Slow progress bridging America's economic divide

When Federal Reserve Chair Janet Yellen testified on Capitol Hill earlier this month, the questions from her congressional hosts turned to an issue not usually aired in the semi-annual, often opaque discussion of economic data and interest rate policy.

In separate pointed rounds, members of the House Financial Services Committee demanded to know what the nation's central bank was doing to close a widening economic divide that has split the country along racial and ethnic lines.

"We have got to get the Fed to get off the dime and put the issue of African-American unemployment on the front burner," said Rep. David Scott, D-Ga. "That is the core of all of the domestic issues that we're facing."

Although studies show that education alone cannot help bridge the divide, it is a piece of the puzzle. Programs like "Black Girls Code" are hoping to encourage girls to pursue tech jobs.
Jodi Gralnick | CNBC
Although studies show that education alone cannot help bridge the divide, it is a piece of the puzzle. Programs like "Black Girls Code" are hoping to encourage girls to pursue tech jobs.

While noting that an improved labor market had helped all workers, Yellen conceded that the Fed was powerless to target policies to help a specific group of Americans.

"I want to assure you that we recognize how serious the problems are that you've discussed," she said. "We take our employment mandate extremely seriously, and have been doing everything that we can to promote a stronger labor market that will benefit African-Americans."

But for tens millions of Americans who continue to lose ground to a widening economic gap, those policies haven't gone far enough to bridge the divide.

Over the next five days, CNBC will offer TV and digital stories as part its "Bridging The Divide" series, an in-depth look at economic inequality and some promising, if isolated, examples of progress in closing it.

The data are stark. Access to a decent-paying job, for example, is much is greater among whites than blacks or Hispanics. As of last month, the unemployment rate among whites was 4.3 percent — about half a percentage point below the national average.

Among African-Americans 16 and older, the jobless rate in January stood at 8.8 percent — down from 16.8 percent during the depths of the Great Recession. For blacks ages 16 to 19, 1 in 4 was unemployed last month. In 2010, the jobless rate for that group was nearly 50 percent — the highest in three decades.

Across virtually all measures of income, wealth and employment, economic opportunity remains sharply divided along racial and ethnic lines.

Bridging that divide, President Barack Obama declared in landmark 2013 speech, is the "defining challenge of our time."

The economic divide in America, he said then, is rooted in the "painful legacy of discrimination" that has denied opportunity based on race, gender and ethnicity. The gap in wealth and income cuts across multiple fault lines, the president said, "poor and middle class; inner city and rural folks; men and women; and Americans of all races.

"It turns out now we're seeing that pop up everywhere," he said.

More than half a century after the enactment of the Civil Rights Act, the divide between white and nonwhite America is widening, a process accelerated by a Great Recession that sent unemployment soaring among all racial and ethnic groups and wiped out trillions of dollars of household wealth.

Since the White House set out to define the challenge two years ago, there's been little progress in closing the economic divide for American families — let alone the political divide over the government's role in closing that gap. Nevermind a consensus on the impact and effectiveness of specific policy solutions.

"There are broad policies that could move things in the right direction because of where people are situated and certain types of jobs — like raising the minimum wage, creating policies that will ensure sustainable employment," said Valerie Wilson, director of the Economic Policy Institute's Program on Race, Ethnicity, and the Economy. "But there are also policies that are being eroded like affirmative action in higher education admissions."

Closing the American divide isn't just a matter of economic justice. It's critical to the continued growth of the American economy. At a time when many employers report having a hard time finding and keeping talented workers, race and gender barriers remain for many seeking access to those jobs.

"Talent is distributed evenly across the country, yet opportunity is not," said Gerald Chertavian, founder and CEO of Year Up.

Year Up is trying to change that. Founded in Boston in 2000, the company teaches students work-readiness skills for six months to prepare them for entry-level jobs and then places them with employer partners in internships paid by the employers. Today, the program has expanded to 14 cities and graduated more than 10,000 young adults.

As of last year, some 88 percent of graduates were employed or attending school full-time within four months of completing the program, and over 90 percent of the company's corporate partners said they would recommend the program, according to the company's annual report.

"There is no one thing that you can do to wipe all racial inequality. ... But broadly speaking we have to have a national commitment to addressing racial inequality." -Valerie Wilson, director, Economic Policy Institute

Access to high-wage employment in the workplace begins with access to quality education in the classroom. And the opportunity divide begins early — often before formal schooling begins in kindergarten.

