TOPICS > Economy

Americans Facing More Inequality, More Debt and Now More Trouble?

August 17, 2011 at 12:00 AM EDT
Did America's record-high level of economic inequality in 2007 help cause the financial crisis of 2008? With Americans' borrowing back on the rise and signs that economic inequality is growing, could there be another financial crisis in the near future? Paul Solman continues his series of reports on U.S. economic inequality.
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JEFFREY BROWN: Now we continue our series on inequality in the United States.

A new report from The Annie E. Casey Foundation finds that the poverty rate among children has risen by 18 percent over the last decade. That means two million more children dropped below the poverty line, back to levels of the early 1990s.

NewsHour economics correspondent Paul Solman is looking at the widening wealth gap. Tonight, he explores possible connections between inequality and the financial crisis.

It’s part of his reporting on Making Sense of financial news.

PAUL SOLMAN: At Boston Missionary Baptist, a convocation of churches from across the city, with congregates who’d finished the debt-to-assets program…

MAN: Roxbury Presbyterian Church, 38 graduates.

(APPLAUSE)

PAUL SOLMAN: … a six-week financial literacy course run by the Greater Boston Interfaith Organization.

MAN: Boston Missionary Baptist Church, 116 graduates.

(CHEERING AND APPLAUSE)

PAUL SOLMAN: The new alums were graduating from debt, in amounts that beggar the borrower and the imagination.

BRIGITTE MASON, Boston: After four years of working hard at this, I have been able to pay off a grand total of $73,500.

(CHEERING AND APPLAUSE)

PAUL SOLMAN: Some 700 people were celebrating, but if recent trends hold, demand for the program may swell.

From the crash of ’08 to this spring, Americans had — uncharacteristically — been paying down their debts. But borrowing is again on the rise, according to the Federal Reserve. Historically, though, high debt relative to income is a fairly recent development for Americans, which economist Frank Levy blames on the growing pressures of economic inequality.

FRANK LEVY, Massachusetts Institute of Technology: The part that’s really changed in the last 20 years is debt, that people took out more and more debt to sustain consumption.

PAUL SOLMAN: Took our more debt because, he says, America is growing more unequal. Since the top one percent now commands more than one-third of all wealth, how’s the bottom 99 percent supposed to keep up with the Joneses, if not the Kardashians? By borrowing.

FRANK LEVY: In the 1950s and 1960s, everybody’s income was rising. Everybody had some claim on economic growth, so that people could buy a middle-class standard of living. If you go back to the ’70s into the ’80s, when things began to flatten out, people started dealing with that by putting a second earner into the labor force.

But that obviously has limits. And so, once that was pretty well exhausted, once you started getting into the ’90s, then we’re into the home equity loans and the credit card stuff and all the rest of that, trying to keep consumption growing like it had been before.

PAUL SOLMAN: We’re not talking poor people. Marisol Trotman earns her salary at Dana-Farber Cancer Institute, and even got a raise this year.

MARISOL TROTMAN, Dana-Farber Cancer Institute: It was so minimal, it turned out to be like a $3 increase, which really didn’t make a difference.

PAUL SOLMAN: The administrative assistant regrets going $10,000 into debt, even if it was mainly for roof repairs.

MARISOL TROTMAN: You’re just digging a bigger hole. And when the income isn’t increasing and the — you know, the IOUs go up, it’s never easy.

PAUL SOLMAN: Nerline Grand-Pierre is a lab supervisor at Boston University. She had run up $29,000 in debt.

NERLINE GRAND-PIERRE, Boston University: Basically we just kept getting more and more into debt. We’re using our cards just basically to survive. So the raise that I get basically is not enough to cover my bills.

PAUL SOLMAN: Bad for Grand-Pierre and, arguably, bad for the rest of us, because however necessary the borrowing of recent years might have seemed, it was bound to end badly for just about everyone.

DAVID KOTZ, University of Massachusetts, Amherst: The huge gap between the rich and everyone else is not just a moral or ethical problem. It is a major factor explaining the severe financial and economic crisis that broke out in 2008.

PAUL SOLMAN: Economist David Kotz:

DAVID KOTZ: If the economy’s going to expand, while profits are going up very rapidly and wages are stagnating or falling, which has been the rule since 1980, then who’s going to buy the increased output of the economy? It’s possible only if households borrow to maintain their living standard.

That’s why we have seen the huge growth in household debts in the economy. Millions of families unable to pay their bills from their declining income were forced to borrow against their home to keep the electric power on.

PAUL SOLMAN: Professor David Moss of the Harvard Business School agrees.

DAVID MOSS, Harvard Business School: As the crisis was in full swing in late 2008, November, December of 2008, I started to put together a graph, a simple chart on bank failures in the 19th and 20th century up to the present. And a really very striking pattern emerged.

