The prevalent idea promoted across much of our media is the vast disparity between white and black wealth is indicative of “systematic racism.” No matter the reason, the gap exists. What is lacking actual proposals to increase black or anyone else’s wealth. What is offered generally involves money transfers or mandated higher wages. This may or may not increase wealth, depending on whether the additional money is saved or consumed. Wealth is just another way to say net worth. We determine our net worth by subtracting what we owe from our assets. What is left is our net worth.
An easy way to understand this is to look at how many people’s two biggest assets would determine one’s net worth. Say you buy a house for $100,000 and auto for $20,000. You were able able to acquire both with 10% down and to borrow the rest. You have $120,000 in assets and debt of $108,000. That leaves a $12,000 net worth. From that point forward, we have to mark the assets to their present market value. Autos are a depreciating asset. They lose value the instant you buy one. Real estate may depreciate or appreciate depending on several factors, the greatest one being location. If the real estate fails to appreciate and the car continues to depreciate, you’ll have a declining net worth. It could even turn negative. Keep this in mind.
Only the portion of one’s income actually saved can add to net worth. Unless it is used to obtain a capital asset, it cannot grow. Putting money in your mattress stays the same. If the assets acquired appreciate it adds to net worth. Maybe the asset gives a return of interest, dividends, or net rent. If those are reinvested, they can also add to wealth. If the value depreciates, your net worth reflects this adversity. This is all basic stuff but is often overlooked.
How do we help those with a net worth deficiency? I submit the “Expanded Dave’s Plan” would be an excellent place to start. Everyone has a Personal Benefits Account (PBA). It consists of two sub accounts at the financial institution of their choice. One combines all tax-favored savings accounts and the other a regular bank account. A catastrophic Health Care plan is associated with the tax-sheltered account. Significant medical bills can wipe out savings, but here we have protected them with a Catastrophic Policy. Employers and governments contribute proper benefits directly into the appropriate account. They’re yours even if you change jobs, locations, or both.
With a minimum of 10% of earnings and EITC, the equivalent of Obamacare and Medicaid credits deposited everyone’s tax-sheltered account, all have a savings account. I can’t emphasize enough how important it is for everyone to always have this institutional connection. I taught Personal and Family Finance at night community college for decades. One of the highlights every quarter was the field trip to Desert Schools Federal Credit Union. Just by attending the class, you automatically were a member. For a good number of people, especially minorities, this was their first encounter with a financial institution. They not only opened accounts, but their extended families and friends often joined. To hear many of them tell it, it changed their lives forever. Beyond ease of paying bills and saving, they established credit with lower-cost loans. An intangible benefit they claimed was a feeling of pride and being mainstream. Along with the class itself, the students, young and the not so young were on their way to a better financial future. Everyone should have this leg up.
Of course, saving becomes easier as income rises. It isn’t automatic by any means. As an investment advisor, I encountered plenty of high-income individuals who went through life with a negative net worth. Still, making more money makes everything easier. One way to do this is to leave a job for a better-paying one. Even the threat of losing a good employee may prompt the present employer to pay more. Historically a fluid labor force leads to advancement. Yet, labor mobility in the US has been declining. There are several reasons for this. Moving from a job with good health care to one with little or none may be a non-starter. This may be even if the new job pays more and is a better opportunity. A better job may require changing one’s location, but this may be difficult for the less well off. Subsidized housing is a prime example of a support system tied to place. Licensing is a further impediment to moving to a new state. For instance, a barber or a dental technician would, in most cases, have to be re-licensed.
Dave’s Plan eliminates the first two obstacles. You own your healthcare, and it goes where you go. Further, you have no need to change your retirement program. Again it’s yours. With all the support programs combined into one monthly cash support payment, location doesn’t matter. Knowing what the minimum monthly amount you have makes it much easier to evaluate your choices. Dave’s Plan can’t do anything about the licensing problem. Still, if all states adopted Arizona’s acceptance of out of state licenses, it would eliminate the problem.
