We are at a unique moment in time in our country where we need to harness capitalism and private capital in new and transformative ways to close racial gaps in income and wealth. The essays in this series speak to what we can learn from the past and how, together, we can do this.

Capitalism and private capital have always played a central role in Living Cities’ strategies. While an increasing number of foundations are intentionally blending grants and investments together to drive social change today, Living Cities has been doing it since our inception in 1991. With foundations and financial institutions making up our membership and governing body, we have always looked for new ways to use precious grant dollars to unlock market forces and more plentiful, private capital, for good. As we commit, as a collaborative, to closing the racial income and wealth gaps, we must expand our experimentation and investments in harnessing the forces of capitalism and the scale that private capital enables towards those ends.

Much Success: Billions into the Built Environment

Since its inception in the decades after World War II, the community development sector in the United States has emphasized the primacy of place. According to this theory, poverty was largely considered to be a side effect of geographic isolation and disinvestment – if you can address market failures in a limited number of neighborhoods, you will dramatically improve the economic conditions of a huge number of the nation’s low-income people who live there. With that theory of change, an ecosystem that could change the built environment, at scale, was intentionally created through the passage of a number of sophisticated tools and policies, such as the Low Income Housing Tax Credit (LIHTC) and the Community Reinvestment Act (CRA), growth of sophisticated organizations, such as LISC, Enterprise, LIIF, and TRF, and the emergence of a supporting cast of local, regional and national actors, public and private.

Using a cornerstone of American capitalism, real estate development and finance, this ecosystem has been able to attract hundreds of billions of dollars in private equity, debt from traditional financial institutions and government, as well as philanthropic grants and loans, and produced more than 2.5 million units of affordable rental housing across the country. Living Cities and its member institutions played important roles in the build out of that ecosystem. In fact, two organizations, LISC and Enterprise, Living Cities’ primary partners in our first 15 years, together have raised more than $20 billion (leveraged many times over), helped build or rehab more than 500,000 units of housing and developed millions of square feet of retail, community and educational space nationwide.

Much to Do: The Realities of Today’s Disparities

However, while so many of us were honing our abilities to harness the tools of capitalism and private capital to transform the built environment, a lot changed in the macro economy. An increasingly global trading system accelerated the globalization of the U.S. economy with profound impacts on neighborhoods and low-income people. It further reduced the role that low-income neighborhoods could play in the economic lives of their residents by moving jobs not just out of the neighborhood to the suburbs, as had happened in the 1970s and 1980s, but out of the country.

Transforming targeted neighborhoods is necessary but not sufficient if our goal is to transform the economic well-being of the people who live there.

Today, in fact, we know that the market failures that we need to address to increase the income and wealth of low income people, especially those of color, are occurring well beyond the built environment in specific neighborhoods. Transforming targeted neighborhoods is necessary but not sufficient if our goal is to transform the economic well-being of the people who live there. Take, for example, San Francisco, one of our Integration Initiative cities where we are partnering with the collective effort of Hope SF. The unemployment rate in the city of San Francisco was 3% in May 2016. However, in the four neighborhoods that are part of the HOPE SF initiative which are made up of majority non-white residents, the unemployment rate is 70%. Transforming the neighborhoods alone will not lead to an increase in income or wealth for those residents. We must be able to connect HOPE SF residents to jobs that provide income and build wealth.

Not only must low-income people be connected to jobs, but those jobs need to be created. However, changes in the macro-economy are impacting how jobs are created in the 21st century. Our economy used to be driven by young companies (firms no more than five years old) who were being formed faster than others failed, and producing a lot of jobs. In fact, over much of the past 25 years, business “births” outnumbered business “deaths” and firms less than 5 years old accounted for substantially all of the net new jobs created in the country.

But that has changed. The number of start-ups has fallen by nearly half between 1978 and 2011. Start-up rates were lower between 2009 and 2011 than they were between 1978 and 1980 in every state and Metropolitan Statistical Area except one. In 2013, business “deaths” exceeded business “births” for the first time in 30 years; reaching a milestone that we have been approaching for years. As if that wasn’t enough, the start-ups that are surviving are creating fewer employees. In 1982, 75% of all five-year old firms had fewer than 10 employees, and 12% had 20 or more employees. In 2010, the number of new but small companies grew to 80% while the companies with 20 or more employees shrunk to 8%.

