Mehrsa Baradaran on How COVID-19 is Exposing Existing Societal Wealth Gaps and Financial Access Challenges

Mehrsa Baradaran is a professor of law at the University of California Irvine and researches banking law, financial inclusion, inequality, and the racial wealth gap. Her scholarship includes the books, *How the Other Half Banks* and *The Color of Money: Black Banks and the Racial Wealth Gap.* Mehrsa joins Macro Musings to talk about the impact of COVID-19 and how existing wealth conditions and financial access challenges are exacerbating the crisis. David and Mehrsa also discuss the historical context for the racial wealth gap, why banking deserts are so consequential, and how a postal savings system may be a solution to the financial inclusion problem.

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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Mehrsa, welcome to the show.

Mehrsa Baradaran: Thank you so much for having me. I am a huge fan.

Beckworth: Well, Mehrsa, it's great to have you on the show. We have been interacted on Twitter quite a bit, so I followed your work. I really enjoyed reading your book as I prepared for the show. Fascinating history. Great prose. There's a really captivating story that you told in that book. So, I'm excited to talk about it today as we get into it. Tell me though how did you get into this area of research? You're a law professor, but you are covering financial system issues, financial regulation, and the like. How did you become an expert and care about this area?

Baradaran: Well, I mean, I guess the knowledge, the expertise came from... I was at Davis Polk working in the Financial Regulation Group during and after the financial crisis and just became interested in that stuff from as a... I like to say I was... When you represent Goldman and you see the way that the Fed comes in and bails out these firms, it gives you both perspectives, both sides of the issue. So, that's where I gained the knowledge. As far as why I care about these issues, so connecting, I guess banking into the inequality work that I bring with my scholarship is just maybe my background. It's hard to know why I care, but I think growing up, I'm an immigrant to America. I came here when I was nine, and we lived... My parents had working full-time jobs.

Baradaran: So, I've lived on that other income side of the spectrum and know what it's like to have those experiences and then the other side. So, really, I think some of the stories and the myths that we tell about poverty and inequality, it bugged me enough to launch a research career in trying to explore some of these issues.

I think some of the stories and the myths that we tell about poverty and inequality, it bugged me enough to launch a research career in trying to explore some of these issues.

Beckworth: That's fascinating, and you have another book out on how the other half banks. So, tell us about that book real briefly before we get into the show.

Baradaran: Yeah, that book... I mean, it came from a series of articles I had done as a more junior person, just trying to figure out how it was. I was really interested in the history of credit unions and thrifts and ILCs, industrial loan companies, and all these different banks that used to have these specific missions for working people or farmers or whatever it was and how those shifted over time. So, I started digging in and looking at how it was that the credit union normalized from this radical fringe, sort of populist movement, into an institution that is now just like a bank.

Baradaran: So, as I started doing this research, I more focused on the inequality drivers and backed into a solution, which I thought would be a good idea, which was postal banking. As I looked through this history, I realized, "Oh, we used to have all these different varieties of banks, and I'm not trying to say that it was always robust, and poor people used to be banked and as they are not now. That was never the case, but I offered an early article around 2013, this idea of postal banking, and it took off a little bit. So, I wrote the book to make the full case for that. That was I think in 2015, and since then, it's been a policy proposal that has appealed to a few people specifically on the left. So, that was the first book.

Beckworth: Yeah, but financial access is an issue for everyone, right? I mean, it's something that we're seeing coming to play now. Whenever the economy collapse, you see the people on the fringes of society really being impacted more so than others. So, I think that's an issue that cuts both ways. Maybe there's different solutions being proposed, but you have a real passion about that. I like that about your work, and it comes through in your other articles as well, and speaking of that, I want to begin our conversation today about the disparate impact of COVID-19 by going over some facts maybe or some observations about how it is affecting different groups differently.

The Disparate Societal Impacts of COVID-19

Beckworth: So, first off, I think most people know there's regional differences, so New York is getting hit particularly hard, close to 600,000 cases there, 12,000 deaths, and you look at Texas on the other hand, they have about 158,000 last time I checked. Similar sized states and yet very different impacts, and there's lots of reasons for that. We won't get into all those explanations today, but there's also income differences when it comes to the impact of this virus, and I want to just briefly reference an article to help motivate this observation.

Beckworth: So, Derek Thompson, writing in the Atlantic, has an article titled *The Coronavirus Will Be a Catastrophe for the Poor,* and just a few quotes from his article here. He says, "This wave of the pandemic will almost certainly disproportionately punish the poor not only by arresting the long recovery since the Great Recession, but also by specifically targeting industries where workers are most vulnerable and have the least protection." He quotes a fellow at the Brookings Institution who says, "’One month would wipe out 10 years of progress in this fight against inequality.’ Mark Muro, a senior fellow at the Brookings Institution, said. ‘A huge service-sector recession is coming, and we're talking about more than 10 million jobs at risk that are often low-wage, low-benefit, and tip-based.’"

Beckworth: Now, this has come to fruition and then some. So, as you know, this week, we had some more jobless claims come out, and over the last three weeks, if you add them all up, we're at 22 million jobless claims, which is staggering, and that is the number of jobs that have been created since the Great Recession ended. So, in a few weeks, we've wiped out that decade of job growth, which is just staggering, and who is it mostly affecting? It's the poor individuals, the people on the margins of society, and it's something that's maybe easy for me to talk about as a host of a podcast sitting from my office in front of the equipment. I have a salary. I'm not on hourly work.

Beckworth: So, I want to really think about this today and maybe get into the reasons why this is the case, and your work I think really speaks to that. So, one big issue is these income differences, and we'll make a link up to the Derek Thompson article. They're more vulnerable. Also, there's been some observations about racial differences, and there's reasons why different racial groups may have different impact as well, and I have looked up data I'm just preparing for the show, and there's some mixed evidence on this, but there's reasons to believe at least and some anecdotal evidence this is the case that African Americans are getting harmed more disproportionately than other groups.

