Essay No. 1: Race, Ethnicity and Wealth

Hello. The St Louis Fed established a Center for Household Financial Stability in 2013 to research and otherwise draw attention to the balance sheets of struggling American families. A balance sheet shows what a family saves, owns, and owes, their wealth or their net worth. Families with healthy balance sheets are more economically stable and more likely to move up the economic ladder. And when families are economically strong, so is the economy.

This year, the center is examining the demographics of wealth. We will publish several papers on the roles that race, education, and age increasingly play in determining whether someone is a thriver or a struggler. In fact, a new economic divide is emerging between thrivers and strugglers, one that Bill and Bryan will say more about in a minute. Our primary data source is the 40,000 families who have been interviewed over 25 years through the Federal Reserve's Survey of Consumer Finances. This survey provides the nation's most comprehensive picture of American families' balance sheets and financial behavior over time.

Thriving families typically earn above average incomes, make sound financial choices, and accumulate significant wealth in the long run. Typically, these are families headed by someone who is middle aged or older, White or of Asian descent, and with at least a college degree. Families in these groups, whom we call thrivers, represent about one in four families. They own about 2/3 of the economy's wealth, however, despite being just 1/4 of the population.

The other 3/4 of the families are in groups that are struggling. They are accumulating little or no wealth. Together, they own about 1/3 of the country's wealth, far less than they did 25 years ago. In comparison to the thrivers, they are younger and less educated, make less conservative financial choices, and earn average or below average incomes. They are also more likely to be Black or Hispanic.

the focus of our first paper in this series. With few exceptions, the financial patterns evident in 2013, the most recent year for which we have data, echo those apparent throughout the period since 1989, at least among Whites, Hispanics, and Blacks. Asian families have changed the most, moving away from the relatively low wealth levels of Hispanic and Black families toward the higher level of Whites. Given the remarkable increase in educational attainment by younger Asians in recent decades, virtually all measures of their income and wealth will surpass those of Whites eventually.

In 2013, the median wealth estimate for Whites was about $134,000. For Asians, it was $91,000. For Hispanics, it was just $14,000, and for Blacks, it was even less at $11,000.

The picture looks a bit different when you look at just income, which is a major factor in wealth accumulation, but certainly not the same thing, despite what many people think. Black and Hispanic families earn about 40% less income than Whites. This time, Asians rank above Whites. The median family income among Asians has, in general, grown faster than median White incomes since 1989.

One of the secrets to wealth accumulation is avoiding too much risk when building a balance sheet. A strong balance sheet shows liquidity, and by that, I mean cash in reserves for emergencies. It also shows a mix of assets and a manageable level of debt. There should be a prudent trade off between risks and rewards.

Whites and Asians have much more liquid balance sheets than do Hispanics or Blacks, on average. These cash reserves buffer a family against financial shocks that could lead to high-cost borrowing, distressed asset sales, or costly default on debts. White and Asian families also have a greater share of their assets invested in financial assets and business assets, which provide both asset diversification and higher average returns in the long run than a portfolio consisting mostly of tangible assets, like a house or cars.

And whites and Asians have about half as much debt as Hispanic and Black families as a share of total assets.

So how do we explain these racial disparities when it comes to wealth? Two possibilities are that the thriving groups tend to be older and better educated on average than the strugglers. In fact, the heads of White families are older on average than those of Asian, Black, and Hispanic families.

And it's true that both White and Asian families, on average, have more education than do Black and Hispanic families. But on closer examination, these two factors, age and education, account for only a small part of the difference in wealth accumulation among Whites, Asians, Blacks, and Hispanics. There must be other reasons for these differences.

Yes. There, in fact, appear to be many other reasons for these enormous gaps in wealth along racial and ethnic lines. Others who have researched these differences in wealth have examined the potential effects of current and past discrimination, cumulative disadvantage, early childhood learning experiences, prenatal environments, and many other factors. These explanations, however, fall beyond the scope of our expertise and our ability to assess them based on the survey of consumer finances.

In our subsequent presentations, we will say more about our research into the roles played by education and age and wealth accumulation. We hope you read the entire report about race and ethnicity and stay tuned for our upcoming reports on education and age. Together, we hope that these reports shed light on who's thriving and struggling today in America and why. Thank you.