Closing the Wealth Gap

In my previous blog post, I addressed the fact that over the past several decades the gap in wealth, especially that between whites and people of color, has increased enormously. This has been the prolonged trend despite the passage of novel social welfare programs meant to tackle the issue of urban poverty amongst racial and ethnic minorities. It is interesting to note that this stunt in progress has occurred despite the shift in the type of social welfare policies that began to be implemented during the Civil Rights Era. During this time period, civil rights advocates urged for more laws to be established that protected the rights of specific, underprivileged minority groups rather than the universal rights of all citizens. It is easy to assume that this narrowing of scope would result in an increase in the efficacy of these anti-poverty programs because they were now designed to target racial and ethnic minorities, who made up a significantly large percentage of the poor at the time (and still now). However, these poverty and discrimination alleviation programs did not resolve the issue of the increasing wealth gap given their lack of public support and their inability to provide sufficient outreach to impoverished African Americans.

Welfare programs that were, whether de facto or de jure, racially based tended to become stigmatized by the white, usually wealthier, social classes. African Americans heavily used programs that were intended to enhance the universal rights of all American citizens, such as those entailed in Lyndon B. Johnson’s Great Society program. However, this only happened to be the case given the fact that past discrimination made blacks more susceptible to poverty. Since these racial minorities utilized these programs, they were increasingly perceived (by the white public) as intended solely for poor blacks. Consequently, some white taxpayers began to feel more resentful about these programs since they felt their money was only going to the benefit of minorities, rather than people of their same racial background as well. This lack of willingness to share their wealth with those that need it most – even if they come from a different background – led to the phasing out of these social welfare programs.

Moreover, even when these social programs were sufficiently funded, much of the aid for these in-kind service programs were provided to those racial minorities who were of middle-class and even upper-class income. This problem originated from the fact that many of the these programs that were utilized in the second half of the twentieth century, such as affirmative action policies for both professional employment and educational purposes, were focused on establishing equality of opportunity rather than equality of condition. Equality of opportunity is the condition in which all peoples are provided with equal access to the tools that they need to earn and establish social mobility, such as formal education, a sufficient income, etc. Although these types of social welfare programs created a type of “free market” in which African Americans could now strive and compete for the same positions and resources that many whites had, it did not account for the fact that these two parties were yet to be on equal playing fields. Although programs were established to – theoretically – abolish racial discrimination, middle- and upper-class African Americans still had the unearned privilege of having ample financial resources compared to the black underclass. Under these conditions, those individuals who needed the benefits of these welfare programs the most (i.e.: the African American underclass) were deprived of these positions and services by wealthier blacks that seemed “better qualified,” to receive the benefits of affirmative action policies.

Trying to reconcile the biases present in race and socioeconomic class identification creates the quandary that is currently present in the affirmative action debate. One of the primary arguments against race-based affirmative action policies is the idea that, if the people of color that need the most aid from such policies are of low-income, why not make the eligibility requirements for these programs strictly based on income rather than race? On one hand, I think it is important that race is taken into account when establishing certain welfare programs. By recognizing that communities of racial and ethnic minorities have faced multi-generational hardships as a result of institutionalized discrimination, policies such as affirmative action work as reparations for past misdeeds made by the American government. On the other hand, if the goal of some of these policies is to ameliorate poverty, then policymakers must find a way to  (1) take into account and help poor whites and (2) ensure that middle- and upper-class African Americans do not take away welfare benefits from low-income African Americans. This can only be done if socioeconomic class is considered more heavily as a factor in these affirmative action policies than is race. This suggested approach is beneficial because it acknowledges that poor whites have racial privilege that translates to some economic benefits that blacks are not granted in addition to recognizing that one can still be white and underprivileged in regards to other aspects of one’s identity – in this case class. Furthermore, including income and level of wealth in these the public policy initiatives will provide more opportunities for poor African Americans to take advantage of these programs while also giving wealthier African Americans, some but not all of the benefits that these social welfare programs can provide.

