The Minority Wealth Gap Hinders a True Economic Recovery

Recent events have highlighted the scope of long-standing racial economic disparities in the United States. These disparities are significant and real hindrances to actual equality among different ethnic and racial groups in the United States. The historic sources of these disparities are profound, especially for the Black and Native American communities, and policy leaders at the national and state level must be mindful of the past while addressing their present economic impact.

The Great Recession of 2008–09 and particularly the subprime housing crisis caused a massive loss in minority household wealth. Subsequently, data collected by the American Community Survey from 2013–17 revealed significant racial gaps in median household income: $66,943 for white families, $51,450 for Hispanic families, $41,361 for Black families, and $40,315 for Native American families.

The impact of the COVID-19 pandemic could be even worse, particularly due to the under-capitalization of minority-owned businesses. While the total number of active U.S. business owners dropped by 22 percent from February to April, that rate was 32 percent for Hispanic businesses and 41 percent for Black businesses. Coronavirus has also ravaged Native American communities such as the Navajo Nation, which was reporting an infection rate 1.8 times higher than New York state by early June.

In light of these challenges, the Milken Institute Center for Regional Economics (CRE) is redoubling its efforts to improve access to capital, employment opportunities, and the quality of the built environment via place-based investment in minority communities. Our experiences have provided key insights into removing barriers to minority wealth creation through a new policy framework.

What do we know about the challenges faced by minority communities? Our research agenda to date has explored the positive relationship between place-based investment and job creation—and the challenge in sustaining growth when sufficient capital is not available to local firms. Based on our analysis, we have designed and implemented programs to sustain investment in small and medium-sized businesses in minority communities.

In 2016, the Center for Regional Economics and the US Small Business Administration (SBA) formed the Partnership for Lending in Underserved Markets (PLUM) to develop actionable solutions to overcome barriers to success among minority entrepreneurs. The Institute organized local programs in Baltimore and Los Angeles and the SBA provided seed funding and on-the-ground support. Beyond identifying local-level actors with good ideas, we also led a robust national research agenda on improvements to federal policy that could overcome structural limitations. PLUM demonstrated that a coordinated regional response could be effective in overcoming barriers in access to capital.

The Milken Institute has contributed valuable insights to the national conversation on the need for a more diverse asset management industry. The 2020 Center for Financial Markets report on Empowering Communities and Their Banks: Strategies for Enhancing Minority Depository Institutions (MDIs) presents a series of strategies to promote access to capital in underserved communities by leveraging MDIs as anchor institutions.

Our commitment to expanding access to capital and through place-based investment is also shown by our work in other areas to expand global trade and build better cities. For example, we have developed export frameworks for local manufacturers and policy roadmaps for equitable workforce investments, while our forthcoming work demonstrates the benefits of targeted infrastructure investment in communities of color.

With these lessons in mind, what steps do we take next? Our research and programming experience with place-based investment has provided us with several important guidelines.

First, reaching a consensus on policy reforms requires buy-in from a diverse range of stakeholders. Any efforts to accelerate minority wealth creation must begin with a thorough landscape analysis: common opportunities and challenges as well as key points of contention. The Milken Institute’s convening power has enabled us to host a wide range of actors with experience as both lenders and borrowers, as well as in both government and in the private sector. When a policymaker can see the world from the perspective of a minority small business owner, it is far more likely that the former can take meaningful policy actions to help the latter survive the pandemic in the short run and succeed in the long run.

Second, leveraging public resources is a strong incentive to attract private sector capital. Federal, state, and local governments have a wide array of credit enhancement tools at their disposal. However, they must not be hesitant to use them to incentivize additional investments—particularly in minority small businesses. Our experience in this area has demonstrated that helpful strategies include organizing a marketplace of prequalified lenders and providing expanded loan guarantees when firms commit to priority activities such as local hires or technology upgrades. We must also design new procurement portals, leveraging the government’s purchasing power while streamlining the search process for minority firms with an interest in submitting bids.

Third, minority wealth is built from the ground up. Recently, the Milken Institute supported key revisions to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including that additional Paycheck Protection Program funds, be directed to small businesses through community banks. This experience demonstrated just how difficult it is for under-served communities to benefit from centralized, top-down solutions. In lieu of relying on a one-size-fits-all approach, we must refashion our approach to expanding the pool of available capital, particularly by supporting Community Development Financial Institutions (CDFIs) in communities of color. A robust ground-up strategy should also include technical assistance to minority entrepreneurs in areas such as financial management, workforce development, and expanding e-commerce offerings.

Small businesses can play a key role in restoring economic growth and leading the recovery from the pandemic, particularly in minority communities. However, as the experience of the Great Recession showed, minority households and small businesses will struggle to bounce back if they do not have the capital to invest in growth opportunities. A full recovery requires capital to reach businesses and people who need it most, and only by ensuring equitable access can we restore our nation’s economic promise for all communities.