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April 2012
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Economic Inequality: At the Roots of Economic Crisis
 
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Dear Colleague, 

In this April 2012 issue of the Center for Social Policy Digest:  Connecting Research and Communities, we turn our attention to the connections between the causes of economic inequality In the U.S. and the economic crisis that continues to impact the lives of so many.    Arthur MacEwan and John Miller's brief essay draws from evidence developed more fully in their recently published book, Economic Collapse, Economic Change:  Getting to the Roots of the Crisis.   

 

This essay provides a solid backdrop to the perspectives shared by families living with economic hardship and by Randy Albelda, CSP Senior Fellow, in a recent MarketPlace radio segment that explores the meaning of poverty for working families. 

 

Lastly, I encourage you to listen to the Teen Voices video to learn what a group of Boston teenagers have to say about the meaning of poverty in their lives and communities.   Their understanding of poverty encompasses economic hardship, yes.   However, they give voice to the impacts on human dignity that result when social inclusion and opportunities for advancement can be seen only from a distance.   

 

As always, we welcome your thoughts on the ideas we are putting forward in this issue of the CSP Digest.   For more on the Center's work go to: www.csp.umb.edu, and we invite you to share your ideas, reactions and feedback with us through the Center's Facebook and Twitter links.  

 

Warm regards,

 

Donna Haig Friedman, Director

Center for Social Policy           

 

Economic Inequality:

At the Roots of Economic Crisis

Arthur MacEwan

During the last several months, the Occupy Movement has thrust the great economic inequalities of our society to the center of public attention.  The inequalities are not new, but they have become much more extreme over the last several decades.  As the Figure 1 shows, after an era of relatively less income inequality in the middle of the last century, we have returned to conditions of the late 1920s.  Now as then, the highest income 1% of the population is getting more than 20% of all income.  For the Occupy Movement and for many of the rest of us, there is something fundamentally unfair about this situation.

 

More than unfair, however, the great economic inequality in the United States has been a root cause of the economic crisis that emerged in 2007 and 2008 and generated high unemployment, continuing economic instability, and severe hardship for many, many people.  The inequality has been part of a vicious circle, generating an extreme concentration of political power and a perverse leave-it-to-the-market ideology that has been used to justify that concentration of power.  In turn, the political power of the very rich and this perverse ideology, as well as reinforcing each other, have been used to reshape government policies that have made the inequality worse. Truly a vicious circle.

 

One of the centerpieces in this reshaping of government policy has been deregulation, the deregulation of financial activity in particular. Starting in the 1980s and reaching its apex in the late 1990s, many of the rules that had been introduced to bring stability to banking after the Great Depression of the 1930s were removed.  We were told, if things were left to "The Market," the economy would work better for all of us.

 

But here's what happened:

 

As the economy expanded, as overall income rose, almost all the increased income went to the very rich.  Trying to keep up, most other people reduced their saving and took on more and more debt, especially debt for housing.  The government-that is the Federal Reserve Bank (the Fed)-recognized that with the incomes of most people stagnant or near stagnant, buying power could weaken and threaten economic growth.  So the Fed did what it could to keep interest rates low, encourage debt build up, and thus keep people buying.  It worked, for a while, especially with housing debt (mortgages).  As Figure 1  shows during the 1990s, mortgage debt outstanding on 1 to 4 family houses rose from 61% to 69% of after tax personal income, and then ballooned to 107% by 2007; total mortgage debt (including that on multifamily properties, commercial properties, and farms) rose to 140% of personal income by 2007.

  

This increasing level of debt and the rising housing prices that went along with it were unsustainable.  Debt and housing prices can rise faster than income only so long.  In 2007, crunch time came and housing prices began to fall.  Still the story is not complete without the role of deregulation.  Because financial firms-banks and also mortgage companies-were not being sufficiently regulated, they were both charging excessive prices (high interest rates) for many loans and making loans that they knew could not be repaid.  The makers of the loans didn't worry about the fact that they wouldn't be repaid because they sold these loans to others, pocketing hefty fees in the process.  Without proper oversight by regulators, buyers of these loans thought they were good investments.  

 

Then, when housing prices started falling, everything came apart.  Some big financial firms failed.  Others were saved by billions of dollars of support from the government-i.e., from the public.  The financial firms stopped making loans, other firms, without financing from the banks, got in trouble.  Layoffs and lack of new investment followed.  And the crisis took hold.

 

In the spring of 2012, we still have not recovered.

 

So the parallel to the situation of the late 1920s in terms of income inequality (Figure 2) has a good deal of significance.  As the great inequality then led into the Great Depression of the 1930s, the inequality of recent years led us into the current economic debacle.

 

 ~ This opinion piece represents the views of the author. ~

 

* Arthur MacEwan is a Senior Fellow at the Center for Social Policy and Professor Emeritus in the Department of Economics at the University of Massachusetts Boston.  John Miller is Professor of Economics at Wheaton College.  The ideas here are developed at length in their recent book, Economic Collapse, Economic Change: Getting to the Roots of the Crisis (M.E. Sharpe, Armonk, NY, 2011).

The Center for Social Policy provides expertise on poverty policy, policies and practices that reduce social and economic inequalities.

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Sincerely,
 
Center for Social Policy Team

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