Closing the Wealth Gap

Race and the Wealth Gap

During the last several decades leading into the twenty-first century, a hodgepodge of policies were enacted in order to bridge the wealth gap between whites and racial minorities, specifically African Americans. Innovative programs of the New Deal, Fair Deal, and Great Society, for example, were meant to equalize economic opportunities across all races in order to ameliorate poverty. Nevertheless, American society witnessed during this time an incongruous increase in the stratification of wealth and income and a deepening concentration of poverty and racial disparities. The primary contributing cause for this stunt in economic and social progress was the presence of conservative and disinterested political groups that hindered the efficacy of these public policy initiatives by either by limiting the outreach of new social programs to needy racial minorities or by enervating these programs of the power needed to enforce anti-discrimination and anti-poverty practices.

To provide some background, during the later half of the twentieth century, urban centers were experiencing a bout of economic growth. Unfortunately, given certain conditions, racial and ethnic minorities were obstructed from taking advantage of the surge in new jobs created during this time period, thus leading to an increase in racial economic disparity. The urban job growth trend of the 1970’s and 1980’s occurred concurrently with a shift of the economy from a goods-producing industry to a service- producing industry. The increased focus on providing services to consumers lead to a subsequent straitening of job prerequisites, such that individuals had to have more education experience to be employed. This hurt the African Americans and Latinos that made up the wave of migrants who flooded into urban areas at this time, many of whom were young and had less professional experience. This increase in potential employees that lacked the skills to fill in these numerous opening positions lead to the creation of a labor surplus environment. During Nixon’s presidency, his Great Society entailed the implementation of welfare programs that was intended to ameliorate this labor surplus environment for all races.

Unfortunately, given the obstinate Republican Congress during Nixon’s presidency, many of the programs that were enacted in the Great Society plan were amended by Republicans such that the programs lost their efficacy and did not aid African Americans. These amendments were the results of compromises Nixon made with Dixiecrats (i.e.: conservative, Southern Republicans) who wanted to preserve Jim Crow conditions in the South. For example, new organizations such as the Federal Housing Administration were allowed to use racial restrictive covenants or practice redlining for quite some time in order to insure that recipients of housing welfare were racially segregated. The absence of racial integration in public housing complexes only exacerbated the conditions perpetuated by poverty because the social buffer that whites presented remained lacking. Moreover, cases in which racial discrimination occurred in housing were hard to report given the confinements that were placed on the Federal Housing Administration. For example, plaintiffs only had 25 days after signing their housing contract to file a case for racial discrimination. Even then, these cases could only be filed individually and the plaintiff – if found to be a victim of housing discrimination – could not make the defendant responsible for paying the fees for his lawyer. This made discrimination lawsuits both harder – and more expensive – to file and made them less impactful, since they were now individualized and could not be fought on a societal scale.

Blacks were also hurt in welfare programs in the New Deal and Great Society that sough to increase employment rates. In drafting law such as the National Industrial Recovery Act (NIRA), the Agricultural Adjustment Act (AAA), the Wagner Act, and the Tennessee Valley Authority (TVA) Act, lawmakers did not account for the historical, social, and geographical factors that could potentially disallow African Americans benefiting from these programs. For example, the NIRA was meant to restrict production in such a way that both the wages and prices of goods would increase. Although this act was meant to increase the economic prosperity industrial laborers, it ended up hurting many African Americans. The NIRA also included a clause that regulated minimum wage. The minimum wage increased so much that employers were dissuaded from hiring unskilled workers – many of which were racial and ethnic minorities – since their labor was no longer worth this new minimum wage. As a result, 500,000 blacks lost their jobs. The Agricultural Adjustment Act of 1933 was meant to aid farmers by lessening their workload so as to minimize their production and consequently maximizing their profit. However, by forcing farmers – most of who were white – to produce fewer crops, there was less work for poor, black sharecroppers. The AAA hurt black sharecroppers even more because they now had less money to spend on crops that were now increasing in price. Lastly, in creating programs that strengthened workers’ rights, the federal government made it easier for unions to be racist. The Wagner Act of 1935 did just this by legalizing labor union monopolies. After the passage of this legislation, unions such as the American Federation of Labor were able to create a cohort of skilled laborers that excluded the majority of African Americans workers, most of who were unskilled. This decreased the amount of representation that African Americans received in various industries and led to a disparity in working conditions in industries were the majority of employees were African American.

