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Racial wealth divide: Why being neutral is not enough

January 31, 2019
By: Jason Rittenberg

How likely would you be to leave your current job to form a startup if you had $3,600 in the bank? Would your interest increase if you had $147,000? While neither amount is enough to scale a business, the latter case obviously affords more cushion to learn the ropes or absorb the impacts of a few missed paychecks. These amounts are the median wealth for black and white households, respectively, according to a new report by the Institute for Policy Studies. While the report does not directly look to entrepreneurship as a factor — nor, notably, as a solution — the implications for regional innovation economies are clear.

Dream Deferred 2019 graphicHousehold wealth remains skewed when looking at other measures. Looking at average wealth, which is driven up by the extremely wealthy (the top 1 percent owns 40 percent of the nation’s wealth), black households have $132,000, Latinx households $173,000 (and a $6,600 median), and white households $916,000. In 2016, a white household is as likely to be worth $1 million as nothing or less, at 15 percent each. Black and Latinx households are 18 and 16 times, respectively, more likely to have no wealth (37 percent, 33 percent) as they are to have $1 million (2 percent each).

IPS offers policy solutions to address these disparities:

  • Tax the wealthiest Americans, including treating capital gains as ordinary income, and use the revenue for child savings accounts, affordable housing, and Social Security;
  • Improve employment opportunities by increasing the minimum wage, enacting Medicare-for-All, and a federal jobs guarantee; and,
  • Increase research around racial wealth disparities.

Notably, these recommendations do not look to innovation and entrepreneurship as a priority solution. Further, capital gains tax treatment, clearly relevant to venture capital investing, is called out in the report as a problem to be addressed. This oversight begs a question for the field: does tech-based economic development offer solutions to racial wealth disparities?

Startup investments do not have a strong track record of assisting black and Latinx households. While investors and funding programs may not exclude minorities, the opportunities for minority entrepreneurs are clearly more limited. While there has not been a definitive assessment of investments in minority-led startups, studies by Harlem Capital Partners and digitalundivided have pegged the rate of funding at a tiny fraction of the overall venture capital industry.

Minority participation in early stages of innovation can be difficult to assess, but there are reasons not to be overly optimistic. For example, despite high percentage increases in STEM Ph.Ds. awarded to black and Latinx students from 2000 to 2015, the total number of degrees awarded to these groups in 2015 was lower than just the increase in degrees awarded to white students over the same period (3,874 v. 4,739). An FY 2005-2014 study of minority-owned business SBIR/STTR recipients showed that success rates were lower than average and that this could help explain a decline in application rates over the same period.

Given this track record, can tech-based economic development initiatives help to correct racial wealth disparities?

Not without deliberate work.

The size of the disparities and the track record of existing innovation activity suggests that a “race-neutral” approach, simply increasing the resources available for tech-based economic development initiatives are likely inefficient to improve the status quo. Instead, organizations looking to be part of the solution will have to set out to deliberately work with minority innovators and entrepreneurs. Groups like Epicenter and JumpStart, to name a few, have made commitments — and progress — in this regard. Their efforts are also a drop in the bucket.

IPS’s policy proposals prioritize broad and near-term impact. Revenues from tax changes, higher wages, and guaranteed jobs could be the law of the land within months, if Congress were to act, and a large portion of the public would be affected. The innovation-to-business-to-scale process unfolds over years, and TBED policies understandably tend to operate on this timeline as well.

If the field wants to be relevant to current, massive, inequalities, then we need to be more aggressive in pursuing a “yes and” approach.

Yes, create programs to train minority entrepreneurs — and adjust existing place-based “job creation” incentives so that companies have to make new hires from underrepresented groups.

Yes, establish seed funds for minority founders — and commit funding to create more investment funds operated by minority general partners so that the field will have more black and Latinx investors.

Yes, encourage more minority students to pursue STEM Ph.Ds. — and launch workforce initiatives that can improve the placement rates of underrepresented groups in technology companies within a year.

The TBED field has been talking about addressing racial disparities, but IPS has underlined that the problem is too significant, and too unfair, to be addressed through long-term solutions alone. We should all feel challenged to think bigger and do more.

inclusion, policy