The Economic Cost of Discrimination Against African Americans

Prepared for the conference of the African American Equality Commission of the Communist Party, USA, St. Louis, June 9-10, 2007

Revised and Corrected July 10, 2007

By Art Perlo (econ4ppl@cpusa.org)

INTRODUCTION AND CONCLUSION

The economic costs of discrimination against African Americans are many-sided, and are interconnected with the effects of social discrimination and racism. Overt racist discrimination is still significant, but institutional forms of discrimination, which can operate without any conscious racist intent, are equally important.

The Urban Leagues State of Black America 2007 measures a number of indexes of Black equality. It shows an overall black equality index of 0.73, but the economic index is the lowest at 0.57. [REF15] In other words, of all the areas the Urban League measures (health, education, home ownership, etc.), African Americans face the worst inequality in economic matters. This can be seen most dramatically in the figures on poverty.

Poverty

The U.S. Census Bureau defines poverty levels for various family sizes. Recently, there has been a growth in deep (or extreme or severe) poverty, defined as an income of less than half the poverty level. On the other end, there is near poverty, defined as double the Census Bureau’s poverty level. Historically, the near poverty threshold has been a minimum, barely adequate level to meet basic needs. Here are the levels based on the Census’ 2005 definitions:

Family with: Deep Poverty Poverty Near Poverty

1 adult, 1 child $6,731 $13,461 $26,922

1 adult, 2 children $7,869 $15,735 $31,470

2 adults, 2 children $9,903 $19,806 $39,612

The corresponding poverty levels, in millions and percentages, in 2004-2005. Figures are cumulative, i.e., Poverty includes deep poverty and near poverty includes the other categories.

Deep Poverty Poverty Near Poverty

All races 15.9M(5.4%) 37.0M(12.6%)

White (not Hispanic) 6.9M(3.5%) 16.2M(8.3%) 28.6%

Black 4.3M(11.7%) 9.2M(24.9%) 48.4%

Nearly half the African American population lives in poverty or near poverty below a minimum adequate income. More than 1 in 9 live in deep poverty, literally on the margins of survival. One quarter of all people in poverty are Black. Poverty increased by 5.3 million from 2000 to 2005; 1.2M (22%) of the increase was African Americans. [Note 0].

This paper is not meant as a complete or systematic examination of the economic costs of discrimination against African Americans. Rather, it can be taken as working notes. I will discuss six interconnected areas where discrimination impacts the economic status of African Americans. Some of these areas are only touched on. In some cases, reference notes are incomplete. (Other areas, such as health care, also have economic impacts, but are not discussed here.)

1. 1. Jobs
2. 2. Criminal Justice system and prisons
3. 3. Ghetto tax higher costs of commodities, taxes, services, debt.
4. 4. Home ownership and home values
5. 5. Education
6. 6. Government policy

It is hard to come up with an estimate of the average economic cost of discrimination. We can estimate the cost of high unemployment; but does it make sense to average that out over all African American households? But it is clear that for the great majority of African American households, the annual financial cost of racism is in the thousands of dollars; it probably averages more than $10,000, and for many it is far higher.

Some of this is taken as profits by the business, large and small, that directly provide services to, or employ workers from the African American community. Probably a larger amount is taken by big businesses and financial institutions which skim the fat from the profits of the direct exploiters. For example, some of the biggest banks provided financing for and profited from the smaller subprime lenders who trapped hundreds of thousands of homebuyers in a virtual prison of debt.

Most of the loss to African Americans, however, is also a loss to the entire country. We are all losing the creativity, labor and enthusiasm of the 30% of African American youth who have no jobs (in addition to the hundreds of thousands in prison). We all lose when so many young people are not educated to their potential.

Most of all, the effects of discrimination and defacto segregation constitute one of the two main tools (along with ultra-nationalism) that the ruling class uses to maintain a control over political and economic policy more total than in any other advanced capitalist country.

For these reasons, it is difficult to calculate a figure for the total capitalist profits of racism. Victor Perlo has an excellent discussion on this topic [REF 28 chapter 10], and calculated that the direct extra profits from racism at $197 billion in 1992, with over $107 billion coming from Black workers. [REF 28 p. 172]. He suggested that the figure should be doubled by including extra profits extracted from white workers because of the effects of racism in lowering standards for the entire working class.

JOBS

Jobs and unemployment.

