Inequality is costly. Citi put a $16 trillion price tag on the economic cost of racial inequities over the past 20 years in a report released last week and estimated that closing some of the racial gaps completely could add $5 trillion to the U.S. economy over the next five years.
Social protests in the wake of the killings of George Floyd and others by police have put a spotlight on race while the pandemic has exposed inequities as the virus has hit lower-income and Black and Hispanic families especially hard.
Companies, including financial services firms, are also talking more about inequality amid pressure from investors and clients. Earlier this month, UBS, which oversees $2.6 trillion, said that it would recommend sustainable investing over traditional investing to clients globally. And Citi last week unveiled $1 billion in strategic initiatives to close the racial wealth gap—targeting areas that help build wealth like housing and entrepreneurship. Even the Federal Reserve has raised the issue and said its policies will focus on “broad-based and inclusive” job gains, though it has also said fiscal policies may be better to address inequality.
Citi took a deep dive into the factors contributing to income and wealth racial gaps and outlined proposals to narrow the gap in its report that was partly driven by alarm at the worsening of racial inequality even before Covid-19. “You can’t expect a journey to equity to be a straight line, but you don’t like to have a regression,” says Citi global chief economist Catherine Mann, who co-wrote the report with economist Dana Peterson.
The current gap between Black and white family homeownership—a major source of wealth for Americans—is greater now than before 1968 when housing discrimination was legal, and the gaps in college degree attainment between Black and white Americans is wider now than during the 1950s and 1960s, according to Citi.
Too often, Mann says, the inequality conversation is viewed through a zero-sum lens, with the assumption that closing a gap means someone else needs to give something up. But Mann says that’s not the right view. “If you give people more income, what are they going to do? They are going to spend it, representing an increase in demand. If you have people with more training and education or access to capital, then we are talking about job creation and the supply side of economics.”
That is especially relevant when the economy has taken a major hit and is piling on debt. Eventually, that needs to be paid off, Citi says. “You do it by expanding the pie,” Mann adds. In its $16 trillion estimate for the cost of wage, education, housing and investment gaps Black Americans faced over the last 20 years, Citi attributed $13 trillion in revenue that could have come from providing fair and equitable lending to Black entrepreneurs. Another $2.7 trillion was attributed to the wage gap.
Covid-19 could widen the inequalities further. The per capita death rate has been higher for Black and Hispanic Americans—a rate of 92 per capita and 74 per capita—compared with 52 per capita for white Americans and 35 per capita for Asian Americans. The economic fallout has also hit these communities harder as job losses have been heavier in low-skilled and discretionary sectors that largely employ minorities. High earners were less likely to lose their job during the pandemic and they also saw a more rapid recovery. By late May, employment for high-wage earners had returned to pre-Covid levels but was still down 15% for low-wage workers as of late July, according to a paper co-written by Harvard economist Raj Chetty.