An important debate is happening about an innovative proposal to address wealth disparities: DC lawmakers are considering a plan to establish “baby bonds,” or trust funds for children born to low-income families. Recently, my Urban colleagues Steven Brown and Signe-Mary McKernan testified about the plan and its potential to level the playing field for Black and Latino children in DC.
Here’s what it would do: Under the Child Wealth Building Act of 2021, babies born to families making less than $132,000 per year would get a $1,000 bond and annual payments from the government to their trust funds of up to $2,000. At age 18, they could use that money to go to college, start a business, or buy a house—to build wealth.
Though baby bonds aren’t a new idea, the concept has gained steam as a possibility for narrowing the huge racial and ethnic wealth gaps in this country. I wondered if their rising popularity represents a larger phenomenon: a long-overdue opening for bold policies and programs to address long-standing wealth disparities as we transition toward economic recovery.
To learn more, I interviewed Urban Institute Racial Equity Analytics Lab associate director Steven Brown on the role wealth plays in fostering economic opportunity. He offered insight on how local leaders dedicated to inclusive economic recovery can seize this rare moment to confront generational harm posed by centuries of racial wealth disparities. Here are three key takeaways from our conversation:
Black and Latino households are facing staggering disparities in this critical building block of financial well-being.
Nationally, Urban research indicates that the average net worth of white families was about $189,000 in 2019, nearly eight times greater than that of Black families ($24,000) and five times that of Latino families ($36,000). Native Americans, Pacific Islanders, and certain Asian ethnicities also have low wealth—and we talk about people of color more broadly elsewhere in this newsletter.
And that average can mask significant variation by place. In my city of Washington, DC, the statistics are bleak. In 2016, the average white DC household had a net worth of $284,000, while Latino households had $13,000 and Black households had just $3,500. In other words, white families had a staggering 81 times the net worth of Black families and 22 times that of Latino families.
Wealth is what people own (assets) minus what they owe (debts). But wealth also translates to capital access: resources that can be deployed to buy a home, fund higher education, or navigate emergencies. Blocking access to wealth or wealth-building opportunities exacerbates inequities in poverty, health, and educational attainment. In other words, wealth isn’t just for the wealthy. It’s a fundamental building block of economic security.
And it is important to recognize the difference between wealth and income. The racial wealth gap is about three times larger than the racial income gap. So, even though income-based solutions are important for helping people meet basic needs, tackling the wealth disparity demands broader long-term solutions.
Wealth disparities are the legacy of racist policies and actions that privileged white families and shut out people of color over generations
The wealth gap isn't determined by individual intentions or deficits. Individual efforts can and often do increase household wealth and well-being, but the barriers that people of color disproportionately face—currently and generationally—make catching up to the wealth of white families more difficult.
“Wealth is built up over time and passed down through our children,” Brown said. “But not just in the form of money; we also pass resources, education, and an economic cushion—the real power of wealth—through the generations.”
Black households in particular have been intentionally held back from building wealth. “We’re not far from a time when racism prevented Black families from being able to access wealth-building opportunities like homeownership and business ownership, much less pass those benefits down to their children,” Brown said.
For example, in 1911, the Baltimore City Council passed the first housing segregation ordinance in the country. And when a similar Kentucky ordinance was struck down by the Supreme Court in 1917, Baltimore’s mayor ordered housing inspectors to impose code violations on anyone selling property to Black people in predominantly white neighborhoods.
At the federal level, in the 1930s and 1940s, redlining policies and practices essentially made race-based housing discrimination legal. More recently, research shows that homes in neighborhoods where at least half of residents are Black are valued at roughly half the price (PDF) as homes in neighborhoods with no Black residents, resulting in Black homeowners accruing less home equity as compared to white homeowners.
Bottom line, the historical roots of current wealth disparities have to be accounted for in the design and implementation of solutions to address the wealth gap.
Local leaders should pursue solutions to build individual household wealth and narrow wealth disparities.
Efforts aiming to increase wealth for all Americans—boosting families’ liquid and long-term savings through individual development accounts or matched savings accounts, for example— are important to increase household wealth building the US. Reform in mortgage lending practices, such as the use of rental payment history to assess homebuyer credit worthiness has also been cited as key approach for increasing homeownership rates for people of color.
But addressing the racial wealth gap will require additional targeting and removing discriminatory practices.
For example, earlier this year, councilmembers in Evanston, Illinois, approved the Local Reparations Restorative Housing Program, granting qualifying Black families $25,000 that can be used for a down payment or house repairs. Efforts like these may help to reduce the Black-white wealth gap by targeting systemic barriers that have kept Black Americans from realizing the wealth-building possibilities of homeownership. Minnesota lawmakers have also introduced a proposal to tackle discrimination in housing valuation, an important factor in the homeownership gap, that would begin to address the gaps in equity gains for homeowners of color.
“Localities have to help people build wealth or to make small gains on reducing the gap—especially when it comes to policies and programs that boost equitable homeownership or encouraging more people to start or grow businesses,” Brown told me.
Cities and localities have an important role to play in spotlighting ambitious solutions on this issue. They can be especially helpful as learning labs for testing new policies and practices to build wealth and closing the gap. But the issue is too massive for any city or network of cities to handle alone. We’ll need the federal government to take the lessons and on-the-ground results from cities and apply them on a larger scale.
“Lasting intervention will require the full range of resources, capacities, and coordination available at the federal level,” Brown said. “We have to think past immediate gains and work toward the big picture.”
The economic impact of addressing the racial wealth gap has big picture implications, to be sure. One study estimated that closing the gap could mean a 4 to 6 percent increase—or as much as $1.5 trillion—in projected GDP by 2028.
That’s why everyone should be paying attention to DC’s baby bond plan. At a cost of just $20 to $30 million, the plan could transform the lives of the more than 9,500 children born each year in the city and put the nation’s capital on the map as the first locality to get such a proposal off the ground. As other places look to undo the harmful legacy of the racial wealth gap, this bold innovation could provide a road map we need.