Debt and Income Inequality

Share (%) of National US Income for Richest 1% (1974-2010)
Yesterday I posted about the Rolling Jubilee coming out of the Occupy Wall Street movement. As I noted in that post, I've been reading and thinking a lot about the issue of debt in light of the biblical witness.

Like a lot of Americans I've been pondering how America picked up the pieces in the wake of the 2007-2008 financial crisis. Specifically, the bad debt of Wall Street was bailed out but the debt of individual American citizens was not. An individual in debt is described as irresponsible and greedy. For example, they buy "too much house" for their income. But a bank that goes into debt is "too big to fail" and is subsequently bailed out. The bank is not blamed for being greedy in extending loans they shouldn't have extended. But loans entail risk, and if there is no risk (if a bailout is available) the bank has no incentive not to pursue greed. It's a win/win.

In short, there is a moral asymmetry in how we view debt.

And let's dig deeper into this. A lot of people blamed the mortgage crisis on low-income people getting loans to buy big houses, more house than they could afford. That was a piece of the puzzle. But surveys of the mortgage crisis have shown that these weren't the bulk of the loans that became distressed. Most of the loans that fueled the mortgage crisis were second loans on houses. In the language of some economists, what was going on was that many Americans were using their homes as ATM machines, taking out a second loan on the house to free up some cash. These, and not first-time low-income homeowners, were the bulk of the loans that became distressed.

Why were people taking out second loans on their houses? Two reasons. First, to pay off other debt (e.g., medical, school). Second, to experience facets of middle class life that were growing increasingly inaccessible.

Let me explain that.

Since the 1970s middle class incomes have remained stagnant or have declined. A certain standard of living that was financially accessible to the middle class in the 70s has been harder and harder to achieve. But this erosion of income, as it gradually shifted from the bottom 99% to the top 1%, has been largely masked and hidden from view. Masked and hidden by what?


As incomes fell or leveled off since the 70s households have held onto middle class lifestyles by going into debt. Either credit card debt or mortgage debt (those second loans on houses that fueled the housing crisis). And one could argue that the political and economic "powers that be" were more than happy to extend this line of credit to Americans because it masked the real erosion of income that was taking place. Debt kept the middle class docile, feeling like the American Dream was still a reality while it was fading rapidly away. The facade of the middle class was being propped up with debt. It was a house of cards waiting to collapse.

Here's a description from a NY Times editorial summarizing this research:
Recent research by economists from the International Monetary Fund and academia offers some new insights about income inequality, with important implications.

The researchers compared the top 5 percent of United States households from 1983 to 2007 with the remaining 95 percent. What they found is that as the rich got richer in the decades before the Great Recession, everyone else tried to maintain his standard of living by going deeper into debt. As income inequality grew over that period so did debt levels, because the rich increasingly invested their growing wealth in bonds and bank deposits, in effect providing money for ever more lending to the poor and middle class.

The top group’s increasing wealth, and the bottom group’s increasing reliance on debt, spurred the growth of the financial sector. But with ever increasing debt, the financial system — and the broader economy — became ever more vulnerable to crisis. 
What we are witnessing in all this might be described as captialism's version of debt peonage, with the rich lending to the poor leading to greater and greater income inequality and debt bondage.

The point here is that when Wall Street was bailed out a key part of the problem was never addressed: income inequality and the stagnation--since the 70s--of middle class wages. All that was "bailed out" during the financial crisis was a mechanism--debt--that has been used to hide income inequality to convince the middle class that it still exists.

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22 thoughts on “Debt and Income Inequality”

  1. Amen!  And the solutions are: a) thrift, which is a preaching of the law, which ultimately we can't keep, but it is still good and wise and b) some form of grace and reconciliation, a combination of repentance and absolution for past rapaciousness and a change to the system to stop the "extortion at the gates".  But how do you make that case in a naked public square? 

  2. I can't disagree that rising debt and growing income inequality created a toxic environment that contributed to the financial meltdown.  I would, however, suggest that much more nuance is needed in the viewpoint of the liberal economists you cite. 