Beckworth: There are reasons why we can go through starting off with they're more likely to be exposed to the virus. Their line of work, they tend to be caregivers, cashiers, sanitation workers in inner cities. They're more susceptible. They also have a higher incident of underlying health conditions that make them susceptible to it, and then lastly but maybe more importantly, they have access to medical care that's not as great as many other people in America. So, we see a potential racial impact and income impact, and the bottom line is if you're a poor minority, or you're an hourly worker, you might get hammered disproportionately by this virus.

Beckworth: On top of all those observations, it's come to light that the government relief effort isn't getting to everyone equally as well, and these same groups seem to be adversely affected. In fact, in your article, which you wrote for the Atlantic, great piece. You talk about this. So, why don't you highlight for us at this point what's going on in terms of the disbursement of funds for those that fall on these groups?

Baradaran: Yeah, so those are all really staggering statistics, and I want to just contextualize why I care about this stuff and why it is that you would see low-income communities get hit specifically hard, especially black communities, and one of the things is poverty is not just you and I with less money. It's not just an economic matter. It is your increased vulnerability to disease, to violence, to psychological trauma, to all sorts of instability that ends up affecting your health and your psychology and just the whole ecosystem of these areas, and specifically with regards to race. I mean, you have this history of segregation that compounds all of these factors.

Poverty is not just you and I with less money. It's not just an economic matter. It is your increased vulnerability to disease, to violence, to psychological trauma, to all sorts of instability that ends up affecting your health and your psychology and just the whole ecosystem of these areas, and specifically with regards to race.

Baradaran: So, that's one, and that's why you are going to see not just the disease, the virus specifically affecting these communities harder. I mean, some of the stats on this are staggering as you mentioned on the race side. So, 40% of deaths. I mean, we still have to get all the numbers in, right?

Beckworth: Yeah.

Baradaran: I wouldn't be surprised if that holds up. Some of the stats saying 40% of deaths so far are African American. I mean, that is shocking. Maybe it's not fully going to be that, but it will be high, and part of that is just where history ends up playing out in real life. In a way, I think this virus actually shows the myth of the colorblind society that we think we live in, because this virus is clearly not racist, right?

Beckworth: Right.

Baradaran: This virus is an equal opportunity killer. It should be because it's affecting all of us. I mean, one, it shows that we're all human, and we're all going to be infected by this thing. But why? Why is it killing more poor people and African American people? Part of that is the jobs that African American communities take are more service jobs, more jobs that are essential workers' jobs. The other is just the compounding effects of segregation, meaning that you have to live in areas that are more exposed to other people and have a history of higher heart disease and asthma and all of these other health effects that end up making you especially vulnerable.

Baradaran: Same with poor regions where healthcare hasn't been robust, and maybe people don't have health insurance and et cetera. Then there's a response as you pointed out has been also very color blind. It's discriminatory. Same with low-income people. It's supposed to be helping people, but what you have is a system where people who have lawyers, companies who have lawyers, companies who are bigger were able to go to the PPP loans and any of the Federal Reserve monetary policy facilities, the 13(3) stuff and TALF and everything else went disproportionately to large firms and corporations, not to black and brown-owned businesses, not to the small firms, and that's obvious because you have greater access. You have greater ability to just know about these programs and get in line and be first and have that ongoing relationship with your bank.

Then there's a response as you pointed out has been also very color blind. It's discriminatory. Same with low-income people. It's supposed to be helping people, but what you have is a system where people who have lawyers, companies who have lawyers, companies who are bigger were able to go to the PPP loans... and everything else went disproportionately to large firms and corporations, not to black and brown-owned businesses, not to the small firms.

Baradaran: The fact that we have this massive program both legislative and through Treasury and then also the Fed that all of that stuff went through banks, and it wasn't a mandated thing. So, you said, "Wells Fargo, go and give your customers these loans," but Wells Fargo can pick their customers, and they chose to pick the bigger ones first, their credit customers first, their bigger customers. I was actually helping a small business in the area, it was a minority-owned business, and we applied to Wells Fargo for the loan the first day, and they got an email right away saying that they're on a queue and wait, and we never heard back, and the funds ran out.

Baradaran: I knew that. I told like, "Oh, Wells Fargo, your bank. Maybe we should try another thing." We tried a couple different things, but they wanted to go through Wells Fargo, and we never even heard back from anybody, and that's playing out across the board as I'm hearing as I'm reading these reports. There's a lot of small businesses just did not get these loans.

Beckworth: Yeah, and it's very sobering, and in your article, which is titled *The U.S. Should Just Send Checks but Won't,* in the Atlantic, you bring out some good illustrations of this. You mentioned some of them already, but small business owners who've been convicted of a felon, they are not eligible either, correct?

Baradaran: Yes, yes. If you have felony, if you have any... Even if you're one of the owners of a business. So, if you have a 20% share, and the felony could be at any point in the past, or it could be a crime of moral turpitude. So, it didn't even have to be a felony but something that qualifies as a moral turpitude crime, and it just seems unnecessarily punitive, right?

Beckworth: Yeah.

Baradaran: What does that have to do with protecting your workers at your company?

Beckworth: Absolutely, and you mentioned the Payroll Protection Plan. I was just reading how almost all of that went to medium-sized or larger businesses, and very little went to small businesses. In fact, if you add up the part of the CARES Act that's truly grant in nature, so it's not a loan. You have 50 billion going to the big airlines, and then other 349 billion going to this payroll protection program. Well, most of it went to larger businesses who played the system. As you mentioned, they had lawyers that lined up quickly. First come, first serve kind of rationing of these funds. So, it really has a bad look to it.

