Systemic Racism isn’t the Problem. It’s Bad Public Policy. Here’s How to Fix it.
One of things we lament the most in our divided country, is how people are stereotyped and put into a few general boxes. The American Heritage Dictionary defines stereotype as:
“A conventional, formulaic, and oversimplified conception, opinion, or image.”
Stereotypes generally have a negative connotation because they exclude the diversity and complexity each of us have. One of the worst stereotypes is how we put each other in political boxes. “Oh, you voted for Biden so you must support the cancel culture or eliminating second amendment rights, or you voted for Trump so you must be a racist.” We all know things are much more complex than that.
One thought I have shared with friends and family (with mixed reception) is that stereotypes can be very useful because, without it, we would not have any comedy to make us laugh. Next time you listen or watch comedy, observe how much stuff you’re laughing at that is involves stereotyping. You will be surprised how frequent it is. We could use more comedy these days because it breaks down barriers.
Racism is a negative form of stereotyping that also adds the acts of judging and discriminating. The American Heritage Dictionary defines racism as:
“The belief that race accounts for differences in human character or ability and that a particular race is superior to others.”
Racism is bad and America, unfortunately has a history of it. We are big fans of Dr. Martin Luther King whose “I have a dream” speech still moves us.
"I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character."
One hundred years prior to Dr. King’s speech, a divided America spent enormous blood and treasure ridding itself of slavery, the most repugnant form of racism. King’s evangelism of a color-blind society led to the Civil Rights Act which has resulted in nearly 60 years of law enforcement, affirmative action and trillions in spent treasure making progress towards his goal. But there are loud voices out there telling us that America has made little or no progress becoming a more inclusive country. They cite the root cause as “systemic racism,” meaning that the structure of our economy, government and institutions is fundamentally racist because it sometimes has a disparate impact on African Americans and other minorities, making it the most important factor in holding them down socially and economically as a class (or stereotype). These voices ignore the ancient examples of Frederick Douglas and Booker T. Washington, and contemporary African American voices like Thomas Sowell, Robert Woodson, Justice Clarence Thomas and younger acolytes like Candace Owens, who reject the notion of systemic racism because it instills a corrosive culture of victimhood that actually holds people back from living their best life.
The concept of “disparate impact” means that the process or system is not designed to negatively impact minority classes but ends up doing exactly just that. And, while it might be easy to conclude that we should end systemic racism, the truth is that it is going to be much more difficult than we imagine, especially if we do not change our approach as a society. While many automatically consider cases of systemic racism to be the cause of discrimination, it may also be true that they are the symptoms of centuries of discrimination. For some examples, we have been looking at situations related to our profession, property insurance, including homeowners, rental and commercial property.
The first case we ran into is detailed in a book called “Neighborhood Defenders”, which is about the role of the local zoning process that is a part of almost all cities in this country. Our view before reading the book was that if there is any democratic process in this country that is the epitome of Locally Grown, it’s local zoning laws. People in communities voluntarily coming together to determine how their cities will develop. The authors make a strong case that zoning is exacerbating the housing shortage we have in the U.S. by making it difficult to expand multi-family and low-income housing. People don’t want that in their communities, so they use all sorts of laws and tactics to discourage that type of development in their communities. They also make a point that zoning has been used in the past to discourage minorities from moving to communities. However, that is mostly based on the premise that if you have multi-tenant and low-income housing, then you will have more minorities, which in many communities, might be true. But is that because of zoning, or systemic racism?
Anti-discrimination laws have historically targeted a company’s intent but in 2015, the Supreme Court issued a ruling that allowed certain types of outcomes to be considered discrimination even if there was no explicit intent to discriminate. This is disparate impact which the Supreme Court accepted in a limited way. But according to the American Bar Association;
“The ruling did implement one significant hurdle: requiring plaintiffs to prove, early on, that a specific policy or practice caused the disparate impact. The Court noted that disparate-impact liability must be sufficiently narrow to allow defendants the ability to make practical business decisions, profit-related determinations, and other business choices necessary to maintain a vibrant and free-market economy. The Court stated that private policies are not contrary to disparate-impact requirements unless they are “artificial, arbitrary and unnecessary barriers.” Additionally, while this decision is limited to claims brought under the Fair Housing Act, litigants and interested parties anticipate that the holding will embolden plaintiffs to assert similar disparate-impact claims brought under the Equal Credit Opportunity Act.”
