The Economic Cost of Racism

As the pandemic has raged over the summer, it has worsened America’s inequality problem by disproportionately affecting minorities. To add, anti-racism protests have swept the streets of major cities in the U.S., amid outrage over the police killings of George Floyd and Breonna Taylor. These protests, and the pandemic, cast a spotlight on the sheer scale of inequality and racism within the U.S that still exist to this day. In the U.K. large protests also took place in solidarity with the Black Lives Matter movement, branding 2020 as a year for change.

Demanding an end to racism is not only morally correct, but will contribute towards reviving a robust economy. On the contrary, persistent denial of racism, allowing it to be unconfronted with no desire to create change, will lead to a less vibrant, less cohesive, and less prosperous world.

Last week, Citigroup confirmed this in a 104-page report, which stated that not addressing racial gaps between black and white people has cost the U.S. economy up to $16 trillion over the past 20 years. This is an astonishing figure as the total U.S. GDP was $19.5 trillion last year. For those unfamiliar with the term GDP - GDP is a measure of the total monetary value of a country’s final goods and services, and it paints a picture of the health of a given economy. Generally, a higher GDP indicates a strong economy.

“Racial inequality has always had an outsized cost, one that was thought to be paid only by underrepresented groups,” said Raymond McGuire, vice chairman of Citigroup and one of the report’s authors. “What this report underscores is that this tariff is levied on us all, and particularly in the U.S., that cost has a real and tangible impact on our country’s economic output.”

Quantifying the Economic Impact of Racism

The study identifies four key racial gaps between black and white people:

· Closing the black wage gap could have added $2.7 trillion in income, or 0.2% to U.S. GDP per year. This income could have been available for consumption and investment.

· Facilitating easy access to higher education for black students could have increased lifetime incomes by $90-$113 billion. After all, the universities are losing out on a huge pool of income too.

· Improving access to housing credit might have added an additional 770,000 black homeowners, adding $218 billion in sales and expenditures.

· Providing fair and equitable lending to black entrepreneurs might have resulted in the creation of an additional $13 trillion in business revenue, and potentially created 6.1 million jobs per year.

The widening racial wealth gap disadvantages black families, individuals, and communities, and limits black citizens’ economic power and prospects. McKinsey reports that by closing the racial wealth gap, the U.S. GDP could be four to six per cent higher by 2028.

Citigroup estimates the economy would see a $5 trillion boost over the next five years if the U.S. were to tackle key areas of discrimination against black Americans.

So, what perpetuates this wealth gap?

· Policing: Black people are five times as likely to be incarcerated versus white people, where they make up 33% of the U.S. prison population, whilst only making up 12% of the total U.S. population.

· Voting: Over the past ten years, 25 of 50 states have implemented voting restrictions which disproportionately affect black voters. Of the 3.1 million American adults estimated as banned from voting, 2.2 million are black Americans.

· Wealth and Housing: “Redlining,” a Federal Housing Administration policy that refused to insure mortgages in black neighbourhoods, by drawing a red line around them, barred black Americans out of one of the most common avenues for accumulating wealth, home ownership. Today, only about 40 percent of black families own a home, compared with 73 percent of white families. Black homeowners also do not see the same price appreciation in their homes as other homeowners. Black consumers are 73 percent more likely than white consumers to lack a credit score. Black consumers also face discrimination in credit access based on where they live via “credit redlining.”

· Education: Segregated housing has facilitated and perpetuated unequal access to quality education for black Americans. Schools are largely funded via property taxes which means that schools in wealthy, predominately white, neighbourhoods will invariably receive greater resources, while schools in poorer, predominately black areas will receive fewer resources.

What does racism mean for business?

Racism is bad for business.

First, it suppresses creativity. It is no hidden fact that diversity is proven to accelerate innovation, contributing to significant improved financial performance for organisations. In the U.K. alone, full BAME representation in business, and especially management roles, could be worth £24 billion ($30 billion) as reported by the World Economic Forum. A McKinsey report on the topic found the companies that performed worst on diversity were almost 30% more likely to underperform on profitability.

Second, a workplace that tolerates racist behaviour creates an unsafe environment for employees, leading to disengagement, decreased productivity, and a higher staff turnover. In the U.S. for example, more than half of black employees say they have experienced racism at work. This discrimination exists in recruitment too, where a Danish study found that people are more likely to choose a colleague of the same ethnicity, even if they are less competent jeopardising 8% of their earnings.

Third, racial discrimination and workplace bullying can spread unhealthy habits, such as smoking or heavy drinking, as a coping mechanism, according to a study from the US National Institute for Health. This can lead to increased absences due to health problems like obesity and high blood pressure, as well as depression and anxiety.

Fourth, no one wants to do business with a company that has a poor reputation, leading to a loss of earnings and harming recruitment efforts, deterring the best talent.

Hence, adopting an anti-racist approach as a business is imperative. Progressing towards a more diverse, inclusive, and equitable workplace ultimately benefits everyone.

The Remedy

It is apparent that the impact of racism is destructive across the board. It needs to be addressed and eradicated by businesses, governments, banks, and policy makers. This matter should not be simply addressed for the purposes of economic development. Perhaps now that the negative effects of racism on economies as a whole have become clear, and given the huge amount of wealth at stake, will it finally propel countries to take active measures to acknowledge, understand, and eradicate systemic racism? If not, racism will continue to cost us all.