Beckworth: Going to something you mentioned in your book, there's a line you used. I'm not sure if it's your line or someone else's line, but you mentioned it's expensive being poor, and what this crisis highlights, it's really expensive being poor during hard times like this.

Baradaran: Yeah, it's expensive. It's not my line. It's James Baldwin's line.

Beckworth: Oh, okay.

Baradaran: And not just expensive being poor, really. I mean, it is just physically is hard, right? You do pay more for everything. I mean, even just taking the stimulus check, right? If you're unbanked or underbanked, if you live in a community where it's a banking desert, or if you can't get to your bank in the next couple of days, or if you need the payment now and because of our payment system, it takes five days to get that check, you have to go to a payday loan, and that's the turf that I covered in my first book. Just how hard it is for not just the unbanked but the underbanked, anyone who has to rely on payday or check cashing or pawn or any of these fringe loans, because it's not just that you pay 300% APR and you're in this debt cycle, but it's also just the psychological toll of not having money to pay rent and having to have that debt burden on your shoulder. So, that just infects everything that you do, and I think you're going to see this.

Baradaran: I mean, like you said before, like 22 million unemployment, this is a staggering economic blow to people who are not doing all that great. I mean, we did not have a robust safety net before this. We did have a lot of suffering communities. Maybe things were improving over the last 10 years since the last recession, but they weren't improving equally, and this is a blow that will take some time unless, I think, we have much more pointed and a different recovery legislation that actually focuses on those areas that are hardest hit unlike the programs that we just mentioned, which do tend to go toward the top.

This is a blow that will take some time unless, I think, we have much more pointed and a different recovery legislation that actually focuses on those areas that are hardest hit unlike the programs that we just mentioned, which do tend to go toward the top.

Beckworth: Yeah, that 22 million number is so staggering. It's almost like I'm reading a book of fiction, some dystopian novel where the world's coming to an end, but it's right in front of us. And again, I think for me at least, it's easy to not see it or experience it firsthand because I'm in a good position. I have a salary job. In fact, I'm busier than ever. This crisis has been good for my line of work, but I live on the outskirts of Nashville. I'm in a community where I see a big divide. There are some rural communities around here that are very poor, probably very much fit into this description of lacking financial inclusion. They probably don't have regular bank accounts. Like you mentioned, a banking desert. Explain to our listeners what is a banking desert and why is it so consequential.

Banking Deserts and Why They Are Consequential 

Baradaran: Yeah, some of the history I tell in my first book, *How the Other Half Banks,* and you know this as a follower of this industry, but since the 1980s, merger waves of the deregulatory era, you had these conglomerates form, and what happened... This is not new, but it's certainly accelerated over time is that as banks have merged and conglomerated, they've shut branches in areas that were less profitable. So, what you have is if you look at the maps of banking deserts, and there's a great one called *Mapping Inequality* that has actually really visualized this whole thing. I mean, there are wide swaths of the country and rural areas, some urban, but mostly the divide that you typically see in that rural areas that don't have a bank that's within 50 miles.

Baradaran: So, what happens in these areas is you have to travel 40 miles to an ATM and pay $7 just to use the ATM, or you go to a check casher, or you go to a payday lender. There was actually a great American Banker article by a journalist, John Heltman, who I follow, whose work I really like, and he went to this town in Arizona that had just lost their Zions Bank and found that people had to travel 50 miles to another town, or I don't know what the mileage was but something around that, and they ended up doing a lot of their shopping in this other town.

Baradaran: So, this town, the economy lost 20% of their income a year after the bank closed, and to my kind of happiness that they were using the post office in the town as a way to do their financial transactions because there was no way to just even convert checks into cash. So, this is a growing phenomenon. I mean, with this last merger of BB&T and SunTrust, one of the first agenda items if you look at their merger plan is branch efficiency, and what is branch efficiency? It is closing branches that are less profitable. That's one of the big things that happens in a merger, and a community will lose many communities in the southeast specifically for this merger will lose their bank.

Beckworth: That ties in nicely to another guest we had on the show, Aaron Klein. He talked about the lack of real-time payments, the lack of instant clearing, and how that also adversely affects those who live paycheck to paycheck or maybe the lower half of the income scale because they get their money deposited, and it may take several days to clear, but they have bills to pay in the meantime. They maybe have child support. They have these obligations they can't meet. So, you have to in a banking desert throw in a payment system that's outdated, and it really is hard to live to be an American if you're really poor and you face these constraints.

Baradaran: Yeah, absolutely. I mean, this is the thing I think... Aaron Klein's work is excellent on this and a lot of other things as well. He's also highlighted the racial disparities recently and the Fed provisions and in a great article he has up in Brookings, but the real-time payment thing, it's just such an obvious thing that wouldn't occur to someone like you and me who gets maybe a paycheck paid, and they don't need it that day, but a whole bunch of Americans, a lot, maybe the majority, needs to buy stuff the day they get paid. So, if you do need that, how do you do it?

Baradaran: So, you would have to wait five days. If you get paid on a Friday, it would take three or five days for that check to clear, so you'd rather go to a check casher, take whatever $10 off that check and get it paid. You have Walmart, a lot of these businesses that do now pay paycheck advancement "loans." They don't call them loans. They just call it a paycheck advance, but you pay a fee. So, Walmart charges a fee for their own workers to get an upfront paycheck just so they don't have to wait another week to get their funds because they need the money to pay rent or whatever, and this is the gap that a lot of us, I think, I don't understand because we don't live it. Just how three or four days of having no funds can really mean, "Do you give your kids dinner or do you not give your kids dinner? Do you get gas in your car so you can go to work?" Maybe your rent is due.

Baradaran: Whatever those urgent needs of payment are, you have to pay it. You can't wait five days, and I think the stimulus check thing, I mean, when you have 22 million people who are out of jobs who are already very much stretched to capacity, I actually think the other shoe hasn't even dropped yet. I think these numbers... The effects of this will be more and more apparent as time goes on, and it will look really dire I think for certain communities that maybe you and I are not living in, and I think that's going to be hard.