•  Official unemployment rate for African Americans has been running about 8% this year, compared with 4% for whites. [REF11]
•  In 2003, Only 50% of African Americans in NYC had jobs. [Ref13]
•  By 2002, one of every four black men in the US was idle all year long [Ref12]
•  In 2004, fewer than 39% of young black men (aged 16-24) had jobs (vs 59% and 60% for white and Hispanic).[REF16]

Literally millions of people have been pushed out of the labor force by the lack of suitable jobs. These are not counted as unemployed in the usual official statistics. I have devised a method to estimate real unemployment, based on how many people would be in the labor force if jobs were available. I get the following results [Note 2]:

Prime working age (25-55) unemployment in 2006

White men: 3%( official) 4%(real)

Black men: 7%( official) 17%(real)

Young workers (20-24) unemployment in2006

White men: 7%( official) 11%(real), Women: 6%(official) 11%(real)

Black men: 17%( official) 30%(real), Women: 15%(official) 20-25%(real)

Note that these figures do not include people in prison (or in the army). If prisoners are included, the real unemployment rate for young Black men exceeds 40%. [Note 7]

Jobs and Earnings:

Black male earnings 70% of white ($17K less), female 83% ($6K less). [REF14] In 1998, for men 24 to 40 years of age who had finished high school but had no further education, the average income for African Americans was $26,223 and for whites was $33,123[REF17]

Causes of lower pay and lack of jobs: Overt Discrimination

• Very conservative standards estimate 2 million minorities and women encountered job discrimination in 1999. This is far less than other studies show. [REF2 p. 5]
• Studies in several cities have shown that a job applicant with a name that sounds Black is less likely to get a call for an interview than an otherwise identical applicant with a normal name. [REF22]
• An academic study concluded In the absence of explicit information about criminal backgrounds, [employers] tend to avoid young black men in general.[REF16].

Causes of lower pay and lack of jobs: Systemic Reasons

• About half of all jobs are still found through personal contacts of some sort economists also suggest that network effects may help to account for income inequality between races. [REF17]. Articles in the business press frequently cite the advantages of personal networks both for the jobs seeker and the person doing the hiring. My article in PA [REF18] discusses this in the IT industry
• Geography jobs have moved from where African Americans live (often in central cities) to suburban and rural areas with few African Americans. The computer/IT industry is a prime example. Auto manufacturers building in the rural South usually avoid counties with high Black populations. Geography also plays an important role in social networking.
• As a result of outsourcing in both corporate and government world, on-job training and promotion paths are disappearing. For too many of our people, entry level no longer means entry-level. It means dead end, says Rodney Glenn [of the TWU].[REF19] African Americans are particularly affected, because they have fewer personal contacts or educational opportunities to provide alternatives.
• Education: Nationally, only 2/3 of all students and of African American, Latinos and Native Americans graduate HS after 4 years. In NYC less than 10% of African American students get a regents diploma (preferred for college admission). [REF20] Teachers with less than 3 years experience teach in minority schools at twice the rate they teach in white schools [REF14].
• A criminal record is a legal barrier to employment in many professions, and a practical barrier in many more. [Note 3]
• Manufacturing was exceptionally important for African American workers, but they have lost manufacturing jobs even faster than white workers (Hispanics had the biggest drop). All three groups had similar employment rates in manufacturing (10-12%) in 2006.[REF21]
• Unions: From 1983 to 2006, union representation declined for all groups, but most sharply for Black and Hispanic workers, least so for whites. [REF21] Decline of unions has especially hurt African Americans. In 2006, 14.5% of employed Black workers were in unions, versus 11.7% of white workers. (If we include unemployed workers, unionization rates are about the same for Black and white). For non-union workers, the median Black weekly wage is 79% of white workers; for union members, this improves slightly to 82%. For white workers, the union members earn 30% more than non-union. For Black workers, the union advantage is 36%.[REF29].

CRIMINAL JUSTICE SYSTEM

The basic facts are well-known: Over 1 million African Americans, including 1/8 of young Black men, are incarcerated at any given time; nearly 1/3 of Black men will pass through the criminal justice system in their lifetimes.[REF3][REF 7] Numerous studies show that African Americans are far more likely to be stopped, arrested, convicted, and serve time even when the incidence of illegal behavior is the same. (eg, REF 5). This is most dramatically seen in drug arrests, where studies show whites are just as likely to use illegal drugs as African Americans. So all these expenses fall much harder on African American families.

