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Stagnant Wages and Speculation Triggered the Crisis

There’s another line of thought about the cause of the economic crisis, which is: the underlying issue is that in fact it’s a crisis of inequality.

(Part 1). Stephanie Seguino: Blacks, Hispanics, and single mothers have much greater loss of income since crisis, triggered by income inequality in the first place.


PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Baltimore.

There’s been a lot of debate about just what is at the root of the current economic crisis. Some people have called it a banking crisis. Some people have called it a regulatory crisis. Some people are trying to say it’s a debt crisis. Well, there’s another line of thought, which is: the underlying issue is that in fact it’s a crisis of inequality.

Now joining us to talk about all of that is Stephanie Seguino. She’s a professor in the department of economics at the University of Vermont. She’s worked with a number of international organizations, including the United Nations development program. She’s a research scholar at the PERI institute at the University of Massachusetts Amherst. And that’s where she joins us from today.

Thanks for joining us, Stephanie.


JAY: So what is the evidence for this theory that inequality is actually at the root of both, I guess you could say, the crash in ’08, but more importantly the ongoing crisis?

SEGUINO: Well, you know, it’s hard to establish an evidentiary basis that there’s—where there’s a single smoking gun, but I can describe to you how we arrived at this analysis of why inequality is at the root of the crisis.

One of the things that we do know is that inequality has risen in the United States and in many other countries quite substantially since the 1970s. So the share of income that goes to wages has fallen in the U.S. and many other countries, and real wages have declined for workers in the United States. And one of the results of this is that people have inadequate income to buy the goods and services that they normally would with declining income.

And so the link to the crisis is that corporations who depend upon sales as a motivation to invest, to create new jobs, and so forth have not had as much pressure to do that. But they have been awash with profits as wages have fallen. And so what they have done, of course, is channeled those profits into the financial sector. And so they may be paying down debt or they might be buying financial instruments for themselves.

And so we find the financial sector both less regulated and awash with what I would call bubble dollars—dollars from the housing bubble. And so what financial firms have done—that is, to lend those dollars—and when they ran out of creditworthy borrowers, they began lending to precisely those households who have been struggling as a result of the downward pressure on their wages, the downward contributions to pension funds, rising medical costs, and rising health-care costs.

And so the inequality in a sense contributed to this financialization, to this flood of funds to the financial sector, who then sought to lend that money precisely back to those people who were struggling in the first place.

JAY: Yeah. In fact, we’re doing some work on this. Baltimore was one of the guinea pigs for all of this, that the subprime mortgage schemes focused on African-American communities, particularly in Baltimore, and then Chicago and New York, and starting in the early 1990s. It wasn’t a post-2000 phenomenon here.

SEGUINO: I think that’s a really interesting point. And one of the things that I find very interesting about this is that the people that were targeted for the subprime loans and what we would call predatory loans because they were obfuscatory, in terms of the terms being hidden with balloon payments and so forth, they were precisely targeted at African-American households, and especially single mothers. So these are people who had been excluded in the past, who had been redlined in the past when the conditions of lending were good, and now were, in the words of Gary Dempsey, super-included in these subprime predatory loans.

JAY: When you get the situation where demand is weak and so they don’t want to invest in the real economy, you’re saying this drives money more into speculative activity that also connected with the subprime, because it wasn’t that people thought it was okay to loan money that could never repay it, is that they bundled all this stuff up into these, you know, complicated derivatives packages and then made those things look like they were good and, you know, got the rating agencies this—call them triple A. But I guess what your main point is is that this lack of real demand leads to this more parasitical use of capital.

SEGUINO: I think that’s exactly right. And I think that, you know, what happens in this process, as you get this, not only the lack of demand, but lack of demand because of the downward pressure on the wages of workers of a variety of different groups, that the financial sector, awash with this money and immense profits, also began to develop an enormous amount of political power to affect the lobbying process and further deregulate the financial sector, making it ever easier for them to bundle these loans, to use these kind of financial instruments that were really in fact quite dangerous to the financial system and ultimately to the economy as a whole.

JAY: Yeah. I think that’s the part that doesn’t get talked about enough is how much political power accrued to the big finance sector, because you can’t pass even the most measly regulation against them now, even though, you know, in 2008 they had to have—I think it was a virtually secret session of Congress where they were threatening martial law across the country if they didn’t have the bailout. And that’s all gone now. I mean, Gore Vidal used to call, you know, the U.S.A. the United States of Amnesia, but this is kind of craziness.

SEGUINO: Well, I think that, you know, when we talk about what the problems are with inequality and what the cost of inequality is, one of the costs, of course, is that if families, if single mothers, if poor households have such weak income that they can’t invest in their children, the long-run health of the economy is compromised.

But just as importantly, inequality means that there’s not only disproportionate economic resources in the hands of the wealthy, but that translates into disproportionate political power. And what that means is that the resources that we do have, the public resources that we do have get funneled to uses that benefit the elite but in fact fail to benefit those at the bottom of the distribution. And so you have those at the bottom of the distribution who are deeply in need of better jobs and more support services, and instead what we have is resources funneled to the top of the distribution.