When you have 22 million people who are out of jobs who are already very much stretched to capacity, I actually think the other shoe hasn't even dropped yet. The effects of this will be more and more apparent as time goes on, and it will look really dire I think for certain communities that maybe you and I are not living in, and I think that's going to be hard.

Beckworth: Absolutely.

Baradaran: Yeah, right.

Beckworth: No, absolutely, and you think of the folks who are being affected by this recession. So, that 22 million. Most of them are in the service sector, right? Because that's what's being locked down. That's what's being shut down. They're the ones on hourly scales. They're the ones who probably need these checks immediately, and they're probably the ones who're having the hardest time getting them as well. So, it will be interesting to see studies that are done two or three years down the road, maybe longer than that that'll look back and see how the delivery of these cash payments were, how effective were they, and to see who got them first.

Beckworth: My understanding at least is that the initial numbers indicate the people who got them first are the ones who had everything already set up, so they had direct deposit set up. So, that means they have a bank account. They pay their taxes. It's a fluid system for them, but if you're someone who doesn't pay taxes or you have someone else do it for you. Another article I read indicated a number of these tax services that file for people that they have also been a roadblock in people getting their checks, their funding, so I think it's easy to paint a picture that the people who need it the most probably aren't the ones getting it first.

Baradaran: Absolutely, and I think you mentioned the tax preparers. I mean, that's an industry that's going to be booming, people who are going to need their tax returns, and a lot of pawn, payday. Those businesses are going to be booming in the next little bit, and there's this great research done by... I think it was J.P. Morgan's research arm talking about the Earned Income Tax Credit, and they sent it to me early. I don't know if it's public yet. I think it is, but one of the things that they showed is a whole bunch of communities, and they studied it racial wealth gap-wise, and with the Earned Income Tax Credit, when families get that. So, it's like $2,000 or whatever.

Baradaran: The spending that goes up directly afterwards is healthcare. So, a lot of families wait for their EITC check to get needed healthcare, right?

Beckworth: Interesting.

Baradaran: It's not as though they're out there spending on consumer… and that's the thing that just popped out to me. I saw those stats before this crisis, but it really occurs to me that there's just... I mean, even the way that we are now enmeshed in each other's healthcare, someone not getting proper healthcare puts everyone at risk at this point because this is something that is very contagious. So, what does that mean if you can't afford to actually... Maybe you do have a job. You're one of the lucky ones, and you get COVID, and you just can't afford to go to the hospital for whatever time it takes to recover or to shelter in place.

Baradaran: So, I think this is where you start to see, "Look, actually, it's not just an issue for poor people. It's an issue for all of us. The most vulnerable end up... We have to worry about that floor because we're all in it together."

Beckworth: Okay, so let me go back a bit and ask, "What were the trends leading right up into the crisis? So, we know things are getting really bad in this crisis and later in the show, we'll come back and look at your suggestions for fixing those who are left out that improving financial inclusion, but leading up to this crisis, was there any improvement in the trends surrounding financial inclusion? For example, did any private sector solutions help? Are there any innovations, you know, the person-to-person payments? Did those take away some of the problems with financial inclusion or is it stuck at a bad place?

Trends in Pre-Crisis Financial Inclusion Solutions

Baradaran: Yeah, I mean, I think for those with bank accounts, the mobile apps have been working phenomenally, and a lot of people use those primarily, but Venmo, Square, Cash App, all of them ride on a banking system. So, you have time a bank account to plug into those. The unbanked numbers as the FDIC tax them were going slightly down, but the bank desert situation had not improved. There were more big deserts, specifically as the BB&T-SunTrust merger was going to close down a bunch of branches in certain areas.

Baradaran: I think the trends were not promising before. I mean, there were some glimmers of hope in that some of the recovery was starting to go into wages. A lot of states and companies had raised wages just maybe a year ago, two years ago. So, those were wins that you could say, "Okay, maybe now people will have more money," but the trends weren't... I don't think it's fair to say that we were on an upward trajectory with these issues. Even healthcare I think has been... Angus Deaton, and they came out with the *Deaths of Despair* book, right?

Beckworth: Right.

Baradaran: As white Americans are dying at way higher rates than ever just through these deaths linked with poverty and the decline of certain areas. So, I think there was a lot of inequality that was increasing.

Beckworth: Okay, so these deeper problems which were maybe hidden or out of sight and maybe even more so because the recovery lasted for so long and was beginning to pull people. Back in the labor force, we saw people leave. For example, the disability payrolls and start working again. So, there was some good news, but maybe it hid the deeper structural problems that we're talking about here that there are some real issues with financial inclusion. To really be a functioning member of society, you got to be a part of the financial system.

Beckworth: So, you have some solutions. We'll come back to those later on in the show, but I want to get back to something you've written on and we touched on earlier, and that is this disproportionate effect that these challenges have on African Americans as well as poor, but I want to focus on African Americans for a while because you have the great book you've written on that. I want to speak to it because it's something I think that many of us don't know about or don't appreciate, and that is this wealth difference between African Americans and whites, and we'll focus on those two groups.

The Importance of Fixing Racial Wealth Disparities

Beckworth: Preparing for the show, I went back and looked at the Survey of Consumer Finances, because you talked about that. A lot of people talk about that, and I just want to throw some numbers out to you, and then you can respond. I know these are nothing new to you, but to me, it was the first time I've seen them, and it's just pretty staggering what I saw. I mean, I saw the numbers in your book, and I have seen other people write about it, but just looking at the raw data myself was really fascinating.

Beckworth: So, in 1989, when the survey starts or at least that's where the data starts that I was able to access. If you look at the median value of assets for families with holdings, so this would be a household. For whites, this is median, which is different than the mean. If you look at the mean data, it's going to be a little bit higher, but this is the median. This is also adjusted for inflation, so this is in 2016 dollars. So, I'm going to span several years here just to understand we've corrected for inflation.

