bjbjLULU 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. gdS7 gdS7 gdS7 urn:schemas-microsoft-com:office:smarttags
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place JEFFREY BROWN: Now we continue our series on inequality in the United States Normal
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