As a result of the unemployment of African Americans in a labor surplus environment and the inability of new welfare programs to aid them in areas such as employment or housing, African Americans became stuck in a spiral of poverty. Neoconservatives view poverty as the result of innate cultural denigration that is inherent of the African American community, which is one of the reasons why wealthier blacks and whites moved away from these communities. However, in reality poverty resulted from the inability of blacks to actively participate in the nation’s workforce. Ideally, what needed to occur to avoid these problems was for the Dixiecrats not to have deprived these welfare programs of their administrative power and for some of these policies to have specifically targeted racial and ethnic minorities such as African Americans. This shift from universal welfare programs and public policies to narrower, identity group- specific policies will be discussed more thoroughly in my next blog post.

Race and the Wealth Gap

Poverty in Racial Terms

In my previous blog post, I made note of Daniel Patrick Moynihan’s “Benign Neglect” memo to President Nixon. Although I appraised the work for assessing poverty through both a quantitative and qualitative lens, Moynihan still fails to accurately depict the living conditions and supposed, “progress” of the African American community. I believe that this shortcoming was, in part, a result of Moynihan’s inability to make connections between the racial identities of the individuals he studied and their economic statuses. To a certain extent, Moynihan views the relationship between poverty and the African American community as coincidental rather than as a trend that is motivated by an underlying sociological force such as institutionalized oppression. In order to avoid Moynihan’s blunder and develop a more truthful depiction of how poverty emerges and is perpetuated in contemporary society, individuals should measure and describe poverty in both economic and racial terms.

One characteristic of Moynihan’s analysis that may have led him to neither see nor note the distinct presence of poverty plaguing the African American community is the absolute, not relative, lens he used to assess poverty. Absolute poverty is defined as the state of being unable to subsist, whereas relative poverty is the inability to attain the minimum respectable standard of living in a particular society. If Moynihan implemented a more relative assessment and compared the levels of poverty of whites to those of African Americans, he would have surely been able to note the apparent disparity in wealth between the two groups. For example, in 1963, average white family wealth surpassed that of African American families by $117,000 (in 2013 dollars). Although the wealth of the country as a whole has increased since that time, the disparity is aggregating as well. In 2013, white families amassed an average wealth $500,000 more than that of both African American and Latino families. In observing cases such as this and noting that white families are the majority racial group in the U.S., one can assuredly claim that African American families are impoverished relative to the standard of wealth in the U.S., both during the 1960’s and today.

Race should be considered a factor in economic studies because social, cultural, and historical contexts intertwine to impact the financial status of certain identity groups. Take for instance, the long-term and multi-generation effect of racism on current African American communities. It is impossible to completely separate the racial factors from economic or political factors when assessing poverty. When discussing racial factors, the focus should be placed on institutionalized racism rather than on personal, race-based prejudice. Political scientist Michael Harrington explains this claim more succinctly when he claims that “racism is too easy an explanation” for the issue of poverty, because it frames the economic and social hardships of African Americans as a result of the racially prejudiced mindsets of some white Americans rather than as a result of an “occupational hierarchy rooted in history and institutionalized in the labor market.”