Beckworth: But the median household asset holding for a white family was about $185,000 worth of assets. In 2016, it jumps to about $265,000. So, there's a significant increase, quite a large growth. Now, it does decline during the Great Recession, but it recovers. So, you see you go from $185,000-265,000 between 1989 and 2016. If you look at black households, pretty staggering differences. First off, in 1989, the median value of assets for these households was only $50,000 or 49.5 or $50,000 compared $185,000 for whites.

Beckworth: Then in 2016, it's actually declined of about 47,000, so it's been flat, basically flat. Now, again, everyone suffered during the Great Recession, but it's just shocking. It's been flat. Now, tell me and tell our listeners why is this so consequential? Why is wealth so important to weathering storms like the one we're going through and just life in general?

Baradaran: Yeah, there's a lot in here, so let me take one at a time-

Beckworth: Sure.

Baradaran: The subprime crisis, I think we talked about a general recovery, but one community that never recovered, in fact has been suffering since 2008, is the African American community. Part of that is that they got targeted. They were the hub in a lot of communities of the subprime loans. In Atlanta and Chicago and areas that you studied where they were the ground zero for subprime loans, there's a lot of African American communities, and they lost 53% of African American wealth, which was small to begin with, was wiped out during the financial crisis through mortgage foreclosures.

One community that never recovered, in fact has been suffering since 2008, is the African American community. Part of that is that they got targeted. They were the hub in a lot of communities of the subprime loans.

Baradaran: Brad Miller is a former congressman who I worked with. He calls it a mass extinction event for the black community, and why is wealth important? Well, wealth is a buffer. Income is your day-to-day general status of life. Wealth is, do you have a home that you can go to when a catastrophe hits? Or do you have parents that had a home? What does that mean is it determines what school you go to. It determines your social circle. It determines your likelihood of going to college. It determines your ZIP code, and it turns out that your ZIP code is more determinative of your future than anything else, and that I think for someone who believes fervently in the American dream, I am an immigrant. I am a living embodiment of the American dream. I believe in it.

Baradaran: That is not a great look for America, right? The fact that you can live in Baltimore just 30 miles outside of D.C. and have just radically different life chances and health chances by the way. The gap of life expectancy between Baltimore and D.C. is something like 20 years.

Beckworth: Wow.

Baradaran: It is primarily a result of systemic segregation, and that is where the wealth affects... Mostly all of that is rooted in some of these large-scale credit programs post-New Deal. A lot of them were pre-existing the New Deal, but since 1934 until the late '60s when some of this stuff was outlawed... I mean, you did have racial covenants. You had FHA loans that just would not go to redline areas, which were black areas. So, you could not get a mortgage. You have white suburbs building wealth and equity, and by the way, the school districts and the social capital and the access to certain jobs, and this is just one generation back. So, this is your parents, your grandparents, and those inequalities just stick. They get very, very stagnant, and that's where the wealth passes on very slowly and easily.

Baradaran: So, the best financial decision you can do to make yourself rich is to be born to wealthy parents. That's the effects of the history of this exclusion on the current racial wealth gap, and it doesn't close easily because it is about where you live and the value of your home. So, a home in a black neighborhood, even if you are a wealthy high-earning, high-income black family, your home isn't... If you live in a black neighborhood, or if your neighborhood is more than five to 10% black, those homes don't rise in value like white homes in certain areas do.

Baradaran: So, this is a way that race issues are embedded. Racism is embedded in just the equity of your home. So, black financial investors advise our clients to not invest in real estate in their own homes, to invest in either real estate that is not in their neighborhood or in 401(k)s or the stock market. So, that says a lot about the way that the wealth gap self-perpetuates.

Beckworth: Well, that's interesting. Now, going back to my question about the consequences of wealth. I mean, just imagine coming into this crisis, if you're either salaried with a good job, then you're okay. If you're an hourly worker in the service sector, you're not okay, but if you had a lot of savings. You might be okay. You might be able to weather the storm, but what we're speaking to here is that a lot of these hourly workers, particularly African Americans, do not have a lot of savings. Their asset stock is very low. So, they're not in a position to weather this storm. So, it's hugely consequential when these stocks come, 2008, the present one. So, having that wealth in place is important.

Beckworth: Now, your book is all about how this is happening. You just went through it really fast, but if you don't mind, I want to go back and maybe just dig a little deeper through this, but the history you paint and others have also shared is it's a history that begins really at the end of the Civil War, and it starts with the promise of 40 acres and a mule, and then all these promises are broken, or there's laws. As you mentioned, there's intentional policies put in place to prevent wealth accumulation by the African American community.

Beckworth: So, maybe again just walk us through that starting with the Freedman's Savings Bank and the 40 acres and the mule. I mean, what happened at that point there that caused the African American community to fall behind?

Historical Context for the Racial Wealth Gap

Baradaran: Yeah, so because of the Civil War you have emancipation and the North wins, and there is this Freedman's Bill that is meant to rebuild the South but also to get the freed slaves into the economy, and a lot of it is an economic focus, and then 40 acres and the mule, the mule was added as a... It was a division of land that would go to black families and whites as well. It was going to be splitting the land for everybody, and this is a story, and I think it's been told really well. *Empire of Cotton* by Beckert and a couple other books have talked about the worldwide cotton markets and the fear of the Haitian Revolution and emancipation in Haiti, which led to the slaves. Freed slaves took the land themselves, and what happens is the sugar exports diminished radically because when you own land, you're going to grow some subsistence crops and not the debt crop.

