A Great Leap Forward

Heterodox Economic Policy for the 21st Century

Randall Wray

• Publisher: Academic Press
• Year: 2020
• ISBN:
  9780128193815
• Topic: Économie
• Subtopic: Macroéconomie

A Great Leap Forward: Heterodox Economic Policy for the 21st Century investigates economic policy from a heterodox and progressive perspective. Author Randall Wray uses relatively short chapters arranged around several macroeconomic policy themes to present an integrated survey of progressive policy on topics of interest today that are likely to remain topics of interest for many years.

• Rejects neoclassical orthodoxy as the appropriate tool for understanding 21st century economic and social life
• Considers subjects such as innovation and technological progress
• Explores public institutions, global trade, and financial regulation

Part C

Tackling poverty and inequality. The road to full employment and price stability

Abstract

One troubling trend that has gained increased attention is rising inequality. In this part of the book we will link rising inequality to the same forces that have increased financialization of the economy: deregulation and desupervision of finance, promotion of what George W. Bush called the “ownership society”, and the rise of neoliberalism. We examine the failure of the 1960s “War on Poverty”, the strategy adopted by the Kennedy and Johnson administrations to deal with poverty, in large part because it did not provide decent jobs to the poor. As a result, the link between joblessness and poverty remains strong. We compare and contrast two rival approaches to dealing with poverty: the Basic Income Guarantee that would provide income to all, and the Job Guarantee that would provide a job to anyone willing to work. This is particularly important in the context of concerns that increasing “robotization” of the economy is destroying jobs. We will argue that President Roosevelt's New Deal strategy of creating jobs for the unemployed and providing a safety net for those who cannot, will not, or should not work is the best alternative.

Keywords

Basic income guarantee versus job guarantee; Inequality; Jobs for all; Poverty; Redistribution or preredistribution; Rising tide; Robotization; The trickle-down economy

In this Part we continue our analysis of policy to enhance social and economic security, in line with the vision laid out by President Roosevelt in 1941. Here we tackle the problems that contributed to rising inequality, joblessness, and poverty. As we noted in Part B, FDR's third freedom—freedom from want—is inextricably linked to the other recognized freedoms. Unfortunately, we have not made substantial progress in this area—outside improvement for older Americans who now have much better access to healthcare and retirement income through the New Deal's Social Security program and President Johnson's Medicare. But we are left with millions of unemployed people, and with inequality as extreme as it was on the eve of the Great Depression. In this part we will address these twin, related, problems, which have been exacerbated by the rise of Neoliberalism since the mid-1970s. It is hard to see the plague of unemployment and rising inequality as anything but the result of policy choices made over the past half century. It is, indeed, tempting to see them as the desired result of those choices.

I. Poverty and the trickle-down economy

a. One percenters

Back in the Summer of 2005 I wrote a piece, “The Ownership Society: Social Security Is Only The Beginning” that examined President Bush's promise to create a new society of owners. During the 2004 campaign, he had proclaimed: “The more ownership there is in America, the more vitality there is in America, and the more people have a vital stake in the future of this country”. The centerpiece of his “Agenda” was the belief that “every American should have the right to own his or her home, to build his or her own future, and to have the flexibility to make the decisions about their own health care and retirement.” In addition, his “ownership” manifesto included the promise to “fix Social Security,” expand saving and investment through tax-free savings accounts, reform pension rules and streamline retirement accounts, endorse health savings accounts, repeal “death taxes,” promote “affordable, reliable” energy, and “reduce the lawsuit burden.” Taken together, the policy changes would encourage ownership and individual responsibility.

While supporters held out the promise that access to wealth would be broadened by the president's agenda, I argued at the time that such policies actually would increase inequality, a point that undermines an important justification for proposed ownership-society programs. And inequality did boom! But hindsight is twenty-twenty. What did I say in 2005?

First, I showed that except for the rich, the only significant wealth held by the average American is the family home. As I said in 2005, “therefore, the case for the existence of an ownership society rests on home ownership, since owner-occupied homes represent the only significant asset held by families across all income and wealth percentiles …. [F]amilies that do not own a home have insignificant amounts of other forms of wealth, with median family net worth equal to $4,800, median retirement accounts valued at only $6,800, and financial assets equal to just $3,900 …. By contrast, families that own their home have a median value of asset holdings equal to $240,100—about 18 times greater than the median holdings of renters who had any assets. Home ownership does seem to open the path to wealth.”

However, I warned that all was not hunky-dory even for homeowners because it is rather misleading to count homes as wealth. First, mortgage debt was rising rapidly, from 40% of personal disposable debt in 1984 to 80% by 2005, and it continued to rise rapidly until the Global Financial Crisis as many homeowners used their houses as “ATM machines”, borrowing against them to pay for consumption. Second, families have to live somewhere, “so liquidating the family home means purchase of another, or moving into a rental unit that is not usually of comparable quality, and that commits the family to rents in perpetuity …. ”

Other debt was rising, too, and in an inverse manner so that those at the bottom of the income pyramid were taking on relatively more debt (Wray, 2005):

American families have taken on a lot of debt. About 75 percent of all families have some kind of debt. This varies—mostly inversely—by net worth, with 69 percent of the poorest quartile having some kind of debt, and 80 percent of families in the second-lowest quartile having debt … Nearly half of families at the very bottom of the wealth distribution had installment loan and credit card debt. Interestingly, while over 55 percent of all families in the top decile of net worth had home-secured debt, only a quarter had installment loan debt, and only 22 percent had credit card debt … Hence, installment debt and credit card balances entail a burden that varies inversely with wealth and income.

