Financial Crisis

In this podcast, Reid Cramer, director of the Asset Building Program at New America, describes the new dynamics of inequality that emerged in the wake of the Great Recession and have given rise to the Occupy Wall Street movement.  Without dramatic changes to the housing market and policy efforts designed to get families out from under the overhang of debt, significant wealth inequality will persist for years to come. This is particularly apparent when recognizing  the staggering growth of the racial wealth gap. Today, November 17th, marks the two month anniversary of the protests, which should be applauded for initiating a national conversation about equality, mobility, and opportunity.

SAN FRANCISCO, CALIFORNIA - The bursting to life of the Occupy Wall Street movement is the most hopeful development in American politics since Barack Obama was elected president three years ago this month. Obama's election has turned out to be largely a false hope. But that false hope might still be redeemed - and the president motivated to become the reformer he once pledged to be - if the Occupy movement grows into the kind of massive, broad-based, relentless movement no president can afford to ignore.

The Occupy Wall Street protests that have popped up across the country may lack a uniform set of demands, but they undoubtedly possess a singular and powerful critique. High finance has been allowed to assume a disproportional role in our society and, as a result, we see widespread and debilitating inequality. The protesters have found creative ways to publicize a number of contributing factors, including skyrocketing CEO pay and corporate consolidation, flat wages for average Americans, and diminishing employment opportunities. While the financial sector’s share of GDP rose to 40%, with a set of practices that plunged the global economy into a deep recession, the prospects of the top 1% have materially diverged from those in the bottom 99%.

Perhaps the most visible indication of receding opportunity is the growing disparity in incomes. The story of income inequality has been playing out for decades and it features wage stagnation despite growing productivity, with almost all the income gains captured at the very top. New analysis from the nonpartisan Congressional Budget Office confirms that the top 1% saw their average real after-tax income grow by 275% between 1979 and 2007, over six times the gains of everybody else. Economist Paul Krugman calls this the Great Divergence, which corresponds to a 20-year period when more than 80% of the total increase in income went to the top 1%, despite productivity gains of around 20%. The recession has likely narrowed this gap a bit as incomes for the top 1% have come down from their highs. Yet this is just part of the tale.

The surge and persistence of inequality in the aftermath of the Great Recession is most apparent when we shine the spotlight on wealth rather than income. As with income, the gains in wealth which occurred during the aughts (the 2000s) largely flowed upward. Those in the top ten% saw their assets rise 24% between 2001 and 2007, far outpacing gains of everybody else. In 2007, the richest 1% of households owned 34.6% of the nation’s wealth; by 2009—after the recession took hold—this rose further to 35.6%. This degree of concentration has occurred at the expense of those in the middle. Economist Sylvia Allegretto estimates that top 1% of households by wealth had net worth 225 times greater than the median household in 2009. This is the highest ratio of wealth inequality on record and an increase of 24% since 2007.

The skewed distribution of wealth is perhaps more consequential that that of income. This is because one’s prospects for future growth and mobility are not just determined by what someone earns but importantly by how many resources they have at their disposal. Assets can be tapped to help families weather unexpected events, such as when incomes decline through job loss or a health problem, but they can also be strategically deployed to make investments that can pay off down the line. Without access to these resources, families will have a harder time navigating through economic uncertainty or seizing the opportunities offered by our economy.

The Great Recession has only further skewed the distribution of wealth. When the housing bubble burst and the stock market tumbled, the distribution of the nation’s wealth became more equal. But these losses have been short-lived since security prices have rebounded and wealth holdings at the very top have been largely recouped. This wasn’t the case for most families, where home equity was the largest item on the family balance sheet. Home values will remain low for the foreseeable future as foreclosures continue to spread. Many families will find it difficult to rebuild their portfolios.

The current divergence between housing values and security prices will be one of the mains drivers separating the lower, middle, and upper-middle from those at the very top. Without dramatic changes to the housing market and policy efforts designed to get families out from under the overhang of housing debt, such as large-scale loan modifications and principle reduction, significant wealth inequality will persist for years to come.

On Nov. 2, Federal Reserve Chairman Ben Bernanke confidently predicted that in 2012, the U.S. economy will grow at a rate of 2.5 percent to 2.9 percent. A few months earlier Bernanke predicted that the economy would expand 3.3 percent to 3.7 percent next year. A few months before that, the Fed projected growth in 2012 to be somewhere between 3.5 percent and 4.2 percent.

These shifting forecasts tell us two things: The U.S. continues to experience excruciatingly slow growth, and economists continue to have little success predicting it.

After days of drama-filled meetings, in late October eurozone leaders announced the latest “comprehensive” rescue plan. Although it was an improvement over earlier efforts, this package, too, came up short in that it failed to calm the markets and offer the eurozone a path back to economic growth. And without growth, there will be many more months of crisis.

We all know the details of the story by now: a young Tunisian vegetable vendor loses his licence to work because of predatory local police; he refuses to pay a bribe; he complains at the municipality; they tell him to get lost; he lights himself on fire; a nation erupts; a leader falls; the Arab uprisings begin.

I’m not really equipped to interpret the communiques released by the Vatican. But it seems there was a pronouncement this week that has the Pope weighing in on financial reform.  Specifically, the Pontifical Council for Justice and Peace supports the idea of a Financial Transaction Tax (FTT) as a means to better promote social justice and solidarity.This undoubtedly has the Pope’s blessing, so to speak, and is significant in its recognition that social justice is a priority, revenue has to come from some place, and high finance should increase its contributions to the public coffers worldwide.

A small tax on financial trading could raise significant revenue to fund for many cash strapped governments. It is an idea that has been discussed in the US context, but for some reasons Wall Street and the big banks have not come around. But perhaps it is indicative of a growing sea change that the idea is gaining prominent and diverse supporters. Not only has it been spotted on Occupy Wall Street protest signs but German Chancellor Angela Merkel and former British prime minister Gordon Brown have also endorsed the idea. And this weekend, Bill Gates is on his way to the G20 summit to argue that it is one way that governments can generate new resources to support international development efforts.

There’s certainly an upside to having this policy implemented internationally, because if it’s implemented everywhere no one will be disadvantaged. While Gates may see this policy as a means to fund specific initiatives (see his Washington Post op-ed), what makes this idea attractive to me is not the earmark for specific activities but the new revenue that could be generated relatively painlessly. In the context of rising inequality and a widening racial wealth gap, calling it the “Robin Hood” tax does not hurt either; its redistributive potential is an added bonus.

“In 1948, the Universal Declaration of Human Rights called for social protection for all in the form of adequate life standards, access to health, education, food, housing, and social security …Despite the six decades of strong economic growth that followed [its] adoption, access to adequate social protection, benefits and services remains a privilege offered to relatively few people.”

The second season of The Walking Dead premiered last week to ratings high enough to raise William Seabrook—the journalist who imported zombies to the United States with the 1929 novel