast to the Joneses, who were. Yet the Smiths were worse off than the Joneses, despite the fact the U.S. government and most researches would have classified the Jones family as the one who met the threshold of neediness, based on that family's lower income.

These income-based poverty thresholds differ by family size and are adjusted annually for changes in the average cost of living in the United States. In 1998, more than two dozen government programs-including food stamps, Head Start, and Medicaid-based their eligibility standards on the official poverty threshold. Additionally, more than a dozed states currently link their needs standard in some way to this poverty threshold. The example of the Joneses and the Smiths should tell us that something is gravely wrong with the way we are measuring economic hardship-poverty-in the United States. By ignoring assets, we not only give a distorted picture of life at the bottom of the income distribution by may even create perverse incentives.

Of course, we must be cautious and remember that the Smiths and the Joneses are hypothetically embellished examples that may exaggerate differences. Perhaps the Smiths would have divorced regardless of their economic circumstances. The hard evidence linking modest financial differences to a propensity toward marital dissolution is thin; however, a substantial body of research show that financial issues are a major source of marital discord and relationship strain. It is also possible that the Smiths, with nothing to lose in the form of assets, might have easily said into the world of welfare dependency. A wide range of other factors, not included in our examples, affect a family's well-being and its trajectory. For example, the members of the family might have been healthier than those of the other, which would have had important economic consequences and could BHE affected family stability. Perhaps one family might have been especially savvy about using available resources and should save been able to take in boarders, do under-the-table work, or employ another strategy to better its standard of living. Nor do our example address educational differences between the tow households.

But I have chosen not to address all these confounding factors for the purpose illustrating the importance of asset ownership per se. Of course, homeownership, savings behavior, and employment status all interact with a variety of other measurable and unmeasurable factors. This interaction, however does not take away from the importance of property ownership itself.

The premise of this book is a relatively simple and staightfoward one: in order to understand a family's well-being and the life chances of its children-in short, to understand its class position- we not only must consider income, education, and occupation but also must take into account accumulated wealth (that is, property, assets, or net worth- terms that I will use interchangeably throughout this book). While the importance of wealth is the starting point of the book, its end point is the impact of the wealth distribution on racial inequality in America. As you might have guessed, an important detail is missing from the preceding description of the two families: the Smiths are black and have fewer assets than the Joneses, who are white.

At all income, occupational, and education levels, black families on average have drastically lower levels of wealth than similar white families. The situation of the Smiths may help us to understand the reason for this disparity of wealth between blacks and whites. For the Smiths, it was not discrimination in hiring or education that led to a family outcome vastly different from that of the Joneses; rather, it was a relative lack of assets from which they could draw. In contemporary America, race and property are intimately linked and form the nexus for the persistence of black-white inequality.

Let us look again at the Smith family, this time through the lens of race. Why did real estate agents tell the Smiths that nothing was available, thereby hindering their chances of finding a home to buy? This well-documented practice is called "steering," in which agents do not disclose properties on the market to qualified African American home seekers, in order to preserve the racial makeup of white communites-with an eye to maintaining the property values in those neighborhoods. Even if the Smiths had managed to locate a home in a predominantly African American neighborhood, they might well have encountered difficulty in obtaining a home mortgage because of "redlining," the procedure by which banks code such neighborhoods "red"-- the lowest rating- on their loan evaluations, thereby making it next to impossible to get a mortgage for a home in these districts. Finally, and perhaps most important, the Smiths' parents were more likely to have been poor and without assets themselves (being black and having been born early in the century), meaning that it would have been harder for them to amass enough money to loan their children a down payment or to cosign a loan for them. The result is that while poor whites manage to have, on average, net worths of over $10,000, impoverished blacks have been essentially no assets whatsoever.

Since wealth accumulation depends heavily on intergenerational support issues such as gifts, informal loans, and inheritances, net worth has the ability to pick up both current dynamics of race and the legacy of past inequalities that may be obscured in simple measures of income, occupation, or education. This thesis has been suggested by the work of sociologists Melvin Oliver and Thomas Shapiro in their recent book Black Wealth/White Wealth. They claim that wealth is central to the nature of black-white inequality and that wealth-as opposed to income, occupation, or education-represents the "sedimentation" of both a legacy of racial inequality as well as contemporary, continuing inequities. Oliver and Shapiro provide a texture description of the causal factors leading to this growing gap, such as differential mortgage interest rates paid by black and white borrowers. However, because the use a "snapshot" of families as their primary source of information-that is, cross-sectional data collected at one point in time (the 1984 Survey of Income and Program Participation)-they are limited in the scope if their investigation of the causes and consequences of black-white wealth differentials over time.

I hope to build on the work of Oliver and Shapiro by developing a formal model for the inclusion of assets in statistical models of socioeconomic attainment and family processes, thereby mapping out the role that wealth inequities play in the larger context of a cycle of racial inequality. Specifically, it is the hypothesis of this larger context of a cycle of racial inequality. Specifically, it is the hypothesis of this book that certain tenacious racial differences-such as deficits in education, employment, wages, and even wealth itself among African Americans-will turn out to be indirect effects, mediated by class differences. In other words, it is not race per se that matters, racial differences in income and asset levels have come to play a prominent role in the perpetuation of black-white inequality in the United States.

This is not to say that race does not matter; rather, it maps very well onto class inequality, which it turn affects a whole host of other life outcomes. In fact, when class is taken into consideration, African Americans demonstrate significant net advantages over whites on a variety of indicators (such as rates of high school graduation, for instance). In this fact lies the paradox of race and class in contemporary America-and the reason that both sides of the affirmative action debate can point to evidence to support their positions.