Why do racial disparities persist?: Institutional path dependency

The compound interest problem

Take $24,000 and $188,000. Go back to 1960. Apply the S&P 500’s historical average return to both figures. Compound for sixty-five years. You land within striking distance of the current gap.

We are economists. We did not set out to make anyone uncomfortable. The model produced a conclusion that made every camp angry: the gap does not require ongoing discrimination to persist. It requires only that initial conditions were skewed and compound returns are indifferent to justice.

Path dependency is what happens when small initial differences, amplified by feedback loops, produce large persistent outcomes. A family denied a mortgage in 1950 could not build equity. Their children entered adulthood without inherited wealth. Each generation starts from the endpoint of the previous generation’s constrained trajectory.

The structural analysts and cultural analysts are fighting over the present tense. If compounding explains 80 or 90 percent of the current gap, both are arguing over the remainder. The only intervention proportional to the mechanism is direct wealth transfer. The structural camp resists this because it implies ending discrimination alone would not close the gap. The cultural camp resists because it reduces agency to a rounding error. The individual agency camp offers the hardest emotional challenge — people who compounded their own human capital against headwinds. We do not diminish those stories. For every person who escapes the trap, the trap itself has not changed.

Where we concede ground: Our model is elegant, and elegance is suspicious when the variance is this wide.

What would change our mind: Genuine reparations implemented with the wealth dissipating rather than compounding forward.

Read the full synthesis: Why do racial disparities persist?