Here’s What A Reparations Plan Could Look Like

Several 2020 Democratic Presidential candidates have embraced the concept of reparations for slavery. Elizabeth Warren, Kamala Harris, and Julian Castro have all voiced their support for reparations in recent weeks. Black people have aspired to receive reparations for generations, but the concept has long been rejected by all viable political parties in the United States. We can’t forget that reparations are also vigorously opposed by white voters of all classes and political affiliations. This is why the support from Warren, Harris, and Castro matters so much. Even without a concrete plan in place, these candidates realize that as demographics change, Black voters are likely to become more emboldened in their political demands.

The concept of reparations here that I outline does not simply pertain to a remedy for lost wages due to slavery. After all, a significant portion of the racial wealth gap is also due to what happened afterwards — Jim Crow, racial terrorism sanctioned by the state (think Emmett Till, the Klan, or the destruction of Black Wall Street), redlining, and other institutional barriers that were purposely created to prevent Black people from being able to compete on a level political and economic playing field. Many opponents of reparations argue that no Black Americans today personally lived through slavery. However, there can be no argument that Black Americans today have not lived through racial terrorism sanctioned by the state, or other legal and institutional barriers setup to prevent Black Americans from being able to compete.

There is a strong moral case for reparations, but there is also a contemporary economic case. As more candidates talk about the wealth gap between the 1% and the 99%, it becomes impossible not to highlight the wealth gap between median white families and median Black families. In 2014, Pew Research found that the median white household had a net worth of $141,900, while the median Black household’s net worth stood at $11,000. The goal of reparations is to close the racial wealth gap. I decided to draw up some ideas of what that would actually look like.

What Would Reparations Actually Look Like?

It is important to note that reparations would be race-specific as opposed to a race-neutral plan. This means that only African Americans would be eligible to receive reparations. This is opposed to most economic plans proposed by United States politicians, which tend to be race-neutral. Race-neutral plans, such as the free college plan promoted by Bernie Sanders in 2016, tend to be more popular in polls. However, race-neutral plans have a poor track record of actually curbing the racial wealth gap. In the case of higher education, research has shown that a college degree does not improve the income gap. In terms of wealth, Black college graduates have less wealth than white high school graduates. A race-specific plan, however, would be able to provide capital, property, low-interest loans, or other assets directly to African Americans without whites receiving the same benefits. This would undoubtedly be less popular politically, but it would do far more to actually close the racial wealth gap.

Obviously one of the biggest issues with a race-specific program is the question of how to determine eligibility. Is it African Americans regardless of lineage? Is it only the descendants of slaves in the United States? How would that lineage be identified and proven? Those are questions that would perhaps be answered by the Department of Reparations, which I talk about a bit later in this piece. Personally, I favor the inclusion of African Americans regardless of lineage.

This takes us to the actual meat of the program — what would reparations benefits actually include? I believe there are a few different options. The goal is to close the racial wealth gap, or at least to shrink it significantly. The total labor cost of slavery (and financial opportunities lost to Jim Crow) is incalculable but likely sits in the tens of trillions. A reparations plan that focuses on closing the racial wealth gap would actually cost significantly less than that. As of the 2010 Census, there are 42 million African Americans living in the United States. Considering the previously mentioned statistics from Pew Research, the racial wealth gap sits at about $130,000 (that number is likely higher today). However, for convenience, let’s say that the goal of our plan is to provide each African American household with $125,000 in value. There are a number of different ways to do this.

The Cash Payments And Financial Assets Plan

To give all 42 million African Americans $125,000 would cost $5.25 trillion. As I state later in the piece, a lump sum payment is non-desirable. So that money would likely be paid over a longer period of time. I argue that a reparations plan needs to be generational in order to be successful, thus it would last anywhere from 50–100 years. If we say that we’re going to pay 42 million African Americans $5.25 trillion over 50 years, then the cost of reparations is $105 billion a year. For comparison, the US government spent $604 billion on national defense in 2016 (15% of total spending) and net interest on government debt payments were $240 billion. However, the $5.25 trillion figure is unlikely to be accurate for several reasons. The first is that the plan is focused on the household level, not the individual level. The second is that the number of African Americans is going to increase over time. The federal government expects the US population to reach 417 million by 2060. If we believe that African Americans will remain 14% of the population, that means there will be 58–60 million African Americans living in the United States in the next 40–50 years. That is an increase of almost 50% from current population numbers. The federal government estimates that there are 2.63 people per household in the US. Dividing 42 million by that number gives us 15.9 million households, and dividing 60 million by that number gives us 22.8 million households. Considering that birth and death rates are not static (neither is the number of people living in each individual household in the US), it is difficult to calculate how many total households will actually participate in the program over a 50 year period. To account for the deaths over the span of the program, I’d estimate that the total number of individuals involved would be 20% more than the number of participants about half a century from now. For convenience, I’m using the 2060 estimate of 417 million US citizens and about 60 million African Americans. Adding 20% to that number would give us a total of 72,000,000 African Americans who would have participated in reparations over a 50 year period, and assuming the number of people per household remained constant, that would give us around 27 million households. Giving 27 million households $125,000 each would cost $3.375 trillion. Over 50 years that would average out to a cost $67.5 billion annually. For comparison, the US government spent about $49 billion on foreign aid in 2016.