Baradaran: So, sugar prices rose, and the cotton market was spooked by obviously the emancipation and wanted to keep those prices low, and there's a whole bunch of different effects that happened, but it wasn't like this, "Oh, the Klan... " It wasn't just the Klan. I think sometimes you get these boogeymen in history, but since I'm talking to an economist, I think the economy had a lot to do with it too. So, there was this decision that instead of land that you could just get a savings account at the Freedman's Bank.

Baradaran: The Freedman's Bank is created by Congress. It's signed into law by Lincoln. It's not a commercial bank. It's just a savings bank in the model of the philanthropic savings banks that were around in the 1850s, and what it was just a glorified piggy bank. You would keep your money in there, and the promise was that instead of land, you would have this savings account, and you could just buy land yourself. Meanwhile, in the South, the legislators and the courts and the paramilitary Klan did the legal system such that whites wouldn't sell land to blacks or allow them to sell their skilled trades, and there's just a lot of... This is pre-Jim Crow. They called them freedom codes where you couldn't do anything basically but grow cotton, and that was essentially the point.

Baradaran: So, the Freedman's Bank, the money that is invested in that bank, and it's a lot because of freed slaves really took to this bank, including some Irish in the North who were also very discriminated against, and the money was basically taken by Jay Cooke's brother. Henry Cooke was the president of the bank, and he speculated it in railroad bonds, and the money just was gone. So, that was like the first half of it was gone, and it was a huge shock, and it really led into a certain generation or two of distrust of banks and the federal government that has lingered.

Baradaran: Still, when I did some interviews for this book, and every time I do a book talk in an older black community, people say, "Oh, yeah, my parents told me to never put my money in a bank and put it under my pillow or under my mattress because banks weren't trustworthy." So, the Freedman's Bank devastation was longer-lasting than just in effects of losing money, and then you go on. So, after the Freedman's Bank, until the New Deal in the 1930s, you have a lot of black communities in the South under the sharecropping regime. So, that is a very high debt, low wealth. You cannot build wealth while you're sharecropping.

Baradaran: A few families were able to own land, but most didn't. Most ended up growing cotton under the same plantation in the same land that they were growing cotton under slavery, and then you have the great migration North, so starting in 1910, and the Industrial Revolution and all that stuff. I look at what happens in the North when those banks are starting to be developed. I focus on the racial wealth gap through the lens of these black banks because I think the banks really show the obstacles to wealth creation when you have segregation.

Baradaran: So, that was the focus of my book is trying to not focus on the racists or the Klan or that. Just look at the money and see how it's possible or I guess not possible to build community wealth or individual wealth when you have these systems of segregation specifically where you are not able to build equity in your home or in your land.

Beckworth: Yeah, it's a great book, and we'll provide a link to it on our website. So, listeners, check it out. But just to go back to what you're saying, so just from the get-go after the Civil War, the deck was stacked against African Americans in terms of accumulating wealth and catching up. It's understandable that they just come from a lower starting point. They've been enslaved. They hadn't been able to build up wealth during that time. But the Freedman's Savings Bank collapsed. As you mentioned, the Jim Crow laws, and then the New Deal... I mean, that's another part of history I think that's not really appreciated how it really harmed the ability of African Americans to get ahead that you mentioned that the New Deal, Fair Labor Standards Act, the exemption for domestic agriculture and service occupations.

Beckworth: The G.I. Bill didn't help either. You mentioned redlining, and which is again... It's hard to appreciate now, but most of Americans, their wealth is built up in their home, and if you prevent that from happening through redlining, it's going to have this lasting legacy, and something else I have come across is our interstate system. The National Highway System also impaired the accumulation of wealth that oftentimes it was designed to cut off certain parts of the city. So, you talked about being on the wrong side of the tracks. It was literally the case. If your home was on the wrong side of the tracks, it lost value.

Beckworth: So, there are a number of intentional policy decisions that prevented African American communities from accumulating wealth, and as you mentioned, it's a huge deal if your parents have wealth that they leave you some wealth. It sets an example for you. It just puts you on a different path altogether. It affects your community, your schooling, your psyche. You mentioned that psyche cost. These things are hugely consequential. So, it shouldn't be surprising by looking at these numbers even though it isn't looking at these numbers that there hasn't been much change. It has been flatlining. Any kind of progress was lost during 2008. But even then, they started from a low point relative to other people in America.

Beckworth: So, coming into this crisis... I mean, I imagine you're probably very worried for the African American community because they are not in a position to weather a storm like this, right?

Baradaran: Yes. I mean, it's funny. Not funny. Ironic. I was just recently brushing up on one of the sources that I had looked at in the book was this insurance data I think written in 1896 that talked about African American health outcomes and how varied they were to whites. I mean, African Americans have always had lower life expectancy and higher incidences of these sort of diseases that tend to affect people who live under harsh conditions, and in 1896, there was this insurer that did this data across races, and this was during the height for Social Darwinism and race, like the pseudoscience of skull measurements and all of this stuff.

Baradaran: This very "scientific insurer," as he's trying to advise these insurers on risk of life insurance and does this whole thing about race traits and talks about how African Americans die more prematurely of these diseases, and by the way, it has nothing to do with the fact that 90% of African Americans are living below poverty. It is about their inherent race traits, and that the African American race was going to go extinct. That was his prediction based on his understanding at the time, which was that everything was inherent to your race.

Baradaran: I mean, now, obviously, we laugh that stuff off because it was not... I mean, hopefully not just laugh but also just be horrified that people used to think like this. But I think you follow that logic through time, and it is funny. Unless you understand where the roots of these things are, I think people just make up stories that make sense to them and that are just wrong. I think there's a lot of myth-making on race differences that, "Oh, well, it must have something to do with inherent traits, or it must have something to do with IQ or whatever."

