Letter from the US: Wealth inequality grows fives years on from Lehman collapse

Two related anniversaries were marked this September.

The first was the collapse five years ago of Lehman Brothers, which came to symbolise the financial crisis, the subsequent Great Recession, and the anemic recovery.

The second was the upsurge of the Occupy movement two years ago in response, which popularised the idea that the richest 1% are the enemy of the rest of us. This slogan has taken hold in mass consciousness ― an enduring legacy of Occupy.

The divide between the wealth of the 1% and the rest of society is now at its highest since the government began collecting such statistics a century ago. The gap is even greater if we look at the 1% versus the working class, which makes up the majority of the 99%.

The wealth gap reached a peak in 1928, on the eve of the Great Depression. A comparable peak was reached in 2007, on the eve of the Great Recession.

In the years since the end of the end of the recession in July 2009 (using official figures), the gap has grown. Up to last year, the top 1% had captured 95% of the income gains in the recovery.

The inequality is even evident among the 1%. Sixty percent of the income gains went to the top 0.1%.

The top 10% scooped up half the nation’s income last year.

Meanwhile, the median wage (half above, half below) keeps dropping. The median household income (which includes two-income families) is 8.3% lower than in 2007.

Since these figures include better protected higher paid workers and management, the drop is greater for most workers.

There are no countervailing forces to reverse these trends in the immediate future. We can expect the wealth gap will continue to grow in the years ahead.

The 1% recovers

Unlike in the present recovery, the wealth gap did not grow in the period of the 1930s after the crash. The reason for this difference is that in the 1930s, there was the largest labor upsurge in United States history.

Powerful industrial unions were formed, and their strength continued in the three decades after World War II. They won significant gains through struggle.

Since then, organised labour has declined significantly to the point where only 6%-7% of workers in the private sector are unionised. Public workers and their unions are weak and under attack.

In this recovery, there simply is not the working class power to counter the rapaciousness of the ruling class. As a result, the wealth gap continues to grow.

There has been a spate of articles in the press about the growing income gap, including in the New York Times and Financial Times, as well as in books by pro-capitalist economists. None put forth any serious proposals to alleviate the situation.

President Barack Obama himself referred in a recent speech to the “1%” and even to the “top 0.1%”. But beside bemoaning inequality and blaming the Republicans, he has not made any serious proposals to deal with the situation.

At the bottom, tens of millions are near or below the official poverty line. Since the 1970s, wages have fallen for the bottom 20%. This has accelerated in the aftermath of the financial collapse.

Census data shows that nearly one in two Americans are now classified as low income or lives below the poverty line, itself set arbitrarily low. More than a third of African American and Latino children live in poverty, often in hunger.

A new book by Sasha Abramsky, The Other American Way of Poverty: How the Other Half Still Lives, chronicles many of the poor’s stories across the country. It updates Michael Harrington’s book of 50 years ago, The Other America.

One story he tells sheds light on the fragile nature of the so-called safety net ― that of Megan Roberts. This story predates the crash. Roberts and her family had been on Medicaid, a medical insurance program for poorer workers.

When her husband got a raise of US$1 an hour, that ironically made things worse.

In Roberts' own words: “The dollar raise knocked us off [subsidised] housing. We went from $612 rent to $1030 rent. It knocked us off food stamps, so we did not get any food assistance whatsoever.

“We had no Medicaid at that point because the dollar pay raise knocked us off that. It left us hanging. He [her husband] was only going to get private health insurance through his work. It would have taken effect January 1, 2006.

“But I got sick December 12, 2005. So we were left with this bill. We ended up having to ― I believe it was April 16, 2006 ― we filed for bankruptcy.”

A modest proposal the 1% hate

The immediate cause of the financial collapse was the bursting of the housing bubble. With the collapse in employment and income in the Great Recession and its aftermath, millions of workers were unable to keep up with their mortgage payments on their homes, and the banks foreclosed on them.

About three million homes still are in danger of being seized through foreclosure.

In addition, there are millions of homes “under water”. That is, the price paid for them through mortgages during the bubble is higher than their market price now.

Many people living in these homes continue to pay their mortgages, which are still at the bubble price. They cannot pay off their mortgages by selling their homes because the selling price is much lower than what they owe.

The city of Richmond, part of the San Francisco Bay Area, came up with a plan to help such people stay in their homes and avoid foreclosure.

Richmond would pay the holders of these mortgages (often “bundled” and sold by the original lenders) the fair market value of the homes. This would be the same amount the mortgage holders would receive if they foreclosed and sold the homes on the market.

The city would then set new mortgages at the new fair market price, which would mean lower mortgage payments for the homeowners, and help save them from foreclosure.

This would also help the city economically, both by putting more money into the hands of the homeowners, and by stopping home values shrinking further.

If the mortgage holders refuse to sell, the city could use eminent domain to force the sale, at the market price.

It should be noted that this whole modest proposal is based on the rules of capitalism and the market. Everything would be paid at current market prices.

The Obama administration could have done this on a national scale early on and averted much suffering, but did not.

Big finance capital raised a storm of opposition to Richmond’s decision. Wells Fargo, Deutsche Bank and Bank of New York Mellon filed suit against the city, saying the proposal violates protections against impairing private contracts.

They also hired a public relations firm to launch a propaganda blitz aimed at the residents of Richmond, charging that the proposal would lower property values (the opposite is true). Some opponents have called it “socialism”.

As a result, the struggle has broken into the national media, and taken on national significance. If Richmond prevails, other cities might follow suit.

When the laws of the market benefit the rich as they do almost all the time, they are all for them. If workers can use market prices to make even modest gains, the rich are against it.

[Barry Sheppard was a long-time leader of the US Socialist Workers Party and the Fourth International. He recounts his experience in the SWP in a two-volume book, The Party — the Socialist Workers Party 1960-1988, available from Resistance Books. Read more of Sheppard's articles.]


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