The Power of Racial Compounding

Kyle Korver wrote an article about race in America. He gives examples of when his first impulse was racial bias. Not racist, just naïve about the differences between being black and white in America. When his teammate got arrested for no reason he thought “Well, if I’d been in Thabo’s shoes, out at a club late at night, the police wouldn’t have arrested me. Not unless I was doing something wrong.” Then when Russell Westbrook got heated with a fan in Utah for saying racist stuff to him he said “you know Russ. He gets into it with the crowd a lot.” He then talks about the difference between guilt and responsibility. We’re not guilty of the sins of our white ancestors, but we are responsible to act to make things equal. “Let’s face it: I probably would’ve been safe on the street that one night in New York. And Thabo wasn’t. And I was safe on the court that one night in Utah. And Russell wasn’t.”

Thoughtful article. Love Korver. The end is where it triggered a thought that I’ve had for a long time though. He gives stats: black Americans are 5x more likely to be incarcerated, 2x as likely to live in poverty, 2x the unemployment rate, and they own 10% of the wealth that white Americans own. This is where it gets interesting. Now I grew up in a predominantly white rural town in Nevada, went to a predominantly white university in Utah, and live in a predominantly white neighborhood in San Francisco. So I have no voice on this topic. But unfortunately there are a lot of people that would point to these stats and say that it’s caused by their own cultural problem, which was their choice. That opportunity is equal now so if they have high poverty rates then that’s their issue. The argument goes something like this: “Slavery ended over 100 years ago, so generations later everyone has the same opportunity to live the same American dream. There’s no need to make special accommodations or try intentionally to make things equal, just let people live and they’ll succeed or not based on their own merit. Make reparations to the children of slaves, sure, but their great, great, grandchildren are on a level playing field now.” Something like that. This argument is also used against Native American tribes receiving financial support in some way based on their race. There are a lot of problems with this argument, but I want to point out one flaw in the logic that I think is important that many don’t understand, and it has to do with one of the most powerful financial concepts out there… the power of compounding.

It’s a simple concept: Money makes money and the money money makes makes money. That is, the interest gained on an investment is then invested and earns its own interest and that interest earns interest, so your portfolio gains over time end up looking exponential, not linear, like so:

We can apply this concept to intangible assets as well. Knowledge on a particular topic can be compounded (if I already know a lot about sales then I will learn a new sales concept easier and that concept will inform my understanding of another new concept, etc.) Skills can be compounded (muscle memory in sports/music/art allows you move to the next goal without thinking about the last goal). Social and emotional intelligence can be compounded (understanding how people think and behave helps you navigate the world to get what you want, which helps you to better get what you want next). The list goes on. These are all things that can be learned and used to grow exponentially. So when we think about generational poverty, for example, this is a core concept that I use to frame the problem.

In the case of generational poverty, financial assets are not compounding, restricting people from getting to the steep part of the curve and using those assets to better their life/business/family (if you could afford one cow, then you could sell milk to buy another cow, and sell milk from both to buy another). This is the problem that microfinance has tried to solve to fight global poverty. This is hard for a lot of reasons. But what’s also difficult is that in addition their intangible assets are also not compounding. Instead of learning about something new and useful they are trying to find daily food/money/shelter for their families. Instead of earning new marketable skills, they are looking for someone to teach them. And if they are only exposed to their own socioeconomic demographic, then opportunities to “get out” of poverty and ahead in life are limited. It’s survival mode.

So let’s take me as an example. If I look at my family heritage 150yrs ago, my ancestors were farmers in Europe that immigrated to the U.S. and Canada, earning a better and better standard of living than the last. They taught their children their trade and they were unimpeded from using those skills to start their own farm or take over the family farm. Then my dad used his construction knowledge/skills that he learned growing up to start a business and make a good living to support a family and send my siblings and I to college, the first generation of graduates. By the time I came around I had a well-adjusted middle-class home with plenty of educational opportunities and resources to explore the academic/cultural/economic world. So all I needed to do was my part to take advantage of everything in front of me to keep the cycle of growth going. Work hard, use your head, move forward. I could imagine that someone living in poverty that works hard and uses their head isn’t automatically able to move forward. And if they do the starting line isn’t the same so the steepness of the curve isn’t even close. If my kids work hard and use their head then the sky’s the limit. Fast track.

Now back to Kyle Korver. Is there more that we should do to promote equality? Yes. Has being white had a compounding effect on both tangible and intangible assets? Yes. But a white critic might say “I’m not on equal ground with the Rockefellers and Waltons, so shouldn’t they do something about making life equal for me?” No (although I do believe in the estate tax for the wealthy because of this same concept). My relative disadvantage to the Waltons is because they lifted themselves up, not because my family was pushed down. Good on them. But today my relative advantage to my black peer was given to me simply because they were (and still are, on average) pushed down for a reason out of their control. If history changed so that people discriminated against people with big ears then I’d be right there with less opportunity. It’s completely arbitrary. To get onto truly equal ground there is still a lot that has to change and time that needs to pass to allow for the curves to line up with one another. I won’t suggest how that happens, but I think the first step that could go a long way is to recognize that it’s true and be sympathetic instead of critical. I am hopeful of the future and believe that Americans black and white are both on the compounding curve and headed toward even greater greatness. White people just got a headstart.