Sunday, November 23, 2014

An Alternative Wealth Gap Explanation

September 21, 2012 by  
Filed under Action, Business, News, Opinion, Politics, World

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CNN Money recently posted an article on the growing wealth gap in America which promotes parochial opinions on causation. The article’s main focus is on the growing gulf between the wealthy and everyone else, but it also discusses the wealth gap among minorities and Whites. Apparently, America’s wealthiest are at least 288 times wealthier than everyone else. In real numbers, the average middle class income in 2010 was about $57,000 while the wealthy took in about $16,000,000. This marks a huge upswing in wealth disparity from the 60s, where the wealthy held on to a mere 125 time the wealth as the average American. But in its attempts to explain why the wealth gap is greater among America’s minority groups, namely African-Americans and Hispanics, the writer leans on unsubstantiated generalizations and ultimately blames targets of social engineering and resulting income inequality for their plight.

The CNN Money article, “The wealthy are 288 times richer than you,” penned by Columbia University faculty member Tami Luhby, attempts to explain the shocking disparity in wealth between white and minority Americans of color, which CNN reports is $4,900 for Blacks, $1,300 for Hispanics and $97,000 for white households. Luhby, in a cursory fashion, states that “typical” minorities just didn’t invest in the stock market and didn’t have enough in home equity. “Part of the reason for the eye-popping statistics is because Blacks and Latinos had a relatively small amount of net worth so the drop is larger in percentage terms,” Luhby writes. “Also, their homeownership rates grew faster than whites’ during the housing boom, but fell further when it collapsed.”

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Luhby continues, “The typical black and Latino households don’t own any stocks, and the typical black family has no home equity.” Luhby then leans on an “expert” to substantiate her viewpoint. She quotes Heidi Shierholz, economist at Economic Policy Institute: “Overall, the widening of the wealth gap in recent decades is due to two things… The increase in income inequality means the wealthy have more to save and invest every year. Furthermore, the growth of Wall Street means that the rich, who are much more likely to own stocks, accumulated wealth even faster.” But Shierholz does not directly support Luhby’s proposition that the wealth gap is related to minorities’ low home equity and failure to invest in stocks? Shierholz says that income inequality is the cause. Greater income means greater disposable income, which means more money to save and invest in stocks.

Interestingly, this article cites no independent sources to back up Luhby’s statements that low home equity is responsible for the minority wealth gap. It also ignores widespread and institutionalized racism, redlining and predatory lending as the primary reason why minority wealth dropped so steeply after 2008. Many public figures have addressed this issue in the last few years. See “The Hidden Cost of Being African-American,” “Yes, we’re creating jobs, but how’s the pay?,” and “The Rich and the Rest of Us,” co-authored by Cornel West and Tavis Smiley.

“There are nearly 150 million poor and near poor people in America who are not responsible for the damage done by the Great Recession. Yet they pay the price. The poor did not create the deindustrialization of America, unmatched corporate profiteering and greed, more than a decade of foreign wars, and unregulated tax benefits for the wealthy. When the largest economic institutions in the world were brought to their collective knees, they went crawling to the government’s doorstep in search of salvation. The government obliged, allowing Wall Street to socialize its failure on the backs of Main Street Americans. The housing and jobs crisis they created fostered a poverty unseen in generations—not just in inner-city ghettos and barrios, but also in suburbs and rural areas crossing racial, age, and gender lines. Nearly one-third of the American middle class—mostly families with children—have fallen into poverty.” —Tavis Smiley and Cornel West, “The Rich and the Rest of Us”.

With jobs outsourced, unions busted, rehiring only taking place in low-wage seasonal and temp jobs, full-time hiring mainly taking place in tech fields that favor European, Asian and East-Indian immigrants due to education, with the widespread and widely publicized corporate refusal to train or re-educate older Americans in these tech fields, and with social safety nets like unemployment, medicare/medicaid, SSI, etc under attack, of course, the “last hired/first fired” will feel the impact the most. Stagnant or reduced wages, particularly among Black and Hispanic Americans, can not be ignored as the dominating cause of these groups’ striking lack of wealth compared to White Americans.

Indeed, CNN’s reporting in this case is parochial and smacks of propaganda when it states that low minority wealth is caused by the groups’ failure to save or buy stocks and low home equity, while ignoring in the same article wage inequality and predatory markets. CNN essentially repeats big business’s talking points in blaming victims for their loss rather than offering an unbiased report of economic findings.

In a general commentary on the cause of the Great Recession, widely respected economist Raghuram Rajan, the Eric J. Gleacher Distinguished Service Professor of Finance at the Booth School of Business at the University of Chicago and visiting professor for the World Bank, Federal Reserve Board, and Swedish Parliamentary Commission, and Chief Economic Adviser to the Government of India, argues that income inequality is the cause and that saving unions and taxing the rich are the solutions.

“To understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes. And identifying causes means starting with the evidence.

Two facts stand out. First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession. Second, most of the economic gains in the US in recent years have gone to the rich, while the middle-class has fallen behind in relative terms. In Europe, concerns about domestic income inequality, though more muted, are compounded by angst about inequality between countries, as Germany roars ahead while the southern periphery stalls.

Persuasive explanations of the crisis point to linkages between today’s tepid demand and rising income inequality. Progressive economists argue that the weakening of unions in the US, together with tax policies favouring the rich, slowed middle-class income growth, while traditional transfer programs were cut back. With incomes stagnant, households were encouraged to borrow, especially against home equity, to maintain consumption.

Rising house prices gave people the illusion that increasing wealth backed their borrowing. But, now that house prices have collapsed and credit is unavailable to underwater households, demand has plummeted. The key to recovery, then, is to tax the rich, increase transfers, and restore worker incomes by enhancing union bargaining power and raising minimum wages.”

So here we have it: it’s wage disparity that is causing the wealth gap. The failure to save and buy stocks, and low home equity, are merely symptoms of increasing income inequality. Hopefully more mainstream media outlets will accurately report this fact.