How much is racism costing the American economy?

In recent months, the Black Lives Matters movement and protests against police violence have highlighted the social impact of racial discrimination by law enforcement in the United States.

The disproportionately high cost paid by ethnic minorities to Covid-19 has, in particular, underlined the inequality of access to care.

And a study by the American bank Citigroup, published Thursday, September 24, highlighted another pernicious effect of discrimination on American society: it has cost the economy 16 trillion dollars over the past 20 years.

“It is often considered that a person who discriminates against another on the basis of race, religion or sex does not suffer any economic consequences.

[...] It is false ”, wrote the Nobel Prize winner in economics 1976 Milton Friedman.

Throughout a report of more than 100 pages, the economists of Citigroup set out to demonstrate the relevance of the quote from the famous thinker of liberalism in America today.

Missed opportunities

It's all about missed opportunities, the authors of this document stress.

The most obvious, and most important, relates to wage inequalities.

"An African-American can expect to earn a million dollars less than a white person over the course of his life," recalled, already in 2013, another study on the cost of discrimination by the consulting firm McKinsey.

Wage differentials “have not narrowed since the early 2000s,” noted economists at Citigroup, who compiled data from the Federal Reserve and the Census Bureau.

The failure of policies aimed at combating discrimination in the workplace means that, over 20 years, “the total income that could have been generated without his pay differentials amounts to an extraordinary amount of 2.7 trillion dollars. ”, Concludes the report.

So much money that could, in part, have fed the consumption machine or used for investments in businesses or real estate.

“In all we estimate that these losses of income because of discrimination deprive, each year, the United States of 0.2% more growth”, regret the economists of the American bank.

But the problem does not end with wages, far from it.

“The net wealth - that is, assets minus debt - of an African-American household is, on average, eight times lower than that of a white family, according to calculations by the Federal Reserve ”, Notes Citigroup. 

One of the main components of Americans' fortunes comes from the value of their home.

And, in this regard, the discrimination is blatant and: “the gap between the percentage of black Americans who own property and that of whites has even increased since the 1960s,” notes the study.

When these minorities manage, despite everything, to become homeowners, it is generally in less upscale neighborhoods, which means that the value of their property increases more slowly, “further widening racial inequalities”.

Everyday racism and institutionalized discrimination

If the banks are reluctant to grant real estate loans, they are just as cautious in financing the start-up projects of ethnic minorities.

This is the other big missed opportunity due to racism for Citigroup: if financial institutions had "treated in a fair and equitable manner" the African-American entrepreneurs who came to ask for money to set up their businesses, "it could have generated up to 'to 13 trillion dollars more revenue for the American economy [between the potential turnover of these companies and the tax revenues for the State, editor's note] and create about 6 million jobs for 20 years ” , estimates the American bank.

A finding that encourages Citigroup economists to advocate for an increase in representatives of ethnic minorities in the financial world and, more generally, among investors.

This greater diversity would not only promote access to credit for ethnic minorities.

It could also help to better understand the economic needs of these communities, which would be beneficial for the entire economy, say the authors of the study.

Indeed, due to an overrepresentation of the white population in the business community, money is often poorly spent to provide the right services or products to these minorities.

It is, according to Citigroup, “hundreds of millions of dollars of opportunities to do business” which fall by the wayside for lack of knowledge of the market.

It is this accumulation of everyday racism and institutionalized discrimination that has cost the American economy dearly.

Success in reversing the trend will not happen overnight, as these biases are deeply rooted in society, acknowledge the economists of Citigroup. 

But the benefits could be substantial, as ending these ethnic inequalities could generate more than $ 5,000 billion in additional wealth for the US economy in five years.

And the study even identifies simple measures that could have an immediate impact, like prohibiting an employer from requiring a candidate's salary history for a position.

"If he does not know him, he will not be encouraged, even unconsciously, to perpetuate the wage discrimination suffered by minorities," underlines Citigroup.

A small step that could have important consequences.

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