The appearance that we were achieving Bush's promised ownership society was deceiving—because wealth of all kinds but especially financial wealth was concentrated in the hands of the few. I calculated that the top decile enjoyed median family net worth that was 1184 times greater, financial assets that were 544 times greater, and nonfinancial assets worth 166 times more than those held by the lowest quartile. While 95% of the wealthiest decile of households owned a primary residence, and 42% also owned other residential property; only 14% of the bottom quartile owned a home. While homeownership was concentrated among higher wealth households, debt was more “democratically” shared, with the poorest households facing much higher debt burdens: nearly 14 times more families in the lowest income quintile carried debt greater than 40% of their incomes. Low wealth families were 60 times more likely to have debt in arrears when compared with the wealthiest families. So while the richest households enjoyed financial assets and net worth, the bottom half of the wealth distribution “enjoyed” relatively more debt.

Folks, that was back in the good old days before the Global Financial Crisis destroyed millions of jobs and trillions of dollars of wealth.

Finally, I warned of the precarious nature of home finance in the midst of a real estate bubble (Wray, 2005):

There is a sort of inexorably perverse ownership-society logic in all this. In recent years, banks have promoted “100 percent” (typically “80/20”) mortgages in which home buyers borrow a “down payment” (for example, 20 percent of the home value) at a high-interest rate. According to one report, nearly half of new mortgages are no-money-down deals, and 36 percent of homes are bought with adjustable-rate mortgages …. With little or no equity cushion on many of these new mortgages, even a slight downturn in real estate prices—or a decline in household income—could lead to foreclosures. Moreover, the Fed continues to raise rates; although this has not yet had much impact on household mortgage rates, it will eventually succeed in raising them, causing variable rates to spike.

And, indeed, it was the “hybrid” subprime loan with floating rates that triggered the crisis in 2007. ¹

I went on:

All of this comes at the peak of what appears to be a real estate bubble, [Greenspan] even invented a new term for the phenomenon, calling it housing market “froth,” fueled by speculation that has caused residential real estate prices to climb at double-digit rates for the last several years in many cities. One recent study found that 818,000 of the two million new jobs created since the end of 2001 can be linked to housing: construction, home-furnishing stores, and the real estate services sector. Greenspan tried to downplay the risks, arguing, ‘Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased before prices actually, literally go down, are going to have problems’.

Right, no big problems—homeowners have tons of equity. I did not buy it for several reasons. First, it was clear we were in an unsustainable housing bubble that would crash—and the longer it went on, the bigger the fall. The Fed had begun raising interest rates in 2004—and continued until the target rate had risen by about 4% points. By 2006, housing prices stopped rising. Homeowners who had taken out dangerous hybrid mortgages that would reset to double-digit interest rates after a couple of years had been refinancing into better mortgages before the resets. However, that required both rising house prices to build their (fictitious) equity and low rates they could lock-in with a 30-year fixed rate mortgage. That worked for those who had bought before 2005. When prices stopped rising and rates rose, they could no longer refinance—so those who needed to refinance exploding rate hybrid loans after 2006 were unable to do find better mortgages.

Second, with its infinite foresight, Congress had “reformed” bankruptcy law just in time to make it impossible for homeowners to get out of their mortgage debt when the crisis hit. Even if they lost their homes through foreclosure, they would still owe the debt. As I concluded back in 2005, “It is ironic that the 30-year mortgage brought to us by New Deal government guarantees—making home ownership possible for working Americans for the first time—has morphed into a speculation-fueling, debt-pushing juggernaut that is likely to bury homeowners in a mountain of liabilities from which they will not be able to seek bankruptcy protection. Creditors will emerge as owners of the foreclosed houses and with claims on debtors, who will be subject to a form of perpetual debt bondage under Chapter 13 (which, unlike Chapter 7 bankruptcy—that was eliminated for homeowners--requires a repayment plan).”

Well, how did all that work out? Exactly as planned. Wealth flowed to the top few tenths of a percent. That is what the Ownership Society was all about.

In 2013 there was an amazing update by David Dayen on the progress made on that score:

Over the past couple of years, hedge funds, private equity firms and the biggest banks have raised massive amounts of capital to buy distressed or foreclosed single-family homes, often in bulk, at bargain prices […] to convert them to rental units for a while before reselling them when prices appreciate.

An “REO” is real estate owned by banks that have foreclosed on hapless borrowers. Wall Street put up billions of dollars to buy these for pennies on the dollar from the banks, and now rents them back to all the people who lost their homes (but still pay mortgages on the homes seized by predatory lenders). For example, Dayen reports that Blackstone had already purchased $2.7 billion worth of homes and planned to buy another $100 million weekly. Wall Street was using its market power to raise rents. And those rents, themselves, were becoming another asset class: Wall Street was beginning to sec...