Should Reparations Provide Income or Create Wealth?

Special news coverage and analysis on The Buchanan and Seaton Show w/ @davidaseaton and live streams on WVON or WVON 1690AM on iHeartRadio Friday at 9pm – midnight Central

On June 1 of this year CNBC published an article about BET founder Robert Johnson’s call for a $14 trillion dollar reparations bill. “Now is the time to go big” to keep America from dividing into two separate and unequal societies, Johnson said on “Squawk Box.”

“Wealth transfer is what’s needed,” he argued. “Think about this. Since 200-plus-years or so of slavery, labor taken with no compensation, is a wealth transfer. Denial of access to education, which is a primary driver of accumulation of income and wealth, is a wealth transfer.”

Before we proceed, let’s agree on a definition of reparations.

Definition of reparation: the act of making amends, offering expiation, or giving satisfaction for a wrong or injury.

Let’s quickly define expiation.

Definition of expiation: the act of expiating something : the act of extinguishing the guilt incurred by something.

This is often the problem. If you discuss reparations with the average white person, their response is often something like, “I have never owned a slave”. This response demonstrates lack of expiation or guilt. I recently had a conversation with a white conservative friend of mine who gave a very similar response in a conversation about reparations.

20200713_153826

He and I are around the same age, and our mothers are around the same age. He explained to me how his parents met, and that they were poor. Even though they were poor, they became homeowners (this is important and will be discussed later). They bought a farm in the 1960s. His father later died, but his mother was able to sell the property years later and lives comfortably in retirement today principally because she had that property to sell.

My parents purchased a home in a Chicago suburb in 1971. My father also died when I was young, so we have that in common. What he didn’t know, what many people don’t know, or conveniently forget, is that one year before my parents bought their home in that Chicago suburb, it was illegal for my parents to buy that house. One year earlier there was a city ordinance, and it was legal, that a black person could not purchase a house in that city. This legal prohibition that prevented black people from homeownership in desirable areas, that existed throughout the country, is the foundation of why a reparations program is needed. Remember this point about homeownership because it is going to come up later.

I have had several conversations with black people up and down the socio-economic ladder about Robert Johnson’s proposal. I remember one conversation in particular. I was conversing with a mid fifties black man who works in the travel industry. While discussing Johnson’s proposal, which would give each black person who is a descendant of slavery approximately $380,000.00, I suggested that such a program would immediately bankrupt the country or cause a significant amount of inflation (which would in essence make the money worthless). His response was, “Let’s try it and see what happens.”

At first I was disappointed.  He so blithely dismissed what I said. He didn’t even engage why I believe what I believe. I didn’t engage him anymore as I examined the exchange. Did I poorly explain what I meant? Is $380,000.00 so much money that the average person doesn’t understand my point?

His response is typical of the black people with whom I have conversed about this topic. “Other groups have received compensation and so should we”, is the general sentiment. The larger point that I was trying to make is about the difference between two concepts with which most people don’t truly engage: income and wealth.

Definition of income: a gain or recurrent benefit usually measured in money that derives from capital or labor

Definition of wealth: abundance of valuable material possessions or resources

These two concepts are usually used interchangeably in the discussion of reparations. Even billionaire Robert Johnson conflated the two. You need education to increase your income, and you use your income to create wealth. Let’s examine the definition of income: a recurrent monetary benefit derived from labor.  I have ignored the words “gain” and “capital” in the definition on purpose for the purpose of this conversation. 

A recurrent monetary benefit simply means how often you get paid. Do you get paid weekly, biweekly, or monthly? That’s all the first part means. The second part of the definition, derived from labor, is also simple. How much do you make per hour and how long did you work in a given period? If your rent is $1,000.00 per month and you make $10.00 per hour, you have to work 100 hours to earn enough income to pay your rent. I know you have deductions that come out of your check, but let’s use this simple example for now. 

Let’s look at a second example with the same variables. You work at a job that pays you $10.00 per hour and your rent is $1,000.00 per month. One day you get a call from a sick relative who needs you to visit them in another state for one month. You agree. But how are you going to pay your rent? No problem.  You have $100,000.00 dollars in your checking and savings accounts. You go to your job and use one month of FMLA, visit your sick family member, and still pay all of your bills. You are not impacted by a one month interruption in your income because you have wealth. Put simply, income is a relationship where you exchange your time and activity for money. Wealth is money that you have regardless of your activity. This is important and it will be addressed later.