Considering the numbers, each household would get approximately $2,500 a year. This money could be received in cash, but it could also come in the form of bonds or certain types of investment vehicles. For instance, let’s consider the S&P 500. There are a number of mutual funds available that track the index. The S&P 500 averages returns of 9–10% annually. This can be misleading, so for the sake of the argument, let’s use a rate of return of 6%. Using the Bank Rate calculator, I set the terms for 50 years, with a rate of return of 6%, a $0 initial investment, additional investment of $2,500 annually, and a tax rate of 5% (these reparations programs would receive tax benefits, but I can’t fit everything into this post!). With total invested capital of $125,000, the final number with compound interest would be $388,075. If you believe that the S&P 500 will truly return 10% a year (it won’t) that number would be $2,236,993. There is an argument that this capital should be invested in safer assets, and that is a debate to be had. However, the S&P 500 is regarded as one of the safest instruments with which to get market exposure without the risk of more complex financial products. I would also like to note that I didn’t consider inflation in these projections, it would need to be considered in the development of a reparations plan.

There is a legitimate argument to be made that providing $2,500 to each Black household annually would not do enough to close the racial wealth gap. That is because for so many of these families already trapped in debt or other poor financial situations, that money would immediately be spent as soon as it is received. Building wealth requires that recipients save that money and let it accrue interest over time. Social Security operates on the concept that any given individual cannot be trusted to save enough money for retirement on their own. Perhaps a reparations plan could operate on a similar concept, and thus the $2,500 annually would be put into S&P 500 shares, bonds, or other relatively safe financial instruments for a set period of time. That would allow the assets to accrue interest and ultimately increase the wealth of the beneficiary. The downside is that there is a large percentage of the community that would rather have their money now and spend it upfront. Of course, many Social Security recipients would likely feel the same way, but are nevertheless happy to receive their checks in their mid-60s. Perhaps if these accounts are not accessed — say in the event of a death — they can be bequeathed to a relative.

The Military Model

While the cash model consists of direct payments and financial assets, the military model focuses on providing benefits through means other than cash. The goal of providing $125,000 of value would remain, however, the beneficiaries would receive benefits somewhat similar to military members today. That means a program offering something similar to what the GI Bill and VA loans do. Currently, the GI Bill pays all tuition and fees for in-state students in colleges, along with a monthly housing allowance which tends to be over $1,000 a month. This lasts for 36 months. The VA loan program allows veterans to take out a loan without the requirements of private mortgage insurance or in many cases, a down payment. These loans are guaranteed by the US government. This type of plan is likely to be more politically popular than the first, however, there is a risk that it wouldn’t be as effective. That is because education alone has shown not to do much in closing the racial wealth gap, and home loans still carry the risk of default for borrowers. We should also remember that homes owned by African Americans tend to be worth less than comparable homes owned by whites. This is in part due to redlining, which has made it difficult for Black people to purchase homes in particular neighborhoods. But it is also due to outright discrimination and things like white flight.

A Combination Plan

The combination plan would combine the details of the two plans mentioned above, while still giving each family approximately $125,000 in total value. That would mean a combination of cash payments, financial assets, and a program similar to the GI Bill and VA loans.

A Generational Investment

For reparations to be successful, it would have to be a generational investment. A one-time lump sum payment is less feasible politically and less desirable practically. A one-time lump sum payment would likely lead splurge purchases and would not come with the same kind of financial security as an annuity or a pension, which tend to pay on a monthly basis. The reparations program should instead be conducted over a period of decades, with an ideal period being anywhere from 50–100 years. This allows for wealth to be accumulated by families over time. This wealth can be passed down or used to invest in other appreciating assets. One of the lesser known contributing factors to the racial wealth gap is the lack of inheritance. When significant wealth is accumulated by an African American family, it is often for the first time. They have often not been given money for a down payment on a house, or to cover student loans. These types of payments, along with inheritance, are major drivers in the promotion of wealth in white families over several generations. Making reparations a 50–100 year project will allow Black families time to pass their assets down to their children and grandchildren, a necessary ingredient in a community’s ability to build wealth.

