The discussion in part III has concentrated on tangible assets used by the low-wage sector, willingly or unwillingly: prisons, schools, bridges, and public transportation. It is now time to add some intangible assets and liabilities that affect the low-wage sector. This chapter interprets the treatment of debts in a dual economy. Individual debts are concentrated in bad mortgages and education loans. Societal debts come from the efforts of a democratic government to reduce risks for its members.
Individual debts are contracted between borrowers and lenders. Borrowers are largely individuals, and lenders in our advanced economy are largely financial institutions. Often, although hardly universally, debts are contracted between borrowers from the low-wage sector and lenders from the FTE sector. In that case, the treatment of debts involves relations between the two sectors of the dual economy.
If something goes wrong with a debt and it cannot be paid, then someone will take a loss. It seems appropriate that the loser should be the party that caused the debt to go bad, who was at fault in the collapse of the debt contract. A mythology has risen recently that says that borrowers are always at fault when debts fail, perhaps because the financial part of the FTE sector has become more important in our economy. Fault sometimes is attributed explicitly to unworthy borrowers, and it also may be implicit in the allocation of costs to borrowers. Within a dual economy, banks and other financial institution do not feel obligated to articulate all the reasons why members of the low-wage sector are obligated to pay for debts that go bad.
We have a dual financial system, where the FTE sector generally has more assets than debts and the low-wage system is largely in debt. Finance is seen in the FTE sector as a way to make large purchases or deal with emergency needs. But it is seen in the low-wage sector as a burden or a form of oppression that may lead to prison. Many workers in the low-wage sector say they cannot find funds for an emergency for which they need a few hundred dollars without selling something they would otherwise want to keep.
Consider mortgages, debts that home owners secure using their houses and condos as security. The median worker did not see figure 2 as it developed in the 1980s or the developing split of the American economy that was already under way. Instead, working families had increasing trouble trying to continue the spending habits they had developed before. In terms of figure 2, they acted as if the earlier sharing of growing national production had continued unchanged.
How could these workers continue to increase their spending trends as their earnings stagnated? By relying on their largest asset, their homes. House values rose in the 1970s, and public policy encouraged home ownership for everyone. It seemed only natural to remortgage your house as its price rose to get the resources to support your previously increasing lifestyle.
As with the political decisions of 1971, the actions by individual workers took a while to affect the whole economy. The aggregate impact also was delayed for a decade as economic policies in the Clinton administration led workers’ earnings to resume their rise temporarily. Only after the start of the new millennium did the increasing demand for mortgage income run up against the aggregate supply of houses. It led to a large housing boom that collapsed spectacularly in the 2008 financial crisis.1
The fall in house prices and collapse of the credit markets left households with massive debts—often more than the value of their houses. Mortgage default normally is considered a problem for each individual, but the accumulation of household debt, which doubled relative to income after 1980, was encouraged by government subsidies through tax deductions, guarantees from Fannie Mae and Freddy Mac for home mortgages, and the stagnation of working incomes. The accumulation of mortgage debt has impeded personal expenditures, depressing consumer expenditures after the crash. The result is that employment has remained low since the 2008 financial crisis due to low consumer spending.2
Mortgage relief would promote prosperity better than standard fiscal policies because it would help people most likely to increase spending. This can be seen by looking at the location of spending changes. The net worth of the poorest fifth of the population vanished in the crisis and rose to less than one-quarter of its previous value in the recovery. The net worth of the middle fifth—still in the low-wage sector—fell and rose, but still remains only three-quarters of its previous value. Consumption fell furthest in states where housing prices decreased the most, and the consumption rebound has been much weaker in these same states.3
A report to Congress describes how plans to relieve mortgage problems after the 2008 financial crisis went astray. Congress included mortgage relief in the law authorizing the Troubled Asset Relief Program (TARP) in 2008. The government announced in early 2009 its housing program, entitled the Home Affordable Modification Program (HAMP). Money was allocated for the modification of home mortgages, and mortgage holders in trouble were invited to apply to HAMP for help. But only a small proportion of the money was spent and few potential homeowners were helped. The problem was that the banks involved with HAMP rejected more than seven out of every ten homeowners who applied. Citibank denied 87 percent of its HAMP requests. JPMorgan Chase rejected 84 percent, and Bank of America rejected 80. The banks holding the mortgages refused to write them down even when subsidized by the government—and the government did not enforce and impose this obligation on them.4
This should not have been a surprise. HAMP was designed to help banks rather than underwater debtors. Timothy Geithner, then Secretary of the Treasury, admitted, “We estimate that [banks] can handle ten million foreclosures, over time. This program will help foam the runway.” Just as planes cannot take off from foamed runways, homeowners cannot get relief from their accumulated debts through HAMP.5
Banks and other financial institutions are owned by members of the FTE sector. They are owned by plutocrats or even smaller and richer subsets of the rich. These institutions can be highly levered to make more money, assuming that the greater risk does not harm them, and their balance sheets may be positive only in theory. Their balance sheets changed in the 2008 financial crisis to become negative when some of the assets were found to have little value. The problem of nonperforming loans affects banks and other financial institutions both in America and Europe.