That's the motivation for New York City's recent rollout of wider access to pre-K learning, in one of the largest expansions of the early childhood education in the country.

For the children in these programs, the head start gives them a lifelong advantage as they progress through the rest of their education and job-related training. But private pre-K education programs can run more than college tuition, a financial burden many low-income families simply can't afford.

By providing public access, wider enrollment in pre-K has created and added benefit for the families of young children, allowing parents who would otherwise have to stay home to go back to work.

In New York, the cost of the program is about $10,000 per child, a large upfront cost to taxpayers. But for every dollar spent on early education, taxpayers save $13 on future costs and generate $3 in net business and economic value, according to an MIT analysis.

Bridging the divide means expanding access to education all the way to the post-secondary degrees that boost income and wealth overall.

But access to college alone isn't enough, statistics show.

Job seekers wait in line at Kennedy-King College to attend a job fair hosted by the city of Chicago in Chicago, Illinois. (File photo).
Getty Images
Job seekers wait in line at Kennedy-King College to attend a job fair hosted by the city of Chicago in Chicago, Illinois. (File photo).

Despite increased enrollments of nonwhite students at four-year public and private colleges and universities, completion rates for these students lag their white classmates, according to multiple studies.

Even for those who complete advanced degrees, higher education doesn't close the economic divide, according to a study last year by the St. Louis Federal Reserve.

Analyzing two decades of data on wealth and income, the authors found that higher education helped protect wealth, especially during financial shocks like the Great Recession, but only among white and Asian families. Between between 2007 and 2013, the median wealth of all families headed by a four-year college graduate fell by 24 percent — just half as much as the drop among families without a college degree. That pattern held up among white and Asian households.

Higher education, though, didn't protect the wealth of the typical Hispanic and black college-headed family. Median wealth fell by about 72 percent among Hispanic college-grad households compared with a 41 percent drop among Hispanic families without a college degree; among blacks, household wealth fell 60 percent for college-headed households versus 37 percent for those without a degree.

"Higher education alone cannot level the playing field," the authors wrote.

The wealth divide was also widened by the Great Recession following the massive loss of savings embedded in the equity derived from owning a home, for generations the primary driver of wealth for middle class households.

After an epic lending boom that saw mortgage lenders ignore decades of prudent underwriting practices, the collapse brought a sharp contraction in the availability of credit to buy a home. The resulting housing recession has contributed to one of the slowest economic recoveries in over a half century.

That reversal in lending standards has hit African-American and Hispanic households hardest. Mortgage applicants from those groups make up a large share of an estimated 4 million loans that were not originated due to tight credit standards between 2009 to 2013, according to an analysis by the Urban Institute. Loans to African-American and Hispanic borrowers fell by 50 percent and 38 percent, respectively, versus a drop of just 31 percent for white borrowers. Loans to Asian borrowers increased by 8 percent.

To help overcome that hurdle, housing advocacy groups and community nonprofits have begun working to bridge the credit access gap.

In New Mexico, Santa Fe-based Homewise offers affordable mortgages with low down payments, develops and sells residential property to clients, and provides financial education that helps future homeowners navigate the complex purchasing process better manage their finances and keep up with mortgage payments. Launched in 1986, the organization helps a few hundred first-time homebuyers a year. As a group, program participants have a mortgage delinquency rate of under 1 percent, less than a fifth of the national rate.

These individual efforts — from helping young workers improve job skills to rolling out early childhood education neighborhood by neighborhood — represent a patchwork of programs whose impact can easily be overlooked in the national statistics.

While national policies and programs can help, there is no single policy or program that can address the multiple causes that have widened America's divide. Each of these smaller efforts represent a piece of a broader solution.

"The issue of racial inequality is so much bigger than any of the one programs. ... We need to dig deeper," said the Economic Policy Institute's Wilson.

Success in bridging the divide on multiple fronts will require a broad consensus on the scope of the problem and the need to act, she said.

"There is no one thing that you can do to wipe all racial inequality," she said. "But broadly speaking we have to have a national commitment to addressing racial inequality."

— CNBC's Sharon Epperson and Jodi Gralnick contributed to this report.

Watch CNBC's "Power Lunch" each day this week to see the work being done to bridge America's divide.