January 24, 2023

The idea of reparations for African Americans due to slavery began during the Civil War when General William Tecumseh Sherman, on January 16, 1865, issued Special Field Order No. 15 that called for allocating up to 40 acres and lending mules to newly emancipated slaves. President Lincoln’s successor, Andrew Johnson, ignored the order but the idea has nevertheless lived on. Not much happened on reparations until 1988 when Representative John Conyers introduced HR 40, a bill to establish a national commission to study reparations, but this bill died in committee.

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In 2019, however, with the murder of George Floyd and COVID-19 impact on communities of color, the dam has burst. The House of Representatives has again taken up the idea of a national commission and countless cities such as Boston, Chicago,  San Francisco plus the state of California have created official reparations commissions. Evanston, Ill has awarded $25,000 each to 15 Black resident to make amends for past housing discrimination.  The Jesuit Conference of Canada and the United States in 2021 pledged $100 million in reparations for descendants of those enslaved by the order.

A major justification for reparations is to equalize the racial wealth divide. As the Brookings Institution, hardly a radical thinktank, put it, “Central to the idea of the American Dream lies an assumption that we all have an equal opportunity to generate the kind of wealth that brings meaning to the words ‘life, liberty and the pursuit of happiness.’”

Will awarding large sums of money to Black people equalize the racial wealth gap? The answer is “no,” and the political damage that this effort will far outweigh its immense monetary cost.

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This wealth gap is massive and enduring. According to recent Federal Reserve data, the average White family has eight times the wealth of the average Black family with the average Black family’s wealth being 15% of what the average White family possesses.  Nineteen percent of Black families have zero or negative net wealth. The gap extends far beyond income differences though this is significant. Differences exist in inheritances, multiple savings and investment plans, plus how Whites gravitate toward investments that appreciate over time, especially home ownership and education.  

Can reparations close or at least narrow this gulf? Much, naturally, depends on the size of this wealth transfer, and payment details while per person award figures have ranged from a about a quarter million to, in San Francisco, five million. Nevertheless, regardless of the final sum, given what we know about how people manage money, there is little cause for optimism.

Spending among Blacks will, for political reasons, likely be discretionary versus restricted to “good things.” Recipients also cannot be forced to heed advice from financial experts. Given this discretion, there can be no rule that money only goes towards diminishing gaps in assets. Conceivably, at least some Blacks will prefer spending reparations on short-term items that rapidly depreciate. This likelihood is hardly hypothetical. One study shows a distinct proclivity among affluent Blacks for spending to achieve “style” and social standing, notably designer luxury brands. Data also show that Blacks are less likely than Whites to save money — half of all Blacks have no retirement accounts.

Meanwhile, studies of all-too-common bankruptcies among super-rich professional athletes (many of whom are African American) revealed a weakness for conspicuously showing off, for example, gifting exotic cars to families and friends, over-the-top personalized jewelry, and hosting big-time nightclub extravagances. Even a half-million-dollar windfall can vanish in a year or two, as these bankruptcies illustrate.

Similar evidence of misspending comes from those winning mega lotteries. A website even catalogues the worst disasters. Accounts often tell of winners being overgenerous to charities, extravagant vacations, ill-advised business ventures and otherwise acting foolishly.  Particularly troublesome was the difficulty of saying “no” to friends and family. Eventually, everything ended thanks to going broke. Indeed, the tribulations of the new super-rich are sufficiently common that psychologists even have a name for it — the sudden wealth syndrome.

It hardly helps that these recipients will often have limited experience managing large sums versus just paying monthly bills. Building a diversified stock portfolio and then patiently waiting years for it to double will not be easy. It might be too tempting to wait decades to pass wealth to progeny. The financially unsophisticated may also struggle with the ultimate safe investment for building wealth — buying a house. Will those receiving a $250,000 check and then spending half on a down payment for a half million-dollar house be able to calculate the yearly maintenance expenses, property taxes, and insurance? When the federal government encouraged banks to offer mortgages to previously unqualified minorities, foreclosures skyrocketed, and this may occur again. Nor can there be any guarantee of increased value. Markets fluctuate and value can decline if nearby schools deteriorate, crime rises, and potential buyers find the house in ill repair. Home ownership hardly guarantees increased wealth.