Creation of a New Federal Department

A reparations program would be an enormous long-term investment in the Black community. The creation of a new federal department would be necessary in order to ensure the progress of the program and to regulate outside actors who may try to siphon off the new wealth being generated. Perhaps this would be called the Department of Reparations. An apt seal would depict the infamous promise made in the 1860s — 40 acres and a mule. You could argue that the reparations program should be run by an independent government agency, akin to Social Security (as opposed to a federal executive department). The benefits to being an independent agency would include more autonomy from the executive branch, and agency heads with set terms to serve out. However, being a federal executive department would allow greater visibility and greater transparency. It is a debate worth having. At any rate, the department would be tasked with doing several things:

1. Monitoring the racial wealth gap between the median Black and white family.

2. Implementing the actual reparations program itself (whether that is the Cash-Payments Plan, the Military Model, or the Combination Plan discussed earlier).

3. Ensuring that the benefits above are actually being received, and that the newly created wealth in the African American community is not being siphoned off by outside actors. These may be private corporations, but they could include a wide range of institutions.

4. Identifying (and potentially remedying) situations where assets owned by Black people (primarily property) are valued significantly less than comparable property owned by white people.

I’m primarily concerned with #3, and the new department would need regulatory power and a broad mandate to make it happen. A reparations program would likely lead to the creation of a new industry entirely focused on taking this wealth. Think loan sharks, shoddy financial advisors, fake investment schemes. The Department of Reparations would be tasked with identifying and regulating these bad actors.

As previously mentioned, homes owned by African Americans tend to be worth less than comparable homes owned by whites. Research from Brookings found the following:

“Homes of similar quality in neighborhoods with similar amenities are worth 23 percent less ($48,000 per home on average, amounting to $156 billion in cumulative losses) in majority black neighborhoods, compared to those with very few or no black residents.”

This essentially means that homes owned by Black families are worth less than homes owned by white families, for no other reason than the color of their skin. This phenomena is more pronounced the Blacker the neighborhood is, regardless of the amenities in the surrounding area. #4 from the list above would deal with identifying these situations throughout the country. Remedying the situation could mean that in particularly egregious cases, where the difference in value between a comparable Black and white owned home exceeds 40%, then the federal government will give a tax credit to the person who purchases the home equal to the 40% disparity. That tax credit could be used overall several years. That would act as a subsidy of sorts, which could increase home values in Blacker neighborhoods, while avoiding needing the federal government to purchase the home to maintain a particular value.

The Question Of How To Pay For This Program

The (very!) rough estimate of $125,000 to 27 million Black households gives us a total of $3.375 trillion. Over 50 years that is $67.5 billion annually. The federal government spent about $4 trillion in 2017. That would mean that this reparations plan would be only 1.6% of the federal budget, a percentage that could actually decrease over time.

In 2015, Patricia Cohen wrote that raising taxes on the top 1 percent (to give this group a total tax burden of 40 percent) would generate $157 billion in the first year. That is over double the cost of this reparations plan annually. New consumption taxes or sin taxes (maybe even carbon, if you want this to be green) could also be used as a source of program funding, as could the reduction of certain tax breaks and exemptions across the board. There is also the option of simply strengthening the current tax enforcement programs, as it has been estimated that the US loses nearly $200 billion per year in tax avoidance.

Proponents of this reparations plan also might say (rightly, in my mind) that the United States already spends billions of dollars effectively oppressing Black people. Think about how much it costs to incarcerate someone for one year. By some estimates, it is between $30,000 to $60,000. About 2.3 million people are locked up in the United States, with Black people making up about 40% of the inmates. That means about 920,000 Black people are in prison each year. If each inmate costs the government (state or federal) $45,000 a year that means $41.4 billion is being spent locking up Black people each year. Any successful reparations plan will positively change the socioeconomic status of Black people as a group, and less poverty is correlated with fewer arrests and prison stints. If reparations could cut the amount of Black prisoners in half, that would also represent a halving of the $41.4 billion number — meaning $20.7 billion would be saved annually. That is already nearly one third of the annual cost of this reparations plan. Similarly, one could anticipate a significant reduction in public housing, healthcare (Medicaid), and food assistance costs as the reparations plan improves the socioeconomic status of African Americans. A significant percentage of the program’s costs could actually be paid by the need for fewer prisons and fewer Black people on public assistance programs.

Looking Forward

A reparations plan would have virtually no chance of passing Congress, as constituted. However, that has not stopped leftists from pushing Medicare-For-All, the Green New Deal, or free college, none of which will likely pass Congress for the foreseeable future either. The moral case for reparations is as good or better than any of those programs, and if political feasibility doesn’t matter, then why not have the conversation? Demographic and political changes in the coming decades could radically reshape what is possible when it comes to race-specific programs for marginalized communities. Reparations might not be politically feasible in 2020, but that doesn’t mean that it can’t be feasible in 2040 or 2050. Perhaps even a bit sooner. Having a discussion of what reparations means now allows future politicians to create a framework for success.