Growing the Economy Will Not Solve Systemic Racism

We want to see a world where black lives matter in order for us to get to a world where all of our humanity is respected.
–Alicia Garza

On June 5, 2020, the jobs report came in better than expected. Unemployment was only 13.3%, compared to expectations of 20% unemployment. Accordingly, the S&P 500 went up 2.62%.

But black unemployment actually increased during the same time period.

All of this happened during a backdrop of Black Lives Matter protests across the country, and President Trump saying that the key to solving systemic racism is to have a strong economy.

Arguably, before the arrival of coronavirus on the world, the United States had a strong economy. The unemployment rate was at 3.5% in February, 2020. The S&P 500 hit 3,380.45 on February 20, 2020. Economically, the U.S. had it really good, though black unemployment was 6% compared to a 3% unemployment rate for whites.

So, why doesn’t a hopefully recovering economy help everyone across the board?

The answer is quite simple.

Most people do not get to the point where their saved assets earn more than their wages until later in life.

Yet, it’s capital itself, rather than wages, that is the generator of wealth. Either you inherit capital, you create capital, or you save from your wages to convert those wages into capital, and that capital is invested, hopefully intelligently, into something that grows over time.

But, to convert wages into capital, you have to have excess wages. Your wages have to be high enough to where you’re spending less than you make and you can save some of your wages.

And here is where we see the failure of the overly simplistic “make the economy great to eliminate racism” notion failing.

Median income – where 50% of a group makes more and 50% of a population makes less – is DRASTICALLY different between whites and blacks.

In 2018, median income for whites households was $70,642.

In 2018, median income for black households was $41,511.

Put another way, the median income of black households is 58.8% of the median income of white households.

While I’m sure the Bureau of Labor Statistics provides median spending somewhere on their website, it’s not easily accessible. So, I had to improvise.

Median household spending in 2014 was $36,800.

Median household income in the U.S. in 2014 was $53,657.

Median household income in the U.S. in 2018 was $63,179. That’s a 17.7% increase.

It’s reasonable to assume that household spending went up approximately the same, so that would make median household spending in 2018 roughly $43,331 (note: if someone has more accurate data, I’m happy to put it in here, but this is close enough to prove a point).

So, median household income for black households is less than median household spending. A 50th percentile black household can’t even afford the median lifestyle of a U.S. household.

Meanwhile, the median white household should have $27,311 in excess earnings to convert into investments and capital.

Let’s assume that inflation is 3%, so the amount contributed increases by inflation annually and the target – median household spending – also increases by 3%.

Let’s further assume that the investments earn an average of 9% (yeah, coronavirus, stocks go up and down, etc. I get it. This is a thought exercise).

How long will that household have to work until they have enough saved up to, using a 4% safe withdrawal rate, not have to work?

22 years. At that point, the median white household should have about $2.16 million saved up, which will generate $86,348.21.

For a median black household to save $27,311 per year, they would have to only spend $14,200.

To put that into context, the federal poverty level for a family of 2 in 2018 was $16,460.

A median black household would have to live a below the poverty line lifestyle to match the savings that a median white household gets by having median household spending.

The progenitor of the extreme retirement extreme lifestyle, Jacob Lund Fisker, claimed to have a radical extreme lifestyle and spent $7,000 per year. That was for a single person. Get married, and you’re at the amount that a median black household could spend in order to have enough saved up to match a median white household’s savings and to retire in 22 years to a median household’s lifestyle.

The middle of the road black household starts off way, way, way behind the middle of the road white household. Dirt road with potholes versus freshly paved four lane highway.

Thus, it is no wonder that for every 10 white households who have taxable investment accounts, only 6.1 black households do.

So, when the economy rises and the stock market rises, white households will benefit disproportionately to black households. It’s because the median black household can’t even afford to invest in the stock market, much less benefit from it.

I readily admit, I don’t know the answers. But I know what’s not the answer: assume that the economy will grow away disparities. It will only exacerbate them. If we can raise the other median incomes up, which is a whole set of reforms away, then we can truly level the playing field so that everyone gets equal economic opportunity. Perhaps then, the simple solution may be a lot closer to being the right one.

Until then, the numbers don’t justify this answer, and there have to be other ways to help address systemic racism.

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Jason Hull was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. He held a CFP certification from 2015 - 2021. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

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