You might ask why should the less fortunate have to move to find a better life? Why not just improve where they live? Bringing the opportunity to a declining neighborhood or town is akin, having to transport a mountain. As Mohamed advised, it’s easier to go to the mountain. Moving from crime-ridden communities such as the predominant minority neighborhoods on Chicago’s west side has been going on for some time. People have migrated to safer places with better schools and employment prospects. At least 200,000 people have left the city since the turn of the century. If you’re living some kind of “Escape from New York” replica you want out. It’s totally unfair to make some people remain. Abandoning children to a bleak dangerous future should weigh on our collective conscience.
Imagine a couple of single mothers pooling their resources to move from a declining inner city to a growing area—a community with better schools. If you meet a possible mate more likely, the prospective spouse will be employed and stable. Two income families have more disposable income. This makes saving easier. In any case, children do better in two-parent families. The home you might purchase can be expected to appreciate in a vibrant place.
The alternative to making it easier for people to leave a diminished area is to move the mountain. Bringing improved economic, educational, and living conditions to failing areas aren’t easy. If it was Detroit would still have 1.85 million people instead of under 700,000. People there found it easier to leave than to fix a myriad of problems. What’s left is blocks of abandoned homes and commercial buildings. Each of these represents a loss of capital—no equity for the owner and unpaid mortgages for lenders.
To return devastated areas to growing prosperity would take an enormous capital investment. It would need private capital that sees an opportunity for gain. Specific questions would have to be answered. Does it have a favorable political climate, potential employees educated, or trainable? Does the proper infrastructure exist? Of the utmost importance, is the area safe? If you can’t give a positive answers, don’t expect anyone to show up.
In most of these areas, the same political party has been in power for decades. These locales generally have an unhealthy alliance between the political power structure and public sector unions. This leads to excessive benefits and high taxes to pay for them. A change to “Dave’s Plan” PBAs for public sector employees would be a big step in the right direction. Public sector employees would have the same benefits as everyone else. A political change would at least show serious intent.
People forget New York before Rudy Giuliani was a city in decline. Filth and crime defined the city. The Republican mayor made the city safer and cleaner. Everyone benefited, minorities more than most. I lived in the city at its worst and I saw the difference his regime made. Good policing leading to greater safety was a major part of the revival. With the right people and will it can be done,but it isn’t easy.
Failing schools won’t add to a competent workforce. Providing for more educational choices would go a long way to rectifying the problem. This would require the political will to face down the influential teacher’s unions.
Business needs transportation and communication support. Are suppliers nearby? Many troubled cities are strategically located but haven’t done much to build on their natural assets.
If the area isn’t viewed as safe, the level of difficulty grows exponentially. A reputation for theft, murder, rioting, and looting will deter investment rather than attract it. Many of these areas will need more and better policing. “We’re defunding the police,” isn’t a winning message. Increased insurance and protection cost are always a deterrent.
We have new legislation for “Enterprise Zones” to help revive declining areas. This idea of tax-favored zones harkens back to Jack Kemp in the 1980s. If these worked then we wouldn’t look at them today. Even if it revives an area, it gentrifies it. This may actually displace the current residents. Even if real estate and wages rise in the future, it may benefit others. Some places, such as Philidelphia, this has resulted in vigorous opposition. Anyway, if you don’t do the things I mentioned above, a tax break isn’t going to do much.
In fact, direct government interventions have proven counterproductive. When lenders “redlined” specific neighborhoods not to offer mortgages, it was seen as discriminatory. Mortgage lenders were forced to lend in the areas. Redling actually delineated areas unlikely to appreciate in the future. Also, redlining actually warned borrowers to beware. Down payments and future appreciation give the lender a measure of protection on a mortgage loan. Low or no down payments in declining neighborhoods is a recipe for disaster. You may be paying down a sinking ship. These risky mortgages were buried in pools with other mortgages and sold worldwide. These bad apples tainted all the pooled debt. This was a significant contributor to the great recession. Buying property in a failing area is no way to build wealth.
I want all our citizens to prosper as much as anyone and maybe more than most. There are no shortcuts to raising people’s net worth. At least “Dave’s Plan” provides tools to make it easier. Taking wealth from some to give to others will only lead to conflict and division. Better to find ways for individuals to be able to lift themselves. Maybe not a grand political statement, but real never the less.