It’s important here that we use the denotative definitions of income and wealth. I didn’t say that someone who has $100,000.00 dollars in the bank is wealthy, but this person according to the definition has wealth: an abundance of resources. Abundance is subjective and based on your needs. Oprah Winfrey is worth $3 billion dollars, but Jeff Bezos is worth $142 billion dollars. The average person would say that they are both wealthy, but Jeff Bezos is far wealthier.

So what does this have to do with reparations? Simple. We have to ask ourselves if we want to provide people with income or wealth. When newly freed slaves were promised forty acres and a mule on January 16, 1865, that would have created wealth. Notice they weren’t promised money or income. Instead they were promised ownership. Imagine what a total of 400,000 acres of land given to all of the freed slaves would be worth in 2020.  Land that could be cultivated to use for agriculture, or real estate, leased to oil drillers, cell phone towers, or anything that you can imagine. 

This is the point that today’s black conservatives generally make in their criticism of Democratic policies to address economic inequality. Democratic policies have provided income: housing subsidies, food stamps, the earned income tax credit, child care subsidies, etc. These programs have created meager sources of income that have maintained dependency. It is important to note that the conservatives of the 19th century were the group that ultimately prevented the forty acres and a mule promise from being realized. These 20th century programs from the Great Society and the war on poverty were another attempt to right historical wrongs. If there is any agreement between me and black conservatives, it is that these programs had the tactical goal of providing income without the strategic goal of creating wealth and thereby independence.

It is the creation of wealth for black Americans who are the descendants of slaves that should be our goal. Writing one time checks for $380,000.00 as Robert Johnson suggested would not accomplish that goal. Some of you are reading this and thinking, “Just give me my money and I will figure out the rest on my own.” You are missing the point if you think this way. And the reason is so simple it is going to scare some of you when you read it. We are owed so much more!

Yes we are owned more than $14 trillion dollars, and we can get it. But this should not be in the form of a check. This should be an investment that will continue forever. So before we discuss what should be done, let’s discuss how wealth is created today and how we can replicate this simple process for black Americans. 

Do you remember earlier when I shared my conversation with my conservative friend about our widowed mothers and their experiences with homeownership? There is one decision families make that is the greatest predictor of the creation of wealth: Homeownership. Consider that the average homeowner has a household wealth of $231,420, per the Federal Reserve’s Survey of Consumer Finances. Compare that to the average renter, who has a household wealth of merely $5,200, that same survey reveals. 

Homeownership is a wealth creation vehicle that doesn’t require the 1:1 ratio of earning money. If you make $10.00 per hour, you have to work 60 minutes to earn that $10.00 dollars. If you have an emergency thirty minutes later, and you have to stop working, then you will only receive 50%, or $5.00 dollars.

When you become a homeowner, you benefit from something called appreciation. Simply appreciation is an increase in value. Think of it like this. On January 1st 1980 the average price of a house in the United States was $60,400.00. Today that same house is worth $327,100.00. That is a gain of $266,700.00. Without doing anything to your $60,400.00 investment, you made over a quarter of a million dollars. What would you have if during that time you paid rent? Maybe a happy landlord, but you would not have created any wealth.

screenshot_20200713-123108_chrome

So let’s start. We can’t go back to 1980 and buy a house for $60,000.00, but we can buy one today. If my $327,100.00 purchase appreciates the same amount, in 40 years my house will be worth $1,771,430.00. What income do I need to buy a $327k house? First, we need to know what your mortgage payment would be. For the sake of simplicity let’s assume that you put a 3% down payment on the house, and you get a 30-year fixed mortgage at 3%. The mortgage payment includes your principal and interest, and your taxes and insurance. The principal and interest payment for this loan is $1,334.11. Let’s assume that your taxes are $300 a month and your insurance is $100 a month. Your complete mortgage payment is $1,734.11. Generally speaking your mortgage payment cannot be more than 28% of your gross monthly income. This means in order to qualify for this mortgage you need a minimum annual salary of $80,512.25. Right away we have a problem. According to the Economic Policy Institute the median hourly wage—the wage at which half the workforce is paid more and half the workforce is paid less—stood at $19.33 per hour in 2019. For a full-time, full-year worker, this would translate into about $40,000 per year. It appears as if we are going to need some additional income if we are going to maintain our goal. So the next question becomes how does one increase their income? Education.

There is a correlation between education and income. This simply means that generally more education translates into more income, and less education translates into less income. Don’t throw up your hands and stop reading here. When I say education, I am not simply referring to a college or a university. Actually, that is not what education is. What is education?

Definition of education: Education can be thought of as the transmission of the values and accumulated knowledge of a society.