The economic impact

•  Loss of Income. While incarcerated, it is not possible to hold a job and contribute to family income.
•  Loss of earnings potential. Ex-prisoners, particularly ex-felons, are often effectively barred from legal employment after their release.
•  Lost of benefits Ex-felons and their families may be barred from public housing. Drug offense ex-felons are barred for life from welfare, food stamps, and student loans. [REF 4]
•  Legal and incarceration expenses. Even when an accused person is found innocent, he/she has to pay a lawyer and often a bail bondsman. Missed days of work. Fines. When incarcerated, families have expenses of visiting (often in remote locations or other states), providing spending money for prisoners, even rip-off phone calls that can cost hundreds of dollars a year. [REF 6]
•  Loss of voting rights, combined with census allocation of prisoners to mainly rural districts under right-wing control, dilutes political power and associated economic benefits to the entire community.

The total impact is hard to quantify. But the cost to a family, once a family member has been arrested, must average at least a thousand dollars per year. After release, the cost to the ex-convict and his/her family can be many thousands of dollars per year. Given the highly discriminatory nature of the criminal justice system, this represents a major tax levied on a substantial fraction probably at least 25% — of the African American population.

GHETTO TAX

It is well-known that in poor communities there is less access to discount stores and supermarkets, banks, etc. [REF8] While this affects all poor people, African Americans are more likely to be poor, and to be concentrated in communities with higher prices and inferior services. In other instances, African Americans are deliberately singled out for higher prices. Examples include:

•  African American car owners with identical cars and driving records pay more for car insurance and car taxes between $400 and $1,000 more per year in some states [REF8] [REF9] [Note 1]
•  Low income families pay an average of 2 percentage points more for car loans. This can easily add $35 to monthly payments. They pay 1 percentage point more for home mortgages adding at least $100/month. [REF8]
•  African Americans buying cars (and presumably shopping for mortgages, houses, and other major items) are targeted with higher prices or inferior products. [REF10]
•  Low income households without bank accounts pay 1% to 10% for check-cashing, and additional charges for money orders, etc. [REF8]
•  Low income houses are victimized by rent-to-own schemes that can double or triple the cost of furniture and appliances. [REF8]

It is often argued that many of these problems are primarily due to lack of financial education or financial discipline. While partially true, the argument does not recognize the reality faced by people who, often struggling with multiple jobs and family responsibility, do not have the time or the means to travel miles in order to comparison shop or find good quality services. Regardless, the fact remains that African Americans, both because they are disproportionately low income, and because of deliberate discrimination, pay a substantial additional price for comparable or inferior goods and services. From the above examples, I estimate the ghetto tax at 5% of income, rising to 10% in communities with high concentrations of low-income African Americans.

HOME OWNERSHIP & HOUSING

Home ownership is a major means working families have of achieving a modest degree of security, and of helping their children get started. This is particularly true in the US, where government policies at all levels subsidize home ownership and provide little support or protection for renters.

•  Home ownership rates (2003?) were 48.1% for Blacks vs 75.4% for whites [REF14]

 Median net worth was $67,000 for whites, $6,200 for Blacks. [REF14]

 Median home equity was $64,000 for white homeowners, $35,000 for Black homeowners.[REF14].

 Among families with similar credit ratings, Blacks and Hispanics are 30% more likely than whites to be charged the highest interest for subprime mortgages[REF23].

 Regardless of income level, Blacks are 3 times more likely than whites to borrow thru subprime loans, according to a Federal Reserve survey. [REF24]

 People with African American & Mexican dialects had more trouble making phone appointments for apartment rentals in white neighborhoods. [REF2 p. 3]



In addition, low income home buyers in general, and African Americans in particular, are likely to pay increased costs for taxes and insurance. Added together, I estimate the average African American homeowner pays an extra $3,000 per year for a house of the same value. [Note 4].

Finally many homeowners have seen the potential price of their home increase substantially while they have lived in it. When they retire, they sell the house, and buy a (possibly smaller) house or condo in an area where house prices are cheaper. The gain from this transaction helps finance their retirement, or provides an extra inheritance for their heirs. House price appreciation plays a role in wealth accumulation in other circumstances as well. Of course, many homeowners of all races/nationalities, particularly in former industrial cities or depressed rural communities, are stuck with houses that have virtually no sales value. But by the very nature of the defacto segregation of the US housing market, African American home buyers are much less likely to see substantial appreciation in the value of their house, and more likely to have the value decline or disappear. [Note 5]

EDUCATION

Nationally, only 2/3 of all students and of African Americans, Latinos and Native Americans graduate high school after 4 years. In NYC less than 10% of African American students get a regents diploma (preferred for college admission). [REF20] Teachers with less than 3 years experience teach in minority schools at twice the rate they teach in white schools [REF14]. For the population 25 and older, we have the following breakdown of educational attainment.