And now the Biden administration has articulated its focus not just on intent but on results, like minority borrowers should be getting more loans or paying the same or less than white borrowers. While we certainly think there is ample room for improvement in reducing income inequality, but using the hyperbolic and divisive term of “systemic racism” is a lazy and flawed way to attribute root cause to any issues involving race. For example, the “Neighborhood Defenders” authors make a strong case that local zoning laws is a big contributor to our national housing shortage. In a recent Locally Grown podcast, Strong Towns founder Charles Marohn said that his research shows that zoning and federal grant money works against communities by encouraging poor economic choices, which we found fascinating.
The concept of disparate impact is also an issue in financial services, especially in home and small business loans and insurance. The National Fair Housing Alliance (NFHA) has brought suits against lenders and insurance companies using disparate impact as, in their words, a “tool” for social justice. The insurance community has successfully defended itself to this point, but there is strong concern that if it loses any significant case or has an adverse NFHA administrative law, it could open the flood gates to lawsuits.
Insurance is by nature discriminatory because it must balance the risk it can tolerate in order to make a profit so that it can keep its doors open employing people. Folks with higher risk profiles like homes that are too close the ocean or a river, in an earthquake zone, have substandard construction or are in high-crime areas, pay more for insurance. This is common sense, and the only way insurance can work. Forcing insurance companies to ignore risk, and simply sell insurance at the same price to everyone, would spell the end of private insurance as we know it. If that happens, then the government just becomes the insurance company. There are many politicians who want the government to run the healthcare insurance industry which represents about one third of our entire economy. Imagine if we added, property and casualty insurance? The means the government would effectively be guaranteeing every home in America, which is worth nearly $34 trillion as of 2019. In this age of Modern Monetary Theory where endless money printing is the solution to every problem, maybe this isn’t such a daunting number anymore.
Still, with the private insurance industry gone because it can no longer earn profit, property insurance would look something like the federal government sponsored Flood Insurance (not much coverage but equal for all at one price) or state “Fair Plans” like Citizens Insurance in FL which is the third-largest property insurance company in the state. Citizen’s is the last resort for homeowners who cannot get private insurance and the company routinely runs unsustainable loss ratios that are subsidized by FL taxpayers, at least for now.
Considering disparate impact, an insurance company’s rating and underwriting rules should result in a book of business that reflects the racial demographics of the country:
White, non-Hispanic 60.1%
Hispanic 18.5%
Black 13.4%
Asian 5.9%
Mixed-Race 2.8%
Native Americans 1.5%
But what happens if there aren’t many Asians or Blacks or Hispanics in a company’s operating area so there is no way to acquire the required minority percentage of their book of business? Are they penalized or given a pass? If they are penalized, when does it stop making sense to write any business at all because the government regulation is too onerous? If they are given a pass, doesn’t it set a bad precedent where other companies that operate in a region with different demographics would rightly cry foul? It’s a slippery slope but that is exactly where we are headed unless this kind of really bad government policy can be stopped in the courts.
Let’s look at Florida, which is in the midst of a homeowner insurance crisis where insurance companies are struggling to stay in business, not only because of an increase in hurricane and other weather events over the past five years, but because of what is called “social inflation”. Taking advantage of a number of statutes and court decisions unique to Florida, plaintiff attorneys, in conjunction with crooked contractors and public adjusters, have cost insurance companies billions of dollars in unjustified claims and attorney fees. This is amplified by the implicit and sometimes explicit threat of disparate impact lawsuits, which coerces insurance companies to pay fraudulent claims. Insurance companies have essentially two options for their survival. The first is to raise rates, which they are aggressively doing. The second is to try to figure out how to write less business with people who are more likely to allow an attorney to file an unjustified claim on their behalf.
Insurance companies have lots of data, but they do not collect data on race because they don’t want it to be used against them. The logic says that if companies don’t know a person’s race, they cannot directly discriminate against them. However, they do know the areas that generate the most claims and lawsuits along with their home values. The fact is, the folks most likely to allow an attorney or public adjuster to file a suit on their behalf are people who;
1) don’t understand that they are signing a suit authorization because their English is poor or their education level is low, and
2) people who have nothing to lose and everything to gain by participating in this system.
