The Black-White Gap in Business Ownership

In a country that touts free-market enterprise, it is ironic that black-white inequality in business ownership and business capacity is more extensive than all other forms of the racial divide – including wealth and income. Business ownership is fundamental to human development and economic prosperity.  Therefore, it is past time that we give serious attention to this persistent inequity. Furthermore, the solution is more deeply-rooted than simple formulas like access to capital.

Today, black workers earn $0.59 for every dollar earned by whites. Even more distressing, the average wealth of blacks is just 15.5% that of whites. It is hard to believe a ratio can be lower, but consider this. Among the 5.7 million U.S. employer-based businesses (i.e. those having one or more workers and excluding public corporations), the receipts of black-owned companies are just 1.1% of receipts of white-owned companies. Further, there are only 2.6 black employer-based businesses for every 100 owned by whites.

This information comes from the Census Bureau’s newly released Annual Business Survey.  The survey indicates there were 124,004 black-owned employer-based businesses in 2017. Interestingly, black women owned 36% of those businesses. In comparison, white women held just 19.7% of all white-owned companies.

Black businesses generated $127.9 billion in revenue annually and employed 1.2 million workers. But overall, the companies represented only 2.2% of all U.S. employer-based businesses, received .3% of total business revenue, and hired .9% of all workers.  The racial disparity in business is more extensive than are the racial gaps in wealth and income. Before I go further let us get one point straight.

There will inevitably be those who argue the superior performance of white-owned firms is a function of their owners’ Horatio Alger spirit, that is, their more exceptional work ethos, perseverance, and capabilities. Ordinary, one would have to spend lots of time debunking this myth. However, today the lie is stripped bare.

In just one decade, U.S. taxpayers have twice bailed out U.S. corporations from the threshold of bankruptcy – those so-called titans of the Horatio Alger ethos. In 2008 their reckless behavior precipitated the Great Recession, and the Federal Fiscal Stimulus Program rescued them.

Once again, it is happening today. In March 2020, Steven Mnuchin, Treasury Secretary stated, “Working with the Federal Reserve — we’ll have up to $4 trillion of liquidity that we can use to support the economy,”  By supporting the economy he means the FED will be helping large corporations and financial institutions.

Unlike the Congressional Paycheck Protection Program, FED support is targeted to corporate loans, buying distressed corporate bonds, purchasing mortgage-backed securities, and maintaining near-zero interest rates to ease the burden on banks, companies, and financial institutions that need cash.

Free market capitalism works best until it does not work.  Right now, it needs trillions of dollars of life support from the Federal Reserve. Again, this is the second time in just over ten years the Horatio Alger myth has imploded.  So, we should not waste time debating whether personal deficiencies caused the lag in black entrepreneurship. I doubt there would be a lag if the current type of support provided by the FED were given to black and minority businesses.

The causes of the racial gap in business capacity are numerous. They include unequal and discriminatory treatment in access to factors such as capital, corporate supply chains, government procurement, distribution networks, and business networks- not to mention corporate management structures and board rooms.  Differences in wealth endowment and income also play essential roles. However, they are related to broader systemic factors such as unequal opportunities in employment, education, housing, and similar factors. By the way, government awards of no-bid contracts to well-heeled firms always accompany economic crises. The current pandemic is no different. Such practices seem benign on the surface, but underneath they reinforce a continuous cycle of inequality.

Today there is a growing concern about the widening racial wealth divide.  Yet, we have seen that the gap in business is even more extensive. As we re-imagine the post-pandemic world, we should not forget that black businesses, income, and wealth are all part of a broader social mosaic that has been trampled by racism. All of it needs fixing.

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About Thomas_Danny_Boston 28 Articles
Danny Boston is an economist, writer, and entrepreneur. He is professor emeritus of Economics and International Affairs at Georgia Tech and for 25 years served as CEO of EuQuant, an economic research company. Today, Danny publishes the blog GazelleIndex.

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