Educational Attainment Avg Weekly Pay

Men Women (all races)

(percentage) White Black White Black Men Women

Less than HS 14% 20% 13% 20% $446 $334

High school 29% 35% 31% 31% $645 $488

Some College 27% 28% 29% 31% $761 $577

Batch Degree 30% 16% 28% 18% $1,142 $860

(and above)

Roughly, the inferior education received by African Americans translates into a yearly cost of $4,100 for African American men, $2,200 for African American women. This cost applies to those with full time jobs. It does not measure the additional impact of higher unemployment resulting from lower educational levels. [Note 6]

GOVERNMENT POLICY

At least since Reagans election in 1980, the Federal government has moved away from fighting against racial discrimination. Even before Bush (in 1999) EEOC policy was to ignore clear patterns of unintentional discrimination unless there are specific (individual) complaints. [REF 2 p. 5] Judicial decisions on affirmative action cases have actually leaned to enforcing discrimination, by making it illegal to take any steps against it.

Under the Bush II administration, this trend has intensified. Bushs Supreme Court appointments both have bad records. The latest (July 2007) Supreme Court decision overturning Brown (the 1954 school desegregation case) is the latest example. Justice Roberts was one of a close-knit group of conservatives who were part of the Reagan administrations efforts to dismantle civil rights and outlaw affirmative action. [REF25] [REF27] In 2004, the staff of the U.S. Commission on Civil Rights issued a blistering attack on the administrations record [REF26]. In 2005, 20% of the Civil Rights Divisions lawyers were forced out or quit over policies that reduced civil rights prosecutions by 40%.

As a result, racial discrimination today can take place with the assurance that the employer, bank, landlord, etc. will never be called to account.

Anti-working class government policies, such as budget cuts, or failure to act on critical needs (like health care), disproportionately harm African Americans. And programs that are available are sometimes implemented in a racist way. This can be summed up in a single word: Katrina.

NOTES

[Note 0] References for this section are:

• Woolf et. al., The Rising Prevalence of Severe Poverty in America, American journal of Preventive medicine V32 N4
• Bureau of Census, Income, Poverty, and Health Insurance… 2005, published August 2006.

All figures are from Census Bureau for 2005, except near poverty is from Woolf, for 2004.

[Note 1] REF9 estimated Black drivers pay up to $1000 more in CT for insurance and auto taxes. REF8, more recently, confirms this for cities in CT, MD and NY.

[Note 2]Calculations from data.bls.gov, using Current Population Survey unadjusted annual data. The basic method is to take the labor force participation rate for a subgroup for 2000, the recent employment peak. EG, the LFPR for white males aged 25-54 was 92.7%. We make the assumption that with jobs plentiful, at least 92.7% of all males would work. We use that to calculate a real LFPR, and from that a real unemployment rate for both white and black males for 2006. Slightly different calcualtions are used for women.

[Note 3] NYT editorial, 6/6/2005 TSA has interpreted Patriot Act to impose sweeping bans that make it almost impossible for ex-felons to become long-haul truckers. Law-abiding ex-offenders will be barred from one of the few professions that have historically been open to them. (my emphasis). Ex-prisoners are proscribed from many service jobs as well as many construction jobs (God knows why). A criminal record is associated with a 50% reduction on employment opportunities for whites, and a 64% reduction for blacks. (entry level jobs requiring HS education). The Mark of a criminal record, Devah Pager, U WI Madison, June 2002.

[Note 4] The monthly payment for a fixed-rate 30-year loan of $150,000 is $805 at 5%, and increases about $100 for each percentage increase in the rate. Between greater likelihood of a subprime mortgage, and being charged higher interest rates for any type of mortgage, we can guess that the typical African American homebuyer suffers a 2% disadvantage. Median home pices are now around $200,000 nationally, so a $150,000 mortgage is a conservative guess. So for mortgage payments alone, African American homeowners are likely to pay a $200/month penalty. Add likely insurance and tax penalties and $3,000/year is conservative.