The solution according to the NFHA would be to force insurance companies to continue to write in areas and on homes that generate suits and quickly go out of business. But if our scenario is true, and these areas are disproportionally minority, then is this really an example of systemic racism? Did the insurance companies intentionally create this situation or did our society and government? If we confuse the symptoms with the causes and attack zoning boards, insurance companies and lenders because too many African Americans or Pacific islanders are struggling economically, how is that going to fix the problem?
Unfortunately, too many politicians don’t care about the real source of the problems because racial politics is such an effective means of holding on to power. It’s no coincidence that trial lawyers and their political lobbying groups are one of the biggest political donors in this country and 95% of those donations go to the Democrat Party. According to the National Insurance Crime Bureau (NICB), the top five metro areas with the highest incidence of questionable insurance claims (a proxy for fraud) are: Los Angeles-Long Beach-Santa Ana, Calif.; New York-Northern New Jersey-Long Island, N.Y., N.J., Pa.; Miami-Fort Lauderdale-Pompano Beach, Fla.; Detroit-Warren-Livonia, Mich.; and Chicago-Naperville-Joliet, Ill., Ind., Wis. All of these large metro areas have been run by Democrat politicians for decades. That is just a sad and inconvenient fact.
The problem of increasingly expensive choices for housing and financial services for poor folks is a bipartisan issue. A February 12, 2021 article in the New York Times by Conor Dougherty sums it up well:
“The problem is that opposition to new housing also has bipartisan agreement. Blue cities full of people who say they want a more equitable society consistently vote to push housing costs onto others. They will vote for higher taxes to fund social programs, but also make sure that whatever affordable housing does get built is built far away from them. Red suburbs full of people who say regulation should be minimal and property rights protected insist that their local governments legislate a million little rules that dictate what can be built where. What does it mean to respect property rights? In zoning fights, it gets fuzzy.”
In the end, disparate impact becomes nothing more than a tool to place blame on companies and employers for something we allowed our government to do. Poor people pay too much for financial services, but the costs of those services are higher as well. We can do a better job designing products, educating and solving the problem if we encourage constructive dialog rather than demonization. However, current “cancel culture” kills any chance to do this.
Using the Habitat for Humanity Model to Fix Low-Income Housing
It is our view that the unintended negative consequences of government policy, is a big contributor to income inequality and the exorbitant cost of housing and financial services for poor and minority folks.
In the book, Locally Grown: The Art of Sustainable Government, we learn how to better distribute the functions of government more effectively between our federal, state and local levels. When we restore the proper balance, we can achieve great sustainable solutions that respect the cultural diversity of our nation and engage other private and non-profit partners to help. It’s all about using our 50-state, 20,000-zipcode laboratories to experiment and identify policies that actually work.
For example, Habitat for Humanity was founded in 1976 by Millard and Linda Fuller in Americus, Georgia. Habitat has built or restored over 800,000 homes, providing 13 million people with the American dream of home ownership. Former president Jimmy Carter and his wife, Rosalyn, have been tremendous supporters of Habitat for decades. It is a great example of real, sustainable results from the private sector and a model that should be considered by government for providing affordable housing.
Habitat is decentralized in that it has no real central authority and is a self-organizing entity. Each local chapter is responsible for its own fundraising, staffing, and project management. Decentralization is one of several Locally Grown principles Habitat embraces along with the bias toward work. Habitat requires recipients to participate in the building of the home alongside volunteers and save $2,000 for a down payment. After the home is completed, the recipient must also pay a monthly mortgage that they can afford, which is much less than the cost of the home and typically much less than they pay in rent. This savings is a substantial pay raise for these working families, which they can use to continue their upward economic rise in our society. The Habitat founders knew that people with “skin in the game” act differently than people who just get something for free. Work and accomplishment are the foundation of self-esteem, which is essential in helping people rise out of poverty.
Now try to re-imagine government housing policy based on the proven Habitat model. With billions more in federal transfer funding hitting the state and local levels, it would spur the 20,000 cities and towns to experiment with the Habitat model those of similar organizations that have proven results in reducing poverty and creating a basis for accumulating wealth for low-income citizens. Below is a chart from the Locally Grown book that shows a more effective way to deploy the billions of spending on welfare (food stamps, housing, unemployment) at all three levels of government in 2018.
