have an additional requirement that those in the longitudinal sample not undergo extreme changes in wealth over a ve-year period. Thus, in analyses where the results
are sensitive to outliers, families at the top and bottom 1 percent in terms of wealth appreciation are trimmed from the sample. The trimming is done both because out-
liers can distort the results for the rest of the sample and because they are likely to have above-average levels of measurement error, given that complicated portfolios
may be involved. As any such sample restriction is to some extent arbitrary, the results were redone both with more and less stringent criteria.
The trimming of the sample removes a higher proportion of whites than African Americans at both ends of the spectrum; the net impact is that the trimmed samples
have higher mean wealth ratios than the untrimmed longitudinal samples and the cross-sectional samples. In addition, the trimming results in a rise in mean wealth
ratios during the 1989– 94 period of 4–5 percentage points, depending on the sample, compared with the virtual stability noted above for the other samples. When impor-
tant, we note the impact of the trimming on our ndings. Additional details on the rules for following households can be found in the appendix on the JHR website.
III. Patterns of Wealth Accumulation by Race
A. Background
Historically, U.S. poverty policy has focused on income adequacy. But by the late 1980s, support began to grow for the view that poverty policy could only be effective
if it focused as well on narrowing the gap between the asset rich and the asset poor. The movement for a wealth-based poverty policy has since gained additional mo-
mentum as the nation continues to reform its antipoverty policy, both in intellectual circles and among policymakers, and some changes in asset policies have already
been made Sherraden 1991; Oliver and Shapiro 1995; Ackerman and Alstott 1999; Schreiner et al. 2001.
The policies— both those proposed and the limited reforms already imple- mented—represent several, sometimes overlapping approaches to raising wealth ac-
cumulation— among African Americans specically or among the poor where Afri- can Americans are overrepresented— through some combination of raising the rate of
capital gains, encouraging additional saving, or diminishing the inequality-increasing impacts of intergenerational transfers of wealth.
Some proposals seek to raise the wealth of African Americans by shifting their portfolios toward assets that have historically had high rates of return or are consid-
ered to have particular advantages, such as homes and businesses. In light of the much lower home ownership rate of African Americans, increasing housing wealth
is considered to be of paramount importance, not only for any nancial benets that may ow directly from home ownership, but also because a home often serves as
collateral for borrowing to nance investment in business opportunities, among other purposes. Given the low rate of self-employment among African Americans, more-
over, particular emphasis has been placed on the need to raise minority ownership of businesses. In addition to making it easier for African Americans to have access
to credit, other proposals for raising ownership of homes and small businesses have involved providing greater incentives for saving.
Prominent in the policy discussion have been the proposals of Sherraden 1991, who, arguing that antipoverty policy should be focused on the accumulation of
wealth rather than on raising levels of income and consumption, advocated the estab- lishment of individual development accounts IDAs that can be used to nance
not only home ownership, but education, business startups, and retirement. Related concerns have been raised that asset limits on the receipt of income from Aid to
Families with Dependent Children AFDC, its successor, Temporary Assistance for Needy Families TANF, and other means-tested programs discourage saving by the
poor Hubbard, Skinner, and Zeldes 1995. A number of states have responded to the increased exibility given to states under TANF by introducing IDAs and re-
laxing assets limits Hurst and Ziliak 2001.
Finally, though, the passage of the 2001 federal tax act moves the nation in the direc- tion of taxing wealth less and not more, others have called for taxes on asset holdings,
in part to reduce inequality in inherited wealth Wolff 1996; Ackerman and Alstott 1999.
Despite the existence of these and other proposals, there is actually little evidence both on the extent to which these wealth-based policies address the underlying causes
of the racial wealth differential as well as on the potential for these proposals to reduce it, gaps we hope to partially ll with the analysis that follows. Why might
patterns of wealth accumulation differ by race? Most obvious is that racial wealth gaps in the past imply that younger generations of African American families will
inherit from their parents smaller amounts than their white counterparts Menchik and Jianakoplos 1997; Avery and Rendall 1997.