JAY: Now, I guess I kind of know the answer to the question I’m going to ask, but I think it’s worth doing. This graph you have, we’ve seen this graph before, where productivity goes up like this and wages essentially stay static. What that means is a lot of wealth was created. And so where did it go?

SEGUINO: Well, I mean, as I mentioned, it in some sense went to corporations in terms of profits. And much of that, because they didn’t have any incentive to build new factories and to hire more workers, ended up going into the financial sector. So we’ve had a dramatic increase in financial sector salaries, but also CEO salaries, for example.

JAY: Part of what you’ve been writing about is not just how the inequality is at the root of the problem, but the inequality’s not equally spread, too. I mean, it has a big racial component to it.

SEGUINO: Right. I mean, it has a big racial and gender component to it, right?

And I think the gender component that doesn’t get talked about too much is that some of the most negative effects that we have seen has been on single mothers, which is deeply problematic because such a large proportion of children grow up in single-parent families in the United States. And to the extent that we fail to ensure the well-being of those families, this has a long-run cost to society.

But you’re absolutely right that a significant portion of the cost of this crisis has been shifted to African-American and Hispanic families. And just to give you an example, you know, the unemployment rate has gone up for both whites and blacks, but the unemployment rate for whites went up roughly 5 percentage points, but it went up 9 percentage points for African Americans. And this is something that we don’t talk about, but it is a significant piece of the growing inequality that we see.

JAY: In your PowerPoint, you have a graph. It compares net worth of household income based on whites, Hispanics, and blacks. In 2005, the average median net worth for white households was $134,992. In 2009, after the crash, it goes down to $113,149. Hispanics go from $18,359 almost cut—I mean, more than half, $6,325 after the crash. Blacks go from $12,124—again, more than half lost—down to $5,677 after the crash. So these are crazy numbers.

SEGUINO: Yeah. I mean, I think that this is also something that hasn’t really received sufficient attention in terms of who the crisis affected. So, you know, it’s roughly a 15 percent decline in the net worth of white families, but it’s over a 50 percent decline for black families and over 60 percent for Hispanic families. So the disproportionate effects of the crisis are a significant phenomenon that is going to inhibit the ability of these families into the future.

JAY: And the reason for this disproportionate effect, is this partly because these Hispanics and blacks were more affected by subprime and lost their houses? Is it also just more unemployment in those sectors of the population?

SEGUINO: Well, I think it definitely has to do with the subprime crisis being concentrated in these areas. And then what happens is with the foreclosures that resulted from the lost income, it depresses housing prices within a community. So if blacks are disproportionately losing their jobs, then they are also disproportionately unable to pay for their mortgages, even if they weren’t part of the subprime crisis. And when they lose their homes and those homes are foreclosed on and are not resold, it depresses housing values in the entire community. So the unemployment crisis was part of the factor that contributed to this loss of net financial worth that really is transmitted partially to the housing crisis.

JAY: Now, another graph you have shows that single women responsible for families with single women with kids, their unemployment rate went up dramatically more than married women or married men. From ’09, right around the time of the crash, women who maintain families, their unemployment numbers just skyrocketed in relation to other parts of the population.

SEGUINO: You know, I think this is something that has been understudied and there’s been too little focus on. At the beginning of the crisis, there was a discussion about a so-called man-cession, that it was men that principally paid the cost at the beginning of the crisis. And the argument was women were relatively cushioned from the effects of the crisis. And that’s been a mischaracterization, because as you mentioned, the unemployment rate of married men went up, but slightly—and of married women as well, but who was really hit in terms of family structure were single women.

So there’s—and a phenomenon that’s beginning to be talked about, which is family responsibility discrimination. So perhaps when an employer has to lay off workers they’re more likely to lay off a person who has family responsibilities, and therefore they see as less committed or more likely to be absentee. We don’t really know. But the point is that disproportionately women who are the sole providers for children have lost their jobs during this crisis relative to married women and men. So it’s a mistake to talk about this as men versus women. It’s much more important to talk about the racial effects of this crisis, as well as the effects on people in terms of my family structure.

JAY: And with austerity policies and the cutbacks, whether they’re coming from sequestration or the grand deal, bargain, or betrayal, depending which word you want to use, it’s precisely these sections of the population that are going to feel it most.

SEGUINO: Right. And I think the cuts to social spending in particular are going to affect households that have to provide more services at home. So there are fewer meals eaten out. There’ll be less trips to the doctor and more care at home. And that increases the care burden. And that’s particularly going to weigh heavily especially on single-parent families.

JAY: So, Stephanie, thanks for joining us.

SEGUINO: You’re very welcome.

JAY: And we’re going to continue this in a part two. So please join us for the continuation of our interview with Stephanie Seguino on The Real News Network.

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