    There is no doubt that middle class incomes have mostly grown at the rate of inflation.  That said, it's very dubious that a "middle-class lifestyle" of the 60s or 70s is totally unachievable by today's standards.  Compared to the middle class of the 70s or even early 80s, the middle class families of today live in MUCH bigger houses, have more televisions, computers, appliances, cars, and clothes, dine at restaurants far more often, consume more alcohol, spend more on private tutors and instructors for their kids, visit health clubs, and typically take much more elaborate vacations.  Remember when a vacation was loading everyone up in the station wagon to go camping - a la the Brady Bunch?  Today, a vacation needs to be at a "destination" with good restaurants, spa treatments, and usually be several hundred miles away.

    These are financial lifestyle choices that contribute to personal debt, but they are not life-supporting choices that decide if the lights will come at night on or whether there is food on the table.  Certainly, things have become harder for low-income households.  It's also no longer realistic for the high-school graduate to expect a guaranteed job at the local factory with benefits and a pension.  However, to suggest that the middle class went into debt due to some kind of running-faster-in-place Red Queen scenario is to also completely ignore the rampant consumerism of the middle class over the last 30 years.

    For what it's worth - while I personally have money in savings and am debt-free (beyond a mortgage), I'm TOTALLY guilty of buying into the idolatry of consumerism as much as anyone.

  3. Brian, your comments were balancing and insightful. However, as much as consumerism has us all throttled in its clutches, (all have sinned) it seems to me that institutions, which, some say really ARE persons, have to bare MUCH of the blame. No wonder big money people and institutions squirm And wiggle At scrutiny and regulation. Somehow, hiding under the God-ordained umbrella of capitalism, they assume that profitability is the ONLY game in town. Everything, I mean Everything meets checks and balances, accountability down here below. As balancing as your comments are, I just see quite a bit of victimization going on here. Jesus help us!

  4. The Times piece I cite has two recommendations: "The first step in restoring real stability to the economy is to lower
    the debt levels through what the researchers call “orderly debt
    reduction.” An example of that would be mortgage modifications. The
    second and more important step is to reduce income inequality by raising
    wages, possibly by strengthening collective bargaining."

    I also think reducing medical and education costs are key to securing the middle class. The Affordable Health Care Act is trying to bend the cost curve of the former, but something needs to be done about the cost of Higher Education as well.

  5. I notice there is a huge increase in top 1% wealth in the years 1986-88. Surely this is somehow concurrent with the film Wall Street (released in 1987), and that culture of greed?

    And surely some of this debt insanity is because some entirely new, hi-tech facets of middle class living have emerged. Today, there has to be a car for each adult, a flat screen in every room and an iPod in every hand. I guess Americans partly compensate by eating and dressing poorly, and stealing music from artists.

  6. I actually agree with all of your statements.  There is no doubt that the 1% fight against regulations and anything that would keep them from the "stuff" they feel entitled to.  While the economy, corporate profits, and CEO salaries continued to
    grow rapidly, wages among the rank and file basically indexed up along
    with inflation.  However, I would counter that the capitalistic greed by corporations (as embodied by Gordon Gekko) is an independent issue, albeit one that is not mutually exclusive, from the growing scale of personal debt among the middle class. 

    Dr. Beck made the argument that the middle class is getting hosed because income inequality prevents them from maintaining the same middle-class existence from the 1970s.  While there might be a nugget of truth there, it assumes that the middle class today would be happy with a 1970s existence.  I largely disagree.  GE, Bain Capital, Apple, or Wal-Mart never forced me to buy things I didn't need - greed did.  In our never-ending battle to keep up with those better off, many of us chose to go into debt to finance that bigger SUV, bigger house, third (fourth??) television, iPod/Pad/Phone, and the next trip to Disney.  I know I did.  These are things and the middle class didn't see as entitlements 30-40 years ago.  The middle class of today tries to live like the upper middle to upper classes of the 1970s.

    Now, finding ways to reduce health and education costs are necessary things because those costs have greatly risen and are necessary expenditures.  Finding ways to make more people qualified for refinancing their mortgages would ease some pain.  Raising wages such that people can save AND enjoy some of the benefits of a 21st century middle class is probably part of the solution as well.  Not because we are entitled, but because the American society needs a healthier, more educated, and more nimble population that doesn't rely on a high-school diploma and the assembly line factory job for middle class security.

