Su Jin Jez (Sacramento St./Stanford) Debunks a Myth that Educated Blacks Make Poor Financial Decisions…

Su Jin Jez (Sacramento/Stanford)

Su Jin Jez (Sacramento/Stanford)

In Not All College is Equal When it Comes to Race, economist Su Jin Jez identifies flaws in a study done by Emmons and Ricketts that claimed the racial wealth gap was due predominately to “racial and ethnic differences in ‘financial decision-making’.”  Professor Jez joins a growing cacophony of voices who oppose racial comparisons that ignore differences in accumulated wealth.  Black and white people making the same yearly income are not similarly situated, because white people have on average seven times more accumulated wealth.  The difference is lower for lower-income people, but higher for high-income earners.  Specifically, Jez finds that what Emmons & Ricketts consider ‘financial decision-making’ is really just a proxy for wealth:

“In the article I reviewed, Emmons and Ricketts used the term “financial decisionmaking” to describe where people held their wealth—in savings, in investments, etc. While the authors acknowledged that these may not be active choices, they continued to use the terms decisionmaking and choice. This language puts the onus on the individual as if each person has the same ability to allocate wealth, but this is not true. The ability to allocate wealth (or make financial decisions, in the language of the article) is largely determined by how much wealth an individual has. For example, a low-wealth individual will stretch to buy a house but will not have extra funds to allocate to financial assets or to hold in the bank. The construction of the financial decisionmaking variable by Emmons and Ricketts made it look like this lower-wealth individual actively chose not to allocate wealth to financial assets or cash, but rather the individual had no extra wealth to allocate after purchasing a home.

One could argue that this lower-wealth individual could buy a less-expensive house and then put the extra funds into the stock market. This is true, but for higher-wealth individuals, they could buy the house they want without concern about the cost, plus have extra to invest in stocks, bonds, a business, or hold as cash—all without doing any real financial decisionmaking. In fact, this excess wealth has to be put somewhere, which, using the language of the article, made it look like the higher-wealth individual was making active financial decisions when the individual was simply holding onto his or her wealth. These were not choices that reflect financial preferences—I argue they were a reflection of wealth itself.

As such, stating that racial and ethnic differences in financial decisionmaking were a key determinant of differences in racial and ethnic wealth is misleading and circular. Emmons and Ricketts could address this by renaming the variable (to help address the misleading aspect of it) and then measuring how individuals allocate investments or more disposable resources, while accounting for the fact that lower-wealth individuals will spend a greater proportion of their financial assets on their homes. Otherwise, this variable seems to largely just measure wealth.”

Professor Jez is also critical of how Emmons & Ricketts define “luck”, as they did not include the capacity of whites to depend on ‘windfalls’ from family members who on average have multiple times more wealth than the typical black family.  This is particularly important when discussing disparities in homeownership—the premier generator of wealth in the United States:

“Emmons and Ricketts also examined whether racial and ethnic differences in luck explain racial and ethnic differences in wealth. They defined “luck” as health, income windfalls or shortfalls, and inheritances. It is not clear whether down payment assistance would be included as an income windfall; however, significant numbers of homeowners depend on assistance from family members to purchase a home.

This means that the role of down payment gifts and loans was likely not adequately accounted for with these data. Such assistance is critical to understanding racial and ethnic disparities in wealth as it is a driver of the cycle of wealth that is racially and ethnically motivated.

Not only do Whites have greater access to down payment assistance, they are then more able to access lower-cost mortgages and purchase homes in areas that will appreciate more quickly. Altogether, this exacerbates racial and ethnic disparities in wealth and would not be accounted for in this article’s analysis.”

As it comes to education, Professor Jez challenges Emmons & Ricketts findings that educational attainment is a poor predictor of black wealth accumulation.  Emmons & Ricketts found that blacks with higher education lost more during the Great Recession than blacks without four-year college degrees.  Jez questions whether this can be explained by the fact that educated blacks were more likely than poorer black folks to have invested in the housing market which crashed:

“why would more-educated Blacks and Hispanics be hit harder? Simply because they were more able to own homes in the first place—they placed huge sums of wealth into their homes (like most Americans of any racial or ethnic group). And then they not only lost it all but also ended up in debt when their homes were worth less than the amount owed on their mortgage. Less-educated Blacks and Hispanics were less likely to have been able to buy a house in the first place, so they did not have as much wealth to lose as their more-educated counterparts. The wealth positions of less-educated Asians closely resemble those of educated Blacks and Hispanics. Less-educated Asians likely also bought homes in areas that are slow to appreciate and quick to depreciate, purchased more recently, and, as a result, were caught in the housing bubble that preceded the Great Recession.”

Last, Jez also questions whether it was wise for Emmons & Ricketts not to differentiate between college degrees, since Black folks tend to value education as much as others, yet are concentrated in low-ranked colleges that provide low returns on investment, and tend to be concentrated in lower-paying industries: 

“[W]hile the research is mixed on whether or not it matters what college you attend, it is fairly consistent that which college you attend does matter for minorities. Sadly, the types of colleges that provide the greatest returns for minorities—namely, highly selective ones—are the colleges with the smallest representation of minority students. Also related is the fact that minorities are more likely to receive degrees in lower-paying fields, such as education.”