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The 2-cent solution to close the racial wealth gap: A call for U.S. companies to invest in Black communities

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If just 2 cents of every dollar earned by U.S. corporations was reinvested in Black communities, the racial wealth gap would close at a pace and scale never before seen in this country.

Referred to as “The 2% Solution,” this premise, championed by Vista Equity Partners founder Robert Smith is bold, yet simple. He proposes that corporations, which reap the benefits of America’s prosperity, take the lead in reversing centuries of structural economic racism by investing 2% of their net income over the next 10 years in Black businesses and financial institutions.

This proposal is good not just for direct beneficiaries of the investment, it is good for corporations and the entire nation. Analysis by McKinsey and Company found that closing the racial wealth gap would add between $1 to $1.5 trillion in economic activity over the next 10 years through job creation and income gains.

So how would this plan close the racial wealth gap? By investing in Black businesses and Black-owned financial institutions, which directly translates to jobs and economic growth in Black communities.

The evidence is clear. In a study of Minority Depository Institutions (MDIs), the FDIC found that Black-owned banks locate and lend in Black communities at significantly higher rates than white-led financial institutions. Likewise, research by the Association for Enterprise Opportunity showed that while the Black/white wealth gap is 13:1; the wealth disparity shrinks to 3:1 when comparing white and Black business owners.


U.S. banks notoriously underinvest in Black people and communities.

Unfortunately, the resources available to close these gaps are far too scarce. U.S. banks notoriously underinvest in Black people and communities: While 77% of white households are “fully banked,” less than half of Black households can claim the same status. Not surprisingly, the denial rate for mortgage loans for Black households is nearly twice the rate of whites. Even among Community Development Financial Institutions (CDFIs) — mission based lenders created to serve low-income communities — capital levels for white led CDFIs are, on average, twice the size of CDFIs led by people of color, a function of capital investment.

Even philanthropic support for these communities is woefully inadequate. The National Committee for Responsive Philanthropy reports that per-capita grant making in the Mississippi Delta / Alabama “Black Belt” — home to the nation’s most concentrated rural population of Black residents — is a woeful $41 per person, compared to San Francisco, where philanthropic investment is $4,096 per person.

Read: To build racial and wealth equality in post-pandemic America, invest in a Cultural New Deal

Also read: It’s time for wealthy donors to embrace reparations, not more charity

Our experience at HOPE, a Black-owned credit union and CDFI serving the Deep South, has shown repeatedly that aligning resources with need enables people to climb the economic ladder. Nowhere was this more evident than in our work to help Black businesses access the Small Business Administration Paycheck Protection Program (PPP).

In a typical year, we make 40-to-50 business loans. However, the onset of the pandemic, the shutdown of the economy and disproportionate impact on Black communities mandated an extraordinary response. Anchored by substantial support from Goldman Sachs, HOPE redirected nearly half of its workforce to originate PPP loans. By the time the program concluded, HOPE had processed close to 7,400 PPP applications and approved 2,900 loans for $85 million. The majority of these loans were to mostly Black communities, with an average loan size of less than $30,000 — more than $70,000 lower than the average for the overall program.

Many of HOPE’s PPP borrowers were small businesses and nonprofit organizations run by Black leaders who could not even get a return phone call from traditional lenders. One of those organizations included a small nonprofit serving youth in the Arkansas juvenile justice system. After reaching out to its bank, the nonprofit learned the financial institution would no longer accept PPP applications.

The news was particularly devastating because, short on funds, the organization was experiencing an influx of teens in need of case management services. Youth formerly in the system were reaching out following their early release, a precautionary measure to prevent an outbreak of COVID-19. Before the organization had a chance to find another lender, the program’s first phase had ended. When the program restarted, HOPE made the loan. While maddening, the outcome was not surprising. What would one expect when a study commissioned by the Winthrop Rockefeller Foundation found that in Arkansas, where 15% of the population is Black, just 1.2% of SBA loans go to Black businesses?

Corporations and their shareholders have long benefitted from systems, policies and practices, all promulgated by law, that have facilitated and perpetuated the racial wealth gap. However, as HOPE’s PPP experience demonstrates, there is a better way. The health, economic and racial crisis facing America has crystalized the importance of transcendent action at this critical moment in history. Smith’s 2% Solution offers a guide for moving forward: Make substantial, sustained and targeted investments that equip Black communities to thrive. All it takes is 2 cents.

Bill Bynum is CEO of HOPE (Hope Enterprise Corporation, Hope Credit Union and Hope Policy Institute), a family of organizations that advances economic opportunity for disenfranchised populations in Alabama, Arkansas, Louisiana, Mississippi and Tennessee. Bynum serves on the boards of the Aspen Institute and NAACP Legal Defense Fund, and previously chaired the Consumer Financial Protection Bureau Consumer Advisory Board, and the Treasury Department’s Community Development Advisory Board.

More:‘Every recession, there’s a massive bailout given to corporations and CEOs’: Stockton mayor Michael Tubbs says basic income payments can help bail out Americans

Plus: Helping companies that ‘keep the country going’: Small businesses can narrow racial wealth gaps and save the U.S. economy, says microlender’s CEO



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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Mutual Funds Weekly: These money and investing tips can help you read the market’s signs and stay on your path

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