Citigroup economist, Dana Peterson, identifies a national loss of $16 trillion due to racial inequity
As the COVID-19 pandemic continues to impact the global economy, it has also highlighted the racial inequities that permeate our country’s financial infrastructure.
In an effort to help businesses keep employees on payroll and cover necessary expenses, the U.S. Small Business Administration (SBA) enacted the Paycheck Protection Program (PPP). The road to recovery (or at least stability) was paved with good intentions.
Instead of distributing the funds themselves, the SBA made private banks in charge of the process. As a result, PPP loans were quickly granted to larger, wealthier companies that had the resources to expedite the application process. That left the most vulnerable businesses — such as those owned by Black entrepreneurs — without a safety net.
For many small businesses owned by Black Americans, obtaining loans from a bank is already an obstacle. But to receive aid during a pandemic proved to be even more challenging.
In response to the growing struggles the Black community faced in the first half of 2020, global economist Dana Peterson looked into how the lack of support for the Black community affected the economy over the course of two decades.
Her conclusion? Racial inequity in the U.S. caused a loss of $16 trillion in the economy.
What Does the Data Say?
Even before Peterson initiated her report, McKinsey & Co. published findings last year that “projected that the racial wealth gap will cost the U.S. economy as much as $1.5 trillion from 2019 to 2028, because of its dampening effect on consumption and investment.”
In other words, the lack of Black wealth is bad for everyone.
Peterson did a deep dive on numerous data sets, each of which reflected a different aspect of wealth building, such as home ownership, salary, and college acceptance. By analyzing them through the lens of racial disparity, she was able to see how much of a monetary loss each stage contributes to the Black community’s participation in the economy.
The data set regarding the racial investment gap was particularly insightful. Peterson found that, while Black founders received more initial capital from friends and family than white founders, Black founders were less likely to receive loans from traditional banking institutions.
And even when Black business owners obtained a loan, it was still less than their white counterparts: “after controlling for firm characteristics and performance, the Fed finds that approval rates for Black-owned firms still remain lower.”
Venture capital and angel investing weren’t much better. While a Black founder was 30 percent more likely to receive less funding than originally requested from a bank, they were just 20 percent more likely to receive less funding than requested from VCs or angel investors. In other words, VCs and angels don’t seem to be a much better option for funding than traditional banks.
In an industry that heavily depends on warm introductions and robust networks, it can be difficult for Black entrepreneurs to secure funding through this route. And when 40 percent of the VC landscape is comprised of Harvard or Stanford graduates, it’s even more challenging for Black founders to advance.
To put this particular obstacle into perspective, the Black student population of Harvard Business School over the past 30 years was around 5 percent.
When all is said and done, Peterson concluded that “an additional 6.1 million jobs a year and $13 trillion in business revenue could have been generated over the last two decades if Black entrepreneurs had fair and equitable access to credit.”
Our take:
Without an equal opportunity to own a home or attend a prestigious university, many Black entrepreneurs face significantly more challenges to building a thriving company than a founder of any other race.
As the pandemic continues, it will be imperative to act on the insights that Peterson has highlighted.
To start, Black entrepreneurs need equitable access to capital. Eliminating bias will be an ongoing challenge, but backing and elevating funds (like Backstage Capital and others) that focus on underrepresented founders is a crucial step to a level playing field. LPs (limited partners) have an incredible opportunity to both do what is right, and to create potential outsize outcomes for themselves. Take PayPal’s recent announcement of $50 million invested across 8 emerging fund managers, including Fearless Fund, for instance.
Banking institutions can also implement policies that prioritize the needs of the Black community. As JP Morgan Chase recently addressed in their pledge to close the racial equity gap, Black and Latinx communities have a harder time acquiring loans from traditional financial institutions. In response, Chase will allocate $2 billion specifically for business loans to Black and Latinx entrepreneurs.
But deploying capital won’t solve all of the problems. There needs to be a comprehensive effort to create an ecosystem where Black communities can thrive and have a fighting chance at building the same generational wealth as their racial counterparts. Addressing policies and issues such as home ownership, quality education, and voting rights will also help close the gap.
Bias continues to adversely affect the economy. The repercussions of policies and practices that disproportionately affect Black Americans still continue to this day. And by not addressing these issues head on, they cripple economic growth throughout our country.
We can use this data to build a better world for ourselves. Everyone will have to step up if the economy is to grow and thrive.
- Arlan Hamilton, Christie Pitts, Brittany Davis, & Chacho Valadez, with research and analysis by Sterling Schuyler.
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