Baradaran: I mean, this is where I just talk about some of the myths that are so destructive. This idea that, "Oh, well, if African Americans just save more money, if you just got an education, if you just made better decisions or whatever, then maybe you would have wealth." When you really look at the span of history and the way that wealth was created or wasn't, you start to see that it actually has much less to do with personal decision-making than just systems of credit and equity and the way that certain populations were able to gain access to certain markets and certain populations weren't, specifically, intentionally, and then just by default.

When you really look at the span of history and the way that wealth was created or wasn't, you start to see that it actually has much less to do with personal decision-making than just systems of credit and equity and the way that certain populations were able to gain access to certain markets and certain populations weren't, specifically, intentionally, and then just by default.

Baradaran: I think that's where really when you learn more of this history, you can start to fill in the gaps and your knowledge with actual facts as opposed to just your own made-up theories. So, I think a lot of that stuff lingers, and it really is disheartening to see it come back up over and over again as these explanations, and just being racist, right?

Beckworth: Yeah, it's a great point because it's easy for example to maybe look at family structure in the African American community and say, "There's the problem right there," without understanding how they got to that point, and I think this history plays a big part in understanding why they're there. And certainly, having a dysfunctional family, maybe many single mothers, that definitely exacerbates things, but the reason they're in that bind is because of all these policies that put them on this path, this trajectory.

Beckworth: So, this is a long conversation. We can't solve it all in the show today, but I think it's an important part of understanding how serious COVID-19 is. It's going to hit a community that is already in a bad place and definitely not prepared for the severity of a shock that has already put 22 million people out of work. Now, again, there are other communities as well, and we need to circle back here. You mentioned there's poor white communities that live here in rural Tennessee. I see some of that myself.

Beckworth: So, let's circle back to where we started, and that was with the problems with our financial system, the lack of financial inclusion, people who don't have access to banks therefore don't have access to the U.S. economy like many other people do, and you have an essay out, a working paper out that's titled *Rethinking Financial Inclusion: Designing an Equitable Financial System,* and it's an interesting discussion, and we've touched on some of these issues already. But I want you to walk us through. In particular, start off by discussing the two big areas where financial inclusion really matters. They're different but important, and that's the payment system versus the credit system.

Financial Inclusion: Payment System vs. Credit System

Baradaran: Yeah, so these things tend to get conflated I think in the dialogue, and when you're talking about financial inclusion, you're talking about payments as Aaron Klein has talked about the real-time payments, whether you have a bank account to cash your checks to put in your money. This is just like the tracks of how you send and receive money, right? So, the payment system. The solutions there, I think, are pretty easy. I think just conceptually, you just need a bank account, or you need a way to access the baking system, not going through a bank, and we could talk about some of those solutions, but what exclusion from that system means is you end up paying more. You pay a toll basically to go through another non-bank third party to access that payment system.

Baradaran: So, whether it's a check casher or Western Union or some sort of mobile app or fintech or prepaid card for families earning under $50,000. Most of that financial transaction work is through a debit card. It's not credit cards. It's mostly just a simple debit card and a checking account, and if you don't have that, then you just pay extra. So, that's a payments problem. I can talk about the solutions as I have heard them in media and Congress. This essay was at first just a pet peeve of mine every time I would go to Treasury or testified in Congress a couple times on these issues and at the Fed, and it's always about fintech and blockchain or Libra or whatever and every time... I mean, when Libra was being debated, I went to the Senate to discuss Bitcoin technology.

Baradaran: And every time you have one of these platforms come to Congress or to regulators or to the public, they say, "Our main goal is financial inclusion." They always start with that as though that's the whole model is financial inclusion. So, they're saying they're going to fix this payments thing, but there's this gap between what the product is and what the problems are of these communities. The problem in these communities is a lot of them operate in cash, and that's not a good thing. I'm not saying that we should maintain that, but how do you get from cash to your mobile apps to Libra or to blockchain or any of this stuff that's actually much more technologically cumbersome than just a debit card?

Baradaran: I think that there are certainly fintech or debit card or mobile app solutions that can fit these communities, but it takes a little bit more of the payments networks to reach out into these specifically banking deserts than just downloading an app. There's just a few steps missing. So, this is where I talk about postal banks, anything that is in your community where you can go take your money, right? If you're a service worker, or if you get paid in cash for any reason, you need a place to go put your money and turn it into digital, and then by all means, use the mobile app and the blockchain if you want or whatever, but you have to handle that conversion.

Baradaran: I think a lot of these fintech firms, I think, oversell their ability to close this. I have been hearing these promises for the last 10 years, and I just think there's a gap between what's being offered and an understanding of what the problem is. I think a lot of people start with a nifty tech thing and then back into, "Oh, well, this will help the poor too," and I don't think that they start thinking about, "Okay, what does someone who lives in a banking desert need?" So, that's one. That's on the payments side.

I just think there's a gap between what's being offered and an understanding of what the problem is.

The Postal Savings System Solution

Beckworth: So, just to be clear, your solution is to have a postal savings system set up for them. Is that right?

Baradaran: Yeah. I mean, that's one solution.

Beckworth: Okay.

Baradaran: I think that's the best one, but I'm just selling my idea. I mean, I think the idea here is the post office is in every community, and often in especially rural areas, it's the one outpost of the federal government or any government. There's a lot of communities where it's just basically the post office. The post office already deals in money orders, so it's already a place where people go. They have that cash operation ability on the backend and also it's... Historically, the postal savings system existed in America, 1910 to 1966, and abroad. Every other country, practically, developed/developing, across the board, has a postal banking system of some sort.

Baradaran: So, I think it's an easy add-on product to the Post Office. All you would have to do, you wouldn't need to do full fractional reserve banking. I actually would hate to see that. Just a simple payments plug into the ACH or whatever payments network.

Beckworth: Okay. Let me ask this question related to that. You mentioned earlier that many in the African American community distrust banks or at least some older ones do, and I imagine some of the unbanked people in general do... They have some reservations they trust. You go to the post office. Everyone knows the post office. Presumably everyone's comfortable with it. Would there be any holdout still? I mean, would it go the last mile? Would there be people who are afraid to put their money in postal savings bank because of, I don't know, privacy or because they just don't trust these institutions?