If we allocated 10 percent of our welfare spending to building Habitat homes to help poor Americans build wealth, we could build 744,000 homes per year. Think of the massive dent that would put in income inequality not to mention a fiscal stimulus that would create thousands of great middle-class construction jobs. Instead of having to spend more than 30 percent of their income on rent to slumlords, that money goes to mortgage payments that build equity. The mortgages would be highly subsidized via 20 percent of labor cost performed by volunteers including the government picking up the tab on 60 percent of the remaining cost, and the Habitat recipient paying a mortgage based on 20 percent of the cost of the home. This approach to reducing income inequality is way more effective that subsidizing rent in crappy homes, or food stamps and other expensive subsidies that tend to create permanent dependency. This method gives people wealth. A much different proposition.
Using Decentralized Systems to Reduce Cost and Increase Access to Financial Services
The global financial system has created massive wealth, but its centralized nature means the benefits have gone to the people who are best connected to the financial centers of the world. As inequality continues to rise, how can wealth building tools become more accessible to the lower-income folks? With 4.6 billion internet users as of October 2020, 3 billion digital banking customers by 2021 and the emergence of Bitcoin and the Blockchain, the infrastructure is already in place for a new decentralized financial system (DeFi) to emerge.
Bitcoin and Ethereum aren’t just digital stores of value — they’re foundational open-source networks that will be used to change how the global economy works. Here are the primary features that differentiate public blockchains from the private networks, like SWIFT, used by governments and traditional financial institutions:
· Permissionless: Anyone in the world can connect to the network.
· Decentralized: Records are kept simultaneously across thousands of computers.
· Trustless: A central party like a bank isn’t required to ensure transactions are valid.
· Transparent: All transactions are publicly auditable.
· Censorship Resistant: A central party cannot invalidate user transactions.
· Programmable: Developers can program business logic into low-cost financial services.
In a near-future DeFi world, users will have access to apps built on public blockchains to participate in new open global markets. Anyone with an internet connection and a smartphone can access financial services, and avoid the barriers that prevent access in the current system such as:
· Status: Lack of citizenship, documentation, credentials, etc.
· Wealth: High entry-level funds required to access financial services
· Location: Vast distance from functioning economies and financial service providers
· In a decentralized financial system, a top trader at a financial firm would have the same level of access as a janitor in Detroit.
Decentralized finance also eliminates costly intermediaries to make services more affordable for low-income folks. Currently, it is prohibitively expensive for people to send money across borders. The average global remittance fee is 6.5%. Through decentralized financial services, remittance fees could be below 3%.
DeFi users control their assets and can transact securely without permission from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.
In blockchain systems, transactions cannot be tampered with and the system cannot be shut off by central authorities like governments, central banks, or big corporations. In a world where the Federal Reserve is printing money as far as the eye can see to monetize government debt, all of us will witness serious inflation until that policy stops or we have a currency collapse. Inflation is the hidden tax that disproportionately affects poor folks. DeFi users can easily and securely divest their dollar-based assets into scarce digital assets like Bitcoin and Ethereum to protect their wealth.
Finally, plug and play DeFi apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system. In the new system, a woman in the Philippines can receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.
But do we collectively have the will to build this brave new world?
Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces its centralized counterparts. It’s equally difficult to imagine a world where the federal government relinquishes much of its power over the social safety net to state and local governments. In the world of power politics, what we are talking about is very disruptive to the existing players that control the game: the federal government, the Federal Reserve and their Wall Street and Big Tech cronies. Already we see some these players talking down Bitcoin and decentralization because it represents a threat to their control. Last week, no less a player than Janet Yellen, former Fed president and current Treasury Secretary, has reservations and “questions about legitimacy and stability” of Bitcoin.
But what if DeFi and public blockchains can coexist in a new hybrid model? Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system. Users could hedge against systemic risk by diversifying their assets in both the central and decentralized system. Like the internet with knowledge, decentralized finance could help democratize the financial system and lower costs and increase access to all people, regardless of race, income, gender, or sexual identity. Deploying Habitat-like models to replace our bloated and ineffective social safety net, can change behaviors and give poor folks true wealth to build on. We believe with a little critical thinking without just resorting to charges of racism to get to the root cause of problems, we can achieve Dr. King’s vision of a color-blind society. But will we allow it?
Werner Kruck is a long-time property and casualty insurance executive and most recently the former Chief Operating Officer of Security First Insurance.
Jim Fini is the founder of Enservio, a leading technology and services provider to the property insurance industry.