There is a direct correlation between this reality and the fact that that lending to entrepreneurs has shrunk significantly. According to Rework America, an initiative by Markle Foundation President, Zoe Baird, and Starbucks CEO, Howard Schultz, whether “it is a local restaurant, a corner coffee shop, or a manufacturer that employs 200 employees, most small businesses …are experiencing a significant shortage of capital. More than 35% of them name access to financing and credit as a major impediment to growth.

The data is compelling. Small business loans made up 51% of loan value on bank balance sheets in 1995. By 2013, that number was down to only 29%. In fact, the overall flow of credit has shifted significantly toward household and consumer credit. Rework cited the most comprehensive study to date on this shift which concluded:

To a large extent the core business model of banks in the advanced economies today resembles that of real estate funds: banks are borrowing (short) from the public and capital markets to invest (long) into assets linked to real estate… . The intermediation of household savings for productive investment in the business sector— the standard textbook role of the financial sector— constitutes only a minor share of the business of banking today, even though it was a central part of that business in the 19th and early 20th centuries. In the boom years in America after 1945, private capital accumulated rapidly. Back then, if people and firms had capital to invest, loans to businesses were a dominant form of credit.

Data also shows that women and people of color have been all but shut out from positions of power, when it comes to providing capital. Despite people of color making up over 30% of the population today and women over 50% of the population, they are rarely the ones making funding decisions or getting capital for their businesses. Recent data shows that on average senior investment teams in leading venture funds have 1% black or Hispanic staff and 8% women. This is important because we know that they are more likely to lend to borrowers who look like themselves. Therefore, its no surprise that a study last year by Babson College found that just 2.7 % of the 6,517 companies that received venture funding from 2011 to 2013 had women CEOs.

[F]irms led by people of color are more likely to employ people of color.

Meanwhile, while 11% of Americans are African-American, only 1% of venture-backed companies in the U.S. were founded by an African-American. Other groups, including Hispanics, receive so little funding that numbers are hard to come by. Again, this is critical to closing the racial gaps in income because firms led by people of color are more likely to employ people of color. Nationally the unemployment rate for white Americans is 4.4% compared to 8.1% for black Americans and 5.6% for Hispanic/Latino Americans. The gaps are even larger in urban communities like New Orleans where the unemployment rate for working age African American men is over 50%.

The gaps in wealth are even more extreme. While blacks earn only 59 cents and Hispanics only 72 cents for every dollar of income earned by white households, the disparities in wealth are mind boggling. A recent survey found that people of color have a nickel of wealth for every dollar of wealth owned by a white household. The wealth disparity is actually 10 to 15 times worse for people of color than the income gap.

The Institute on Assets and Social Policy at Brandeis University has found that there are five “fundamental factors” that account for most of the disparities between white wealth and everyone else: 1) home-ownership, 2) family income, 3) college education, 4) employment stability and 5) family financial support and inheritance. But home-ownership stands out from all the other factors. The Institute’s Director, Thomas Shapiro, articulates it well, “the biggest driver of the wealth gap between whites and blacks remains home-ownership”. If you are a person of color and you own a home, you are likely to have wealth; if you don’t, you’re not.

Wealth from equity in a home makes up 71% of the total wealth of black households, but only 51% for whites. As you might expect, closing the home-ownership gap between races would go a long way in closing the gap in wealth as well. In a 2015 study, the Institute found that if Blacks and Latinos were as likely as white households to own their homes, median Black wealth would grow $32,113 and the wealth gap between these races would shrink 31%. Median Latino wealth would grow $29,213 and the gap with white households would shrink 28%.

The Challenges and Opportunities

The causes of these market failures are numerous and their complex solutions span beyond any defined neighborhood. Like housing and community development in the 20th century, however, grants to nonprofits, the tax and spend of government or market forces alone, will not get us the results we want. We need to creatively use all of these tools. Similarly, as we did to impact the built environment, we must develop robust ecosystems that can scale the results we want through sophisticated policies, intermediaries (and today, online platforms) as well as an array of local, regional and national actors, public and private.

As we pivot towards a concentrated effort to closing the racial gaps in income and wealth, we need to focus on the following four things:

Changing our own Behaviors.