Baradaran: Yeah, I mean, you're certainly going to get... There are some people who don't have bank accounts because they don't want anyone to have their data. So, those people likely are not going to have a post office account.

Beckworth: No matter what, right?

Baradaran: No matter what. Yeah. This is not going to be for everybody, but there's a whole bunch of people who either, one, don't have enough money to put it into a bank because it's free checking, but basically, you have to have something like $2,000 or something to make it worthwhile for the bank, and under that amount, you're going to get overdraft fees. You're just going to get things from the bank to push you out. Then there's the banking desert problem that unbanks a lot of people. So, for those groups, a postal savings account is a good solution.

Baradaran: As far as trust goes, yes, there are people who don't trust banks, but they do trust their post office, check casher, payday lender, right? I hear from a lot of people like me who have lived in urban areas who have all the options available. They're like, "I would never go to the post office," and my response is it's actually not for those of us who have all of the options. I would rather go to a bank that gives me a mobile app, and I can take pictures of my checks. But would you rather go to the post office than a Western Union that charges $10 for every transaction or a check casher that is $5 per check cashed? So, I think it does offer a very appealing solution for a whole bunch of people.

Would you rather go to the post office than a Western Union that charges $10 for every transaction or a check casher that is $5 per check cashed? So, I think it does offer a very appealing solution for a whole bunch of people.

Beckworth: Okay. Well, let's talk about the other element of this and that is the credit system.

The Credit System and How to Fix It

Baradaran: Yeah, that's more, I think, tricky but also more vital, and there's a whole system of credit that is undergirded/subsidized by the federal government, and we're talking about mortgage credit, student loans, and any sort of business type credit like through the SBA or even bigger loans. I think when you talk about inequality or for the poor, access to credit, I'm talking about that lower end. So, small consumer credit. Here, you start seeing where the bifurcation of bank credit versus this commercial credit. Commercial credit or consumer credit, sorry, has always been a very... It's always been an area in flux. There's always been debate here.

Baradaran: It's been pawn, loan sharks. All of those solutions have been offered, but there used to be more robust banking solutions. The credit union was meant to address this area. The industrial loan company. There's been other solutions to this area, and community banks used to offer smaller loans, and there used to be less need for them, and to the extent that they were offered by pawn shops or other fringe non-bank lenders, there used to be interest rate caps. So, usury limits were enforced across the board, and sometime after the Supreme Court case in 1978 called the Marquette ruling, which allowed every lender to export their state's usury limit across the country.

Baradaran: Basically, usury has been ineffective. There are no effective caps besides a few states that enforce these rules. So, you have had this massive market open up to the most unscrupulous internet lenders, title lenders, payday loans that are quite costly and really target these communities, and by target I don't mean per day, but they're just there. They're in those communities where banks have left. They're in those communities where they can just charge 300% to 1,500% APR, and obviously, APR isn't exact, but you do take out the loans for about 10 weeks or so usually.

Baradaran: So, this is just in my mind a huge problem, and I think when I talk about access to credit, I'm focusing on those areas and then contrasting with all the systems that we have to support credit through public policies that we care about, right? Home ownership, student lending, and all of this other stuff that the federal government is involved in. So, my case with credit is you could actually have some public support for the types of credit that average people need to get through their lives, and we could do small loans at reasonable interest rates that would be sustainable, maybe even profitable, but not exorbitant, and I think this is another area where I think either through postal banking or more programs offered through banks, you could offer these credits.

My case with credit is you could actually have some public support for the types of credit that average people need to get through their lives, and we could do small loans at reasonable interest rates that would be sustainable, maybe even profitable, but not exorbitant, and I think this is another area where I think either through postal banking or more programs offered through banks, you could offer these credits.

Baradaran: Now, I don't think this is the answer to inequality or poverty. I actually think it's better to pay people wages, so that they can work and pay their bills, but I think what you've seen, the trends wage-wise and cost-of-living-wise is that gap has gotten bigger. So, your rent and your cost end up being much bigger than what people can make even working 40 hours a week in a lot of places.

Beckworth: Very interesting. Now, we're getting near the end of the show, and I want to come back to your article we touched on earlier, your Atlantic article titled *The U.S. Should Just Send Checks but Won't,* and we touched on this when we were talking about some of the issues with banking deserts and other financial inclusion problems. We've touched them here again, but what your article ultimately makes the case for is how to deal with the situation right here and now.

Beckworth: So, I think some of the changes you suggests in this other article, *Rethinking Financial Inclusion* article, are longer-term fixes, and they certainly wouldn't be able to, I think, address problems right here and now because it would take time to set up, for example, a postal savings system, but you do have a suggestion for making the world a better place here and now in the midst of COVID-19 crisis. So, what is your solution for helping those who aren't getting the checks, who aren't getting the funding they need here and now?

Immediate Financial Solutions in the Midst of COVID-19

Baradaran: So, here, the idea is just to unencumber the system and just send the funds directly. You can do it through Treasury. Send it by mail through the post office. Send it through a prepaid debit card or just a debit card. I mean, just send the funds, send it fast, and send it quickly to these communities, and send enough so that people can make it over the next however long this takes and until they can get another job, and in the same way that we understand liquidity crises for banks, people are going to go through a liquidity crisis.

Baradaran: Well, they're not insolvent. Maybe they can come back from this and get another job, but they're illiquid at this point, and they just need funds for the next couple of months. So, we should just send it. Just send them the money.

Beckworth: Very nice. Okay, with that, our time is up. Our guest today has been Mehrsa Baradaran. Mehrsa, thank you so much for coming on the show.

Baradaran: Thank you so much for having me. It's a pleasure.

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