The rate of return to capital may vary by race because of a combination of differences in portfolio composition and differences in the rate of return to specic assets. Implicit
in proposals to shift the portfolios of African Americans toward assets such as homes and businesses is that African Americans face barriers to the acquisition of these assets,
owing to discrimination in mortgage and small business credit markets, customer dis- crimination, limited access to information about investment opportunities and other fac-
tors Munnell et al. 1996; Blanchower, Levine, and Zimmerman 1998. Moreover, if children’s asset allocations are inuenced by those of their parents, the historically lower
likelihood of African Americans to hold such nancial assets as stocks and transaction accounts will persist over time Chiteji and Stafford 1999.
Though the substantial differences by race in asset allocation that we document below are well-known, the evidence on rate of returns is rather scanty. A partial exception is
the housing market, where earlier research, summarized by Blau and Graham 1990, concluded that homes in African American neighborhoods have appreciated at a lower
rate than homes in predominantly white areas. More recently, however, in an examina- tion of mean housing prices by race using the decennial Censuses for 1960 to 1990,
Denton 2001 nds that the ratio of the value of African American to white homes, while still well below unity, reached its highest level in 1990.
5
5. Blau and Graham 1990 conclude on the basis of a simulation that differences in rates of return could not account for much of the racial difference in wealth levels in their sample. Though their analysis is
not based on actual rates of return, Menchik and Jianakoplos 1997 calculated a specic rate of return
Interestingly, economic theory does not offer unambiguous predictions about the ef- fect of racial discrimination in the small business credit market with respect to the rate
of return to business ownership for African Americans relative to whites. If such discrim- ination occurs in the form of higher credit costs, it can lower the relative rate of return.
If, however, a lack of access to credit causes African Americans to be unable to start businesses that a similarly qualied white would be able to, then, on average, African
American entrepreneurs able to start businesses would be expected to be better qualied than their white counterparts, and thus have a higher rate of return.
The various models that have been developed to study the behavior of consump- tion have implications for the pattern of household saving rates by race Browning
and Lusardi 1996; Browning and Crossley 2001. Life-cycle models predict that, because African Americans have shorter life expectancies and larger families, they
will consume at a faster rate than whites. Though economists have not yet reached a consensus on the importance of precautionary saving and the appropriate proxy
for the uncertainty that generates it Browning and Lusardi 1996; Carroll, Dynan, and Krane 1999, African Americans experience greater income uncertainty Gittle-
man and Joyce 1996; Mazumder 2001. In buffer-stock saving models, the volatility of income increases the necessity of building up savings, but also makes it more
likely that reserves will have to be drawn down Carroll 1997.
Differences by race also may emerge because saving as a proportion of current income tend to rise with current income, and whites have higher levels of current income than
do African Americans. In standard models, this relationship between saving rates and current income may occur because households with high levels of transitory income
may be saving at a faster clip to offset expected lower income in the future Dynan, Skinner, and Zeldes 2000. A number of other economic explanations also have been
offered, in addition to an array of psychological and sociological theories Beverly 1997; Carney and Gale 1999. These economic theories include that relative to the rest of the
population, low-income households may be more impatient Lawrance 1991, have a higher Social Security replacement rate, and have more limited access to institutionalized
saving mechanisms such as 401k plans. Further, the saving behavior of African Ameri- cans may be more affected than that of whites by the presence of asset-based, means-
tested social insurance programs, because of the higher concentration of African Ameri- cans in the low-income population. Programs such as AFDCTANF and Medicaid may
depress saving by providing a consumption oor and thereby reducing income uncer- tainty and thus the need for precautionary saving, and by imposing assets limits that,
in some circumstances, effectively tax assets at a rate of 100 percent for those who are income-eligible for a program but have savings above the threshold Hubbard, Skinner,
and Zeldes 1995.
B. Wealth Accounting Framework