  7.  I needed a home, and if Wall Street wouldn't have issued Trillions in fraudulent mortgages, my home would have been a lot cheaper.  Same thing with student loans, if Wall Street doesn't have its student loans backstopped by the government and non-dischargeable in bankruptcy education would be a lot cheaper. My parents who were factory workers in the 70's could pay cash for their house and their cars. Wages for the middle class need to skyrocket.

  8. Off-topic, but a word to Richard's fans in the Charlottesville area. He'll be speaking over in the Valley at Eastern Mennonite a week from this Friday. See you there!

  9.  November 30 at Eastern Mennonite University:

  10. The burden of the federal debt probably helped with the "too big to fail" bank motto.  There is no doubt, banks made off under this "deal" just as those who wrote the auto bailout did.  Remember that if a bank closes all funds are covered.  Well, if you don't have the billions and billions to cover all those bad decisions.....
      Then there is the hereditary fear of the depression.  Banks closing, factories closing, high unemployment, etc. We can't go through a depression again! 
      Well, tell that to the family whose income is being cut, benefits lost, the retired who have lost their pensions or health care, the loss of wealth in their home and on and on.
      The problem with a jubilee year is that many people (not all) would just return to their status quo.  The 'rich wouldn't get richer' if we did one major change in our lives:  Live within our means. 
      Stop buying a new IPod just because Apple says to.  Live in a smaller house.  Drive your car until it disappears due to rust (mine is 12 years old and still running).  Throw away and do not use credit cards ever again.  Do without.   If can't afford it, don't buy it.  Use cash everywhere. 
      I know not everyone is able to do this, for many life is a financial struggle, but if the rest of us rebelled against the consumerist mentality of new every year and buy buy buy, then the financial burdens would be less. 
      You can live without debt.

  11. As a middle class person, I take issue with what you have stated. If you were to take all of my debt, my mortgage and my educational loans, it would account for about 95% of my total debt. I know I'm not the only one hear. Many of the middle-class are striving to stay afloat, and it's not from greed. I can't be the only middle-class person who lives this way. So, to peg the middle-class as being as greedy as the executives of corporations mentioned above isn't fair to those of us who are the exception to your argument.

  12. Thanks for your comments, Richard. You help make a lot of this easier for me to understand.

    I do wonder if you really mean some of your rhetoric. "The bank is not blamed for being greedy. . . ." Have you watched T.V.? Banks are accused of greed all the time. Bailing out Wall Street was an awful move, unpopular among both Democrats and Republicans, that had to be done in order to avoid even greater suffering for the poor. Everyone held their nose while doing it, and immediately started trying to figure out rules that would kill "Too big to fail" and make sure that in the future we could let banks fail without crashing our financial system and causing even greater suffering for the poor. Of course, rich and powerful entities by definition have lots of money and power, which makes it a lot easier for them to find ways to pass the hurt on to others. . . . In fact, I'd say that in general we are QUICKER to blame corporate greed, bankers' greed, government spending, etc.--and fail to confess that we all have a problem with greed. Blaming this on income inequality is (in my mind) just another way of blaming someone else for the fact that I am not content with the salary I make.

  13. Somehow my reply to Ann didn't show up.  Nevertheless, there is ample survey and statistical evidence that American households now own more cars, more televisions, larger houses, and consume more food outside the home than we did 30-40 years ago.  I'm arguing from the long view - not the short-term picture that only looks at how the middle class is faring post-2008.  Yes, CEOs are greedy but I can't deny our own culpability in this.  Are these exceptions?  Sure - but plenty of economic studies and even the eyeball test will tell you that the standard of living for the middle class has grown over the last 40 years, even if there were big losses over the last 4 years.  Such growth didn't extend very well to the bottom rungs of society.  Poor people are not much better off than they were in the 1970s.  The gap between the middle and truly upper classes no doubt has expanded.

    No one can argue that education costs have skyrocketed as subsidies from state governments have plummeted and universities have added more administrators and amenities to handle so many more facets of the college experience - things the "customers" (i.e. students and parents) claim to want (e.g. coffee bars, workout facilities, upgraded networking, parking lots, better classrooms and labs, etc...).  While it's also true that many fewer people now qualify for loans, those that do can find interest rates at historic low points.  Compared to interest rates that hovered in the double digits during the 1980s, today's mortgage rates are cheap.