For the sake of simplicity let’s use the correlation between education and average income. According to Statista if you have less than a 9th grade education, you can expect to make an annual salary of $26,875.00. If you have a professional degree, you can expect to make an annual salary of $160,007.00. We only need an income of $80,000 to buy our home. The same article says that the average salary with a Bachelor’s Degree is $93,533.00. It is important to note that there are many careers where one can earn this type of salary with specialized training that is comparable to a 4-year college degree.

Any discussion about reparations has to begin with education. Plainly with less education you have less income, without income you can’t create homeownership, and without home ownership it is more difficult to create wealth. There are always exceptions to the rule, and some people will find an alternative path to success which ends with wealth. In this discussion we are addressing a system that can help the largest number of people.

You might be asking yourself, “Do I have to buy a $370,000 home?” Again according to Statista, in 2019 a little over 50% of American adults had children. Educated parents who have good incomes and want to create wealth buy homes. Because they want their children to benefit in life from where their parents started, they look for homes with good schools. Therefore, there is a strong correlation between home values and school performance

screenshot_20200713-153927_chrome

If you want to replicate the multi-generational wealth created by homeownership since 1980, you’re going to look for a home that falls into the average price that we have discussed (understanding that this example will fluctuate in different markets and with different goals).

Educated people who have good incomes become homeowners, which creates wealth. Education leads to income, income leads to homeownership, and homeownership creates wealth. Then those parents buy homes in areas that have good schools, where their children continue the cycle: education, income, then wealth. This has a potentially unintended consequence: Meritocracy.

Definition of meritocracy: a system in which the talented are chosen and moved ahead on the basis of their achievement. On its surface this seems like utopia. If everyone can move ahead based on their talents, then there is no bias. You are not going to be judged on your sex, gender, race, creed, color, religion, or anything else other than your performance. Imagine that world. This is perfection. Right? Not so fast.

Each group who invests in their progeny is going to be ahead of the generation who doesn’t. “So what!”, I hear some of you saying. Invest in your kids. Remember we are having this conversation in the context of reparations, but here is the larger problem with that response. When black people were slaves, they were not allowed to be educated, and neither were their children. Then between the Civil War in the 1860s, and Brown v The Board of Education in the 1950s, black people had inferior schools. If one generation of education, income, and homeownership creates wealth, how much wealth is created in two? How many generations passed between 1600 (when the first African shaved arrived in Amer) and 1950? If one generation is twenty years, then we are talking about 17.5 generations of wealth passed in the White community and zero in the black community. Remember earlier when I wrote that black people are owed far more than $14 trillion dollars? Is it starting to make sense? If you are never allowed to have education that allows you to earn income so that you can become a homeowner, it is far more difficult to create wealth. Furthermore, the meritocracy created in America has further retarded the accumulation and growth of black wealth post 1950.

I think we can all agree at this point that wealth creation is the better choice in a discussion of reparations compared to one-time lump-sum payments that amount to income. We have also identified the three areas where we need investment if we are going to create wealth: education, income, and homeownership. Here are some solutions on how to create a robust reparations plan that addresses these three areas.

Education 

  • Allocate all property taxes for education within a state and divide it equally between each student in that state K-12. This will create equity among all school districts and students will have equal education funding regardless of their geography.
  • One hundred years of free college/technical training for any college or school that you can get admitted into with free tuition, room and board, etc.

Benefit: Unlocking the potential of your entire population allows for a maximization of innovation. In a global market place it is more important than ever to take advantage of our combined intellectual infrastructure.

Income – you can read more about this plan here

  • Companies receive a tax credit for all black people hired. Tax plan would incentivize companies by providing a 150% tax credit for that person’s salary in exchange for compensating black employees 125% above the national median salary.

Benefit: More income allows more consumption and a larger tax base. This is beneficial to every sector of our economy.

Homeownership

  • Black Americans receive grants of 20% purchase price of real estate thereby creating instant equity. Interest rate subsidy on mortgage rates and loans.
  • 200% tax credit to businesses for creating employee home buying assistance.

Benefit: Homeowners pay property taxes. Property taxes are the local source of income that funds social services and infrastructure. 

Remember earlier I wrote that income is a relationship where you exchange your time and activity for money. Wealth is money that you have regardless of your activity. 

Education cannot be taken away and creates intellectual wealth. If we truly address education, it will create more income. More income will create homeowners, and homeownership will create financial wealth.

These are the kinds of policy changes that creates wealth and a true reparations program for black Americans. What do you think? Should our goal be providing income or creating wealth?

One thought on “Should Reparations Provide Income or Create Wealth?

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s