A foreclosure sign in Denver in a crumbling housing market. (AP photo)
Inequality and the sub-prime crisis
ASK THIS | February 13, 2008
The press doesn't write much about inequality in America -- that would be class warfare, wouldn't it? But now Henry Banta asks if inequality and the enormous money explosion for the very rich since 1980 are reasons for the sub-prime mortgage crisis, or at least for its severity.
By Henry Banta
There is an obvious question that is not being asked. Perhaps out of thoughtlessness, but perhaps out of fear of the answer.
It appears widely accepted that somewhere around 1980 the share of the gross domestic product going to a very small number of the very rich exploded and the share going to everybody else began to slide downward. It also seems widely accepted that the current financial crisis was precipitated by problems in the sub-prime mortgage market. Shouldn’t we be asking if there is a connection? Had the income of the bottom 20 percent been greater – for example, had it kept up with their increase in productivity – would we have a sub-prime mortgage crisis, or would it be as severe? Certainly the banks should not have lent all that money to a bunch of deadbeats. But why were there so many deadbeats in the first place?
For a couple of decades we heard that it was the “supply side” that mattered. Our prosperity depended on giving corporations and their shareholders the incentive to invest. Money in the hands of the consumer was wasted. Income redistribution was good as long as it was from bottom to the top. The poor wasted; the rich invested. The road to prosperity was simple: tax consumption; subsidize investment. Few reporters and editors – and few political leaders – ever questioned this principle, and, despite recent events, few are questioning it now.
For a long time it has been accepted wisdom that inequality is not an appropriate concern for economic policy. What mattered was business confidence. Any talk about inequality raised the specter of “class warfare” and could undermine investor confidence. It may be a matter of fairness, social justice, equity, and other mushy things that liberal politicians worry about, but not a matter to be discussed among serious people, much less a concern for economic policy. But now the tough, practical people are in a panic over whether the ordinary consumer will keep spending. There is an almost comic scramble to get a few hundred dollars in the hands of consumers in the fervent hope that they will quickly spend them.
The whole situation is ripe with irony. Were those who conjured up the idea of repackaging risky sub-prime mortgages as high-grade investments among the few whose income exploded while all the rest lost ground? Did they help create a system that socked it to the middle class and to those aspiring to be middle class, then lent them a lot of money they couldn’t pay back? Could it be that twenty years of stagnant wages, rising debt, and shrinking savings are threatening the very stability of the economy? Could it be that inequality was an important issue after all?
Where are Ayn Rand, Milton Friedman, and Ronald Reagan to tell us it isn’t so?
Social Class Indifference
02/19/2008, 08:00 AM
Lester Thurow, the MIT economist, said onetime that an advanced industrial economy could be maintained by solely catering to the needs of the upper middle class. This country was founded by the upper middle class for the upper middle class. Read the debate in the 1830s over granting universal male sufferage to see the resistance upper middle class people, John Adams, and so on, had toward the idea of allowing working class wage earners (wage slaves) to vote. It was felt that only people who earned their income from capital investments had the ability to make prudent judgments.
I think the greatest crime the upper middle class has committed against the working class has been their indifference to the education of working class people. Historically, American business has been idifferent to the education of their workers beyond what they minimally needed to know to perform their function.
The American working class has never been regarded as part of the polit. They were regarded siply as people who needed to be manipulated and controlled.
This has been our history, and we need to recognize the "reality" of our history before we can ever egin to think realistically about what we need to become a united nation