    Yes, people are struggling right now because we're still struggling to get out of the hole from 2008.  But go back and look at the original post by Dr. Beck.  He is examining the increasing levels of debt that was occurring long before 2008 and saying that the middle class existence of 1970 didn't survive.  In some respects, that's true because we wouldn't recognize a 1970s lifestyle.  Compare our standard of living now to that from 1975 or even 1980.  Very few people had cable,  Most people changed their own oil in their cars.  Nobody had microwaves, computers, and even color television was somewhat of a luxury.  Dining out was rare.  Starbucks and the $5 latte didn't exist. 

  14. Ann, 
    I read this post yesterday, felt the frustration you expressed here, and struggled to come up with an apt response.  When I looked here this morning for more insight I found your comment: I couldn't have said it better. You displayed real middle class reality- not the one fantasized by Neo-Con dogmatists and their cohorts of the Evangelical Right and Focus on the Family- an organization which has been utterly silent about what has really degraded family life i.e., 8-6 work days, and loud mouthed only about gay marriage (my family is affected by gay marriage how?).

    I share your frustrations in how so many Christians cling to obscuring simplistic dogmas as a way of life rather than enter the complexity that life truly is. I can excuse this way of life for the Neo-Con; but for those who claim to follow in the way of Jesus I can't excuse: His way exactly enters the complexity and confronts the simplicity embodied in the Pharisees then, and dogmatists today. 

    Thank you for expressing the complexity (reality) of the situation so eloquently.


  15. Strengthen collective bargaining.  NOW.  While you're at it, kiss your Twinkies and Ding Dongs goodbye.

  16. I'm not an economist or a theologian, just a simple dude, but I think it would be awesome if individuals, organizations and our governing bodies all agreed to spend less than we made. Our family made a real effort to budget last year, and it was like getting a raise in that we had more control of where our money went. We were able to pay all of our bills on time, enjoy the small things, and even give more since our funds didn't just "disappear".

    At the end of the day, no matter which party is in charge or what policies impact me in the decades leading up to my adulthood, I'm still responsible for my actions.  At least I think I am.

  17. Dr. Beck - Do you have any specific recommendations about reduce education costs? I know the cost of a particular West TX university that I attended has doubled since I was there. That was only a decade ago. Personally, I think adding more trade school-type classes in high school would be great. I came out of grad school in 2009 and I had more luck getting labor jobs than using my higher ed degrees.

  18. I've often wondered about federal grants to convert junior colleges into baccalaureate Institutions with students commuting locally. Sort of land grant colleges 2.0.

  19. There is also an interesting demand-side story here, that I would love to see someone pull together into a single narrative. During this same period, labor's share of income began to decline. Link:

    In essence, a large share of the money that would have been paid out as wages in the past was kept by investors, and then through the financial industry this money was lent out instead of being paid out. (I'd love to see a precise analysis of the flow of money if anyone has one.) The pattern is a macro-economic version of how debt slaves are generally created at a micro-level. If this money hadn't been paid or lent out, we probably would have seen a depression (a demand shortfall) and rising unemployment a lot earlier. On the other hand, if people had simply been paid their wages, instead of indirectly being lent them, we wouldn't have had a financial bubble and the following crash in demand...we would just have had sustained economic growth. The optimistic take here is that a depression is, in some strange ways, a great problem to have, even if it is a hard one to solve. The problem is that we have all kinds of people who could be working, and all kinds of investment capital looking for a place to be invested. The missing ingredient is demand...people just need the spending money so they can tell all of this potential, unused productive capacity what to do. It would be awesome if we could find a way to put this spending money in the pockets of the poor, and put it toward producing educational infrastructure, rule of law and physical infrastructure that enables economic efficiency, domestically and abroad. The jobs created would also have the benefit of being more meaningful and fulfilling than, say, polishing yachts.The novel question raised by industrial capitalism is: what do we do with all of the amazing increased productive capacity that is created by new technology and modern institutions? I know I'd like to see the machine make more stuff that meets the basic needs of poor people, instead of going to produce more corporate lobbying, propaganda, political power, a new aristocracy, and private jets. This "giving money to the poor" approach, sometimes connected with strings attached (such as sending children to school) is proving effective in various places in Central and South America. The current depression highlights even more acutely that we have the capacity to make this work.

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