The story of educational debt described in chapter 4 is similar, although these debts are concentrated in the low-wage sector. Public support for public colleges and universities has been declining since the 1980s. When states get into financial difficulty in a recession or similar cause, it is easier to cut support for higher education than to lay off police. Public funds for state colleges and universities have decreased in a series of downward steps.
Public colleges and universities have become more and more private, as the private public oxymoron expresses. Private public colleges need to charge tuition to stay in business, and students have seen the cost of college rise rapidly. The result, as described in chapter 4, is a massive growth in student debt.
Mortgage and educational debt are parts of a single problem. The accumulation of these debts was promoted by public policies, subsidizing mortgages and withdrawing public support for college education. And they have left consumers in the low-wage sector burdened with debts that inhibit their spending. Government policy to reduce this debt and increase household net worth would be more effective than traditional fiscal policy in restoring prosperity to America. But the problems of debt relief are suggested by the difficulties of HAMP. The government, run by members of the FTE sector, has been unwilling and unable to pressure organizations owned and operated by members of the FTE sector to engage in programs to help people in the low-wage sector.
People with massive debts and debt payments do not consume very much. Debt payments take the cash they would have used for consumption, and debts discourage efforts at family formation. The mortgage and education debts are large enough that they may be affecting the national income. Economists have disputed the cause of slow growth in the United States and asked if the cause was due to a shortage of supply or demand. Low consumption due to debt is an additional argument for the demand side.6
Interest rates are at record lows, where they have remained since the 2008 financial crisis. It is the perfect time for business firms to borrow and invest in new plants and equipment. They are accumulating cash instead of making new investments because demand is low; they fear they will not make a profit from new investments. Demand is low because people with massive debts from mortgages and education loans do not have enough money left over from servicing their debts to buy new objects or furnish a new abode. The economy may grow more slowly in the future because of problems in the supply of innovations or the low growth of population; it is growing slowly in the short run at least partly due to FTE policies that deny debt relief to members of the low-wage sector.7
High aggregate demand leads in turn to high demand for workers, and this leads in turn to rising wages in the low-wage sector. As President Kennedy said, a rising tide lifts all boats. It does so slowly in a dual economy, but aggregate demand is important even in a dual economy. A low unemployment rate is not a good measure of aggregate demand when demand has been low for a while because the unemployment rate only counts workers actively seeking jobs. In a long slump, workers get discouraged, cease their fruitless job searches, and are not counted. The participation rate that measures how many of the available population is at work gives a better picture. This rate has been declining since 2008.8
This chapter concentrated on personal debts. But we should not leave this subject before saying a bit about our national debts. I do not refer here to the stated national debt that the very rich are intent on reducing; that is not a problem, and servicing the debt requires only a tiny bit of our federal budget. Instead, it is important to recall the commitments the federal government has made to the low-wage sector. These are the products of the New Deal of the 1930s and its extensions, called the New New Deal more recently. These obligations were accepted by the federal government, that is, enacted into laws and sustained by courts. Unlike personal debts, these programs are not now a problem, but the FTE sector and particularly the very rich are working to renege on the government’s obligations.9
The impact of a dual economy on Social Security debates illustrates this effort. The discussion of Social Security in chapter 6 revealed how hard it is for voters to understand what is going on. One part of this discussion is clear and informative. Social Security taxes are levied on wages up to $118,500 at the moment. If this cap on taxable wages were eliminated, the financial problems of Social Security would vanish. The cap was introduced in the 1930s and covered almost all wages. Now it stands near the division of the American economy into two sectors. If the cap on taxable income were removed, that would be a tax increase imposed largely on the FTE sector. People who rely on Social Security to maintain their income as they grow older in their retirement are largely in the low-wage sector.
This solution, which has ease and perhaps fairness to recommend it, is politically difficult. Members of the FTE sector oppose new taxes vigorously. Politicians supporting the FTE sector invoke a sense of impending disaster to obscure the nature of decisions to be made. Instead of a calm discussion of the best way to fix Social Security, we are likely to have highly charged political debate on whether benefits to recipients should be cut. As explained earlier, that will be the eventual effect of inaction.