PAUL SOLMAN: Striking, says moss, was the resemblance between his bank failure chart and a graph of U.S. income inequality over the last century.

DAVID MOSS: Sure enough, the match with bank failures was remarkably strong. Inequality peaked just before the financial crisis in 1929 to 1933. And then it peaks again in 2007, just before this recent financial crisis at almost exactly the same level. And that got me thinking more and more, maybe there is some connection.

Those at the high end are putting some of their money into lending to everyone else. And those down below, who are not seeing the kind of income growth they had gotten in before and don’t have the kind of bargaining power to raise their incomes that they had before, they’re doing the borrowing. That’s creating a source of enormous instability. But, if that model is right, then there really could be a connection between inequality and financial crises.

PAUL SOLMAN: Now, not every economist buys the story that inequality led to the crisis.

RICHARD FREEMAN, Harvard University: I doubt that this was a major factor.

PAUL SOLMAN: Economist Richard Freeman:

RICHARD FREEMAN: Certainly, we know the debt level went up in this period of time, and we know that people’s taking on housing and debt, consumer debt that they ultimately couldn’t afford unless house prices kept going up, contributed to this.

The part that is hard is that, say, their incomes had risen by 10 percent. Maybe then they would have taken on even more debt.

PAUL SOLMAN: Raghuram Rajan’s book on the fragility of the global economy, “Fault Lines,” makes much of inequality, but blames the government response to it for the crash.

RAGHURAM RAJAN, University of Chicago: Starting in the 1980s, a large segment of the American population is falling behind in incomes. When people fall behind, they get anxious. They want something to be done.

Part of the big reason the incomes are falling behind is, people don’t have the education for the jobs that are being created. It’s hard to fix education. What do politicians do instead? They say, well, let’s expand credit. Even if he can’t actually get a greater income, if he consumes more, he has a bigger house, maybe he stops worrying so much about his income.

PAUL SOLMAN: We met up with Rajan and Cecilia Conrad earlier this year at the annual economists’ convention in Denver.

Professor Conrad blames the crash on the rich exploiting inequality by renting their money at fat interest rates to those trying to stay in the middle class, and not only by taking out a mortgage or a home equity loan.

CECILIA CONRAD, Pomona College: I would expand on that story a bit and probably have a slightly different take, because I would expand it to include not only homeownership, but when you look at credit card debt, if you look at the growth of the fringe banking sector, the sort of payday lenders, the growth in those, all of those were helping to fuel consumption. It’s the modern version. Instead of, let them eat cake, it’s let them have flat-screen TVs.

PAUL SOLMAN: Denise Barrant, out of work for three years and facing foreclosure, is a case in point.

DENISE BARRANT, homeowner: I think people, because they were feeling the pinch, took equity out of their houses. Whether they should or they shouldn’t, they certainly were encouraged. And I think people felt a lot of pressure to, because as your standard of living was declining, you get into a situation where there’s just no turning back.

And then, once the value of your house went down, it’s just a no-win situation.

PAUL SOLMAN: Do you expect that, at some point, you may have to declare bankruptcy?

DENISE BARRANT: I might. I mean, unless there’s a miracle and manna falls from heaven or something, I just don’t see how I will ever be able to dig myself out of this hole, which is a very, you know, discouraging feeling.

PAUL SOLMAN: Meanwhile, back at Missionary Baptist:

WOMAN (singing): There can be miracles when you believe.

PAUL SOLMAN: Remember Brigitte Mason, so proud of digging herself out of a $73,500 hole. She’s going to have a hard time staying out.

BRIGITTE MASON: Two days ago, I found out, after five years of employment, I have been laid off. I’m devastated. I am discouraged, but I am so grateful, grateful that I have come this far.

(CHEERING AND APPLAUSE)

PAUL SOLMAN: To business school professor David Moss, the signs of a stagnant job market, shakier global banks and again-rising inequality are ominous.

DAVID MOSS: If there’s a connection between inequality and financial crises, that is a cause for concern.

PAUL SOLMAN: That wouldn’t just be cause for concern, I wouldn’t think, but for serious anxiety.

DAVID MOSS: Absolutely. After 1933, it didn’t grow, of course. It leveled off. And then, with World War II, it came down dramatically and stayed down for quite a long time. What we have seen in this crisis is, it dipped down just a little bit. Now it looks like it’s headed back up, probably will exceed where — where it got.

PAUL SOLMAN: More inequality, more debt, more trouble. Thank goodness past performance is no guarantee of future results. But recent history provides little comfort for what may be to come.

JEFFREY BROWN: Next in our series on inequality, we will look in detail at the new study about poverty rates among children.