We have to hold the mirror up to ourselves and our own institutions. We must acknowledge that despite the successes we have achieved over the past 25 years, we have not closed these racial gaps in any material way. If our race-neutral ways of working haven’t been effective, then how must we change to become more race-informed in our operations and practices? We, at Living Cities, have begun that journey over the past three years with promising results – but we, and so many others, have so much more to do.

We all also have to understand how structural and institutional racism, in public and private institutions, policies, and practices, have contributed to these disparate results, work to change them and measure whether change is actually happening. Our Racial Equity Here effort in five cities, in partnership with Government Alliance for Racial Equity (GARE), is teaching us how the public sector can do this effectively. We need to help this spread to other sectors as well.

Investing and Funding Activities That Will Drive Income and Wealth.

Historically…firm creation and job growth through entrepreneurship and individual home-ownership have not been broadly embraced by philanthropy.

We must fund and invest in activities that more directly contribute towards increasing individual income and wealth for people of color. Historically, for example, firm creation and job growth through entrepreneurship and individual home-ownership have not been broadly embraced by philanthropy. With sufficient support, loans and grants, promising efforts like Kiva Zip, Village Capital and Endeavor, just to name a few, could get much needed advice and capital to entrepreneurs, especially people of color, from the start-up through the growth phase. Programs like Self-Help’s Community Advantage Program, that already has helped 55,000 lower-income Americans to become homeowners across the country, could help millions more with the right long term investments.

For the first time, we now have ways that people and institutions can even invest in helping people to be prepared to earn more income. The emerging Pay for Success field utilizes private capital to invest in public, private and nonprofit actors to achieve specific results for low-income people, with active experimentation taking place in areas such as workforce development, education, and juvenile justice. For example, Living Cities, through the Catalyst Fund, invested $1.5 million in the Massachusetts Juvenile Justice PFS transaction. This seven-year, $27 million deal is focused on reducing recidivism and increasing employment for at-risk, formerly incarcerated young men in the Boston, Chelsea and Springfield areas.

Importantly, new funds are springing up that can help these types of activities scale, if they are able to attract sufficient investment. The Urban Innovation Fund and Impact America Fund are two examples of venture funds dedicated to providing seed capital and regulatory expertise to entrepreneurs working to both solve our toughest urban challenges and grow into tomorrow’s most valued companies. To date, 76% of the companies funded by the founders of the Urban Innovation Fund have a woman or person of color on the founding team. Similarly, the MacArthur Foundation and Chicago Community Trust just launched Benefit Chicago, what they hope to be a $100 million impact investing fund that will use this pool of capital for loans and other investments to eligible nonprofits and social enterprises that help meet significant community needs in the Chicago region, such as education and child care, access to healthy food, quality affordable housing, energy conservation, job training and more.

Engaging new Investors in These Activities.

What is so powerful about initiatives like Benefit Chicago is that they are part of a new generation of funds being created to capture a new generation of investor. These investors are looking to make investments into companies, organizations and funds with the intention of generating social and environmental impact alongside a financial return. Despite the fact that the hype around this idea has far exceeded the amount of dollars actually invested in the past decade, impact investing finally is coming of age. The driver of this change is simple: the recipients of the largest inter-generational transfer of wealth in American history are demanding it. According to the Global Impact Investing Network, the market for impact capital is currently sized at $60 billion and could grow over the next decade to $2 trillion. Wealth advisors and investment platforms, like BlackRock, have taken notice and are hurrying to respond.

Right now, demand (or the amount of money looking to be invested for impact) exceeds supply (or the number of investments or products available for investment). That is changing rapidly, and will continue to change as more for-profit and non-profit companies, organizations (including MacArthur) and funds (like Benefit Chicago) develop more “products.” However, if the limited amount of impact investment that has been done to date is any indicator of what the future will bring, impact investment dollars will be able to super-charge efforts to address racial gaps in income and wealth. We just have to make sure there are enough products that drive money into activities focused on closing gaps in income and wealth.

Our past success in harnessing capitalism and private capital to achieve a level of scale impossible through grants and tax dollars alone is something few other sectors can point to and celebrate. We are at a unique moment in time in our country where we need to take those lessons learned and apply them in new and transformative ways to closing racial gaps in income and wealth. With our imminent transformation into a majority non-white nation, it is both a moral and economic imperative for our country.