[Note 5] I have found no study on this subject, and cannot estimate the dollar impact. It would be an interesting subject for research.

[Note 6] Educational attainment is from Census Bureaus American Community Survey 2005, tables B15002A and B15002B. They exclude people living in institutions (including prisons and military barracks) and in college dorms and group quarters. Average weekly pay is from the BLS.

[Note 7] There are over 1 million Black prisoners, mostly men. Assume 200,000 are 20-24 years old. If those are added to my estimate of the real labor force and the real unemployed, the unemployment rate is 40%.

REFERENCES

[REF 1]4/30/2007 Washington Post, by Micahel Sniffen AP, Race Gap Cited in Traffic searches.

[REF 2] Why Race-Based Data matters, Sally Lehrman, Institute for Justice and Journalism, Alternet, 10/6/2003

[REF 3]on any given day in America, one in eight black males aged 25 to 29 is incarcerated, and nearly a third of all black men in their 20s are behind bars, on probation or on parole. 5/8/2005, Jonathan Tilove, The Star Ledger

[REF4] Ex-felons are barred for life from welfare benefits or food stamps (drug felons), lose access to student loans for higher ed, may be barred from public housing. The Crisis, May/June 2003.

[REF5] New study shows once stopped by police, Blacks were more than twice as likely as whites to be arrested. (4/30/2007 Washington Post, by Micahel Sniffen AP, Race Gap Cited in Traffic searches).

[REF6] Many states have collect-call only regulations for prisoners calling home. Bills can reach hundreds of dollars per month. (NYT editorial, 12/22/2006).

[REF 7] More than half of 2.2M prisoners are black (Black Commentator, issue 147, 7/21/2005).

[REF 8] (Brookings Institution study on ghetto tax cited in NYT 7/16/2006 by Erik Echhom, Study Documents Ghetto Tax).

[REF 9] Art Perlo, PWW, High Cost of Driving While Black, date?

[REF10] One dramatic TV news magazine (circa 1980) filmed a used car lot, where a salesman quoted a significantly higher price for a Black shopper compared with a white shopper. There have been numerous studies indicting this is not isolated.

[REF11] BLS, The Employment Situation, march 2007

[REF12] Herbert, NYT, 7/19/2004

[REF13]www.cssny.org Community Service Society, A Crisis of Black Male Employment. February 2004. Reported 51.8% of Black men in NYC were employed in 2003, compared with 57.1% Black women and 75.7% white men. Using figures from CPS.

[REF14] Urban League, State of Black America 2005

[REF15] Urban League, State of Black America 2007

[REF16]Charles Stein, Economic Life, Boston Globe, 7/31/05

[REF17]Daniel Gross, Economic View Its Who You Know. Really. NYT August 22, 2004.

[REF18]Art Perlo, The Digital Divide and Institutional Racism, Political Affairs, (date?).

[REF19]Promotion Track fades for those starting at Bottom, by Joel Millman, WSJ, 6/6/2005

[REF20] Bob Herbert, NYT 7/21/2005

[REF21] www.cepr.net 3/2007 Decline in African-American Representation in Unions and Manufacturing, 1979-2006

[REF22] 5/30/2005, Ethicist (NYT) AA male reports getting more calls when he files resumes under middle name (Raymond) than first name (Malik).

[REF23] NYT 6/1/2006, Black and Hispanic Homebuyeers pay Higher Interest, by Erik Rckholm, citing study by the Center for responsible Lending.

[REF24]NYT 9/14/2005 Blacks Hit Hardest by Costlier Mortgages, by Edmund L. Andrews.

[REF25]Roberts Sought to shift course of civil rights law, by R. Jeffrey Smith et al, Washington Post 7/31/2005 by way of MSNBC.com.

[REF26] U.S. Commision on Civil Rights, Redefining Rights in America the civil rights record of the George W Bush Administration, 2001-2004 Draft report for the Commisioners review, September 2004.

[REF27] Civil Rights Focus Shift Roils Staff at Justice, by Dan Eggen, Washington Post, 11/13/2005.

[REF28] Victor Perlo, Economics of Racism II, International Publishers, 1996

[REF29] from Bureau of Labor Statistics, Current Population Survey, tables 1 and 2 at http://stats.bls.gov/news.release/union2.toc.htm.

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