Jul 7, 2020 - Economy & Business

The myth of closing the racial wealth gap with financial literacy

Adapted from the Cook Center on Social Equity; Chart: Naema Ahmed/Axios
Adapted from the Cook Center on Social Equity; Chart: Naema Ahmed/Axios

A recent CNBC article suggests financial literacy is the "critical link" that could "help bridge America’s racial wealth gap."

Reality check: Increased financial knowledge is likely to help improve the lives of individuals, however even widespread increases in financial literacy would do little to close the racial wealth gap.

  • According to a recent study by McKinsey, Black Americans can expect to earn up to $1 million less than White Americans over their lifetime.
  • White Americans have significantly higher wealth at every income level than Black Americans, as seen in the chart above.

What it means: The focus on financial literacy generally points to disproportionate use of services like payday lending and check cashing stores with fees and interest payments much higher than traditional lending or banking options by Black folks.

  • However, a 2017 report from the St. Louis Fed points out that the idea that Black people have less wealth because they opt to use such services gets the causal correlation backwards.

What they're saying: "[M]eager economic circumstances — not poor decision making or deficient knowledge — constrain choices and leave asset-poor borrowers with little to no other option but to use predatory and abusive alternative financial services."

Similarly, the report finds the notion that Black families are poorer because they have more "unsecured debt" — defined as store bills and credit card debt, loans from a bank or credit union, and “other” types of debt — is untrue.

  • Researchers found no significant difference in the value of Black and white family unsecured debt holdings.
  • The only category in which there is a statistically significant racial difference in unsecured debt is the "other" category that includes student loans and debt for medical care.
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