The recent history of the Affordable Care Act provides another example showing how the dual economy affects government policies. The Supreme Court stopped short of declaring the act unconstitutional, but it said that the federal government could not force states to expand Medicaid. This program is designed to help members of the low-wage sector. It also has been vilified as serving African Americans even though they are a majority of those served in only a few states. Given the Supreme Court’s decision, several states opted not to expand Medicaid even though the federal government would pay the whole cost for three years and 90 percent after that. As described earlier, the geography of states that refused to expand Medicaid as a free gift reproduced the Confederacy with a few additions up the Mississippi River. And Aetna, one of the largest health care providers, reduced its participation in the Affordable Care Act when the federal government denied its attempt to increase its market power by buying one of its rivals.10
These economic policy measures show how the leaders of the FTE sector ignore the needs of the members of the low-wage sector. A recent political action reveals both the pervasiveness of the dual economy and how the economic division is connected firmly to race. The Voting Rights Act of 1965 was passed in order to complete the integration started by the Civil Rights Act of the previous year. Giving all Americans the vote could lead to policies that would benefit all Americans. It would help the United States to become a democracy.
The Voting Rights Act was reauthorized by a succession of administrations of both parties and wide majorities in Congress, but the Supreme Court decided in Shelby v. Holder that the preclearance requirements that some states—mostly Southern—needed for voting rights changes were based on old data and placed an unconstitutional burden on these states. The result was an immediate explosion of state actions to restrict voting in various ways. These actions have been contested as illegal, but the legal cases are of course subject to the dictates of the Supreme Court.11
Shelby County v. Holder was decided in a 5–4 vote—as was Milliken v. Bradley—with Chief Justice John Roberts in the majority. Roberts clerked for Nixon appointee Justice Rehnquist, worked in the Reagan administration, and was appointed to the Supreme Court by Bush in 2005. His career has been intimately connected to Nixon’s Southern Strategy, and some people have seen this consistency as part of a continuing conspiracy to roll back the accomplishments of the Civil Rights revolution of the 1960s.12
An implication of the dual economy model is that the FTE sector operates independently of the low-wage sector. If substantial parts of the low-wage sector in addition are not able to vote, then the neglect of the interests of the low-wage sector will not be represented in the political process. Present trends will continue and perhaps accelerate. The federal nature of the United States means that if a block of states operates with restricted voting, this block can have a powerful effect on national policies, as it did a century ago.
The FTE sector and the very rich assert over and over again that we cannot afford to spend money on education and infrastructure; we must instead reduce the national debt. They idolize Reagan, but ignore the massive federal debt he created. The drumbeat goes on despite the enormous decrease in the federal deficit that has taken place since the financial crisis of 2008. Yet, as noted earlier, military expenditures are exempt from this directive. As in the eighteenth century, the function of the state is confined to defending the realm. We have been involved in wars in and around the Middle East for thirty years.
Our military involvement in the Middle East was stimulated by the OPEC action that raised the price of oil dramatically in 1973. Nixon, the initiator of so many policies that led to the dual economy, proclaimed “Project Independence” to secure cheap oil for America. George W. Bush massively increased our military involvement by invading Iraq in 2003. We have spent more than three trillion dollars on our Middle Eastern wars, and there is no end in sight. We continue to spend massive amounts of money dropping bombs in the Middle East with no apparent aim or end. And the richest part of the FTE still keeps saying we cannot afford to spend money on programs to help prisoners and urban schools, repair and improve infrastructure, or provide debt relief.13
The war in the Middle East will not end any time soon; its current phase was initiated by George W. Bush’s willful invasion of Iraq in 2003: “ISIS can be seen as an extension of AQI [Al Qaeda in Iraq], which was itself a creature of the 2003 U.S.-led invasion of Iraq and its aftermath. ... The organization [ISIS] has tapped into the communal rift that grew after the U.S.-led invasion of Iraq in 2003.”14
Our military activities, however, are far from the eighteenth-century pattern. They are instead a massive example of the private public oxymoron. The United States military increasingly outsources its functions to private military firms, which grew rapidly after 1990. About six thousand firms like Kellogg, Brown & Root, a division of Halliburton, employ twenty thousand private employees to perform military functions. While their main activities are in construction and transport, they suffered almost one thousand casualties in Iraq by 2005. Kellogg, Brown & Root is thought to have had an Iraq contract of $13 billion, large enough—if redirected to purposes within the United States—to have massively beneficial effects on, say, inner city schools.15
This military activity is supported by the American arms industry that promotes government spending on the development of new weapons and the export of arms to troubled parts of the world. The arms industry uses all the means described in chapters 6 and 7 to advance their interests. They finance think tanks that promote military action, and they donate to the campaigns of congressmen. As described earlier, these paths to political power are not visible to many people; the names of think tanks do not reveal the source of funding. Their effectiveness however provides additional evidence for the Investment Theory of Politics.16
The recent growth of jobs illustrates possible effects of spending on domestic rather than foreign military activities. Middle-income jobs, which have been growing slowly for years as shown in figure 4, grew faster than high- and low-paying jobs from 2013 to 2015. The job growth was “primarily in fields like education, construction, transportation and social services.” Median income rose over 5 percent in 2015, and the growth was seen in black, white, Latino, and Asian families. In fact, median wages rose more rapidly from 2010 to 2015 than in the recoveries from previous recessions. If the FTE sector were to support domestic activities, the middle class would not vanish as quickly as the long-term trend suggests.17