In the book American Apartheid, Douglas S. Massey and Nancy A. Denton provide an example of how interconnected racial, political, and economic factors are in the creation of poverty. Massey and Denton explain that the perpetuation of the African American underclass in inner cities in the 1960’s was an immediate result of the clustering of wealth in certain geographical areas of America. One must note, however, that this shift in the economic disposition of the country resulted from racism against African Americans, specifically from both segregation (de jure and de facto) and discriminatory practices in employment. These legal hardships evolved into a political dilemma when these geographical divides excuse white politicians from passing legislation that would aid the socially isolated African American communities in urban areas. After coming to terms with the multifaceted design of poverty, a more expansive definition of poverty can be introduced. Poverty can be described as the state in which one’s financial status, along with social and political status, impinge upon one’s freedom to live well and independently. It is evident that the clustering of wealthy, white men in areas throughout the United States is a detriment to African Americans because this social isolation from more privileged individuals ultimately leads to a behavioral reaction in which aberrant behavior (e.g.: excessive drug use, gang violence, etc.) is exhibited, and even esteemed, by those in the inner-city underclass.

If government officials can agree that race should be incorporated into the study of poverty, how should they incorporate in into public policy that is designed to ameliorate poverty afflicting the underclass? What are the benefits and disadvantages associated with public policies that target specific marginalized communities rather than universal groups? It is apparent that race-based policies alone cannot abolish poverty in the United States, as there are many impoverished individuals who are white. Furthermore, considering that some of these public policies are grounded in the idea of anti-discrimination, would it be just to enact policies that would aid wealthy and educated blacks, a minority group that is not in need of government financial assistance, and not poor whites? I will begin to answer these questions in my next blog post as I discuss the material I am currently reading in Ira Katznelson’s When Affirmative Action Was White and William Julius Wilson’s The Truly Disadvantaged.

Poverty in Racial Terms

How Poverty is Measured Today

Many Americans have a limited understanding of what it means to live in poverty. Economics is the study of the manner in which individuals or parties handle scarcity, which is the circumstance that occurs when the availability of resources to satisfy a desire is insufficient in meeting that particular want. Given the aforementioned definition, poverty can be defined as the condition in which scarcity is so overwhelming that one is not simply deprived of luxury, but also of the resources necessary to live a healthy and stable life. This interpretation of the term poverty is a more qualitative description. Albeit this qualitative description, the ways in which poverty are measured in the U.S. today rely too heavily on quantitative measurement in the form of income and consumption.

In the United States there are three primary means of measurement to assess poverty, the Census Bureau Method, the Supplemental Poverty Measure, and the Consumption-Based Method. The Census Bureau Method utilizes a series of money income thresholds dependent on family size and structure in order to determine who does (or does not) live in poverty. These thresholds are constant throughout the nation and are not dependent on geographical location. If a family’s total income falls below the established threshold, then the family is officially impoverished. One can claim that the Supplemental Poverty Measure provides a more insightful and encompassing definition of poverty because it also takes into account the monetary value of the government aid low-income families and individuals have received. Lastly, the Consumption-Based Method defines poverty by looking at one’s consumption over the course of a given year.

Although some of these means of measurement incorporate factors that go beyond income, these standards are still heavily number-based in a way that provide an insubstantial description of poverty that neglects the influence of non-economical factors on the economy. To get an accurate representation of the state of poverty in the United States, poverty must be considered using qualitative factors as well. One example of such a novel perspective is seen in Daniel Patrick Moynihan’s, Counselor to the President for Urban Affairs, memorandum to President Nixon. The memo unofficially titled the “Benign Neglect” memo summarizes the cultural and living conditions of blacks such that Nixon would have some platform from which he could actively take charge against the issue of black poverty in the urban underclass. In tis case, Moynihan uses quantitative factors in the form of percentages and family income in conjunction with more qualitative factors such a description of the skewed family structures and dynamics in the black-populated, urban underclasses. Although there are some faults with Moynihan’s specific approach, I find his attempt to discuss poverty as defined by both quantitative and qualitative terms to be a more progressive and accurate description of poverty. I will discuss more in-depth the ways in which poverty ought to be measured in our current society.

How Poverty is Measured Today

Government Intervention and the Invisible Hand

The “Invisible Hand” is a concept coined by Adam Smith that is used to define any force – be it social, political, or economic – that brings an unbalanced market back to equilibrium, the point in which the price-to-quantity ratio in any producer-consumer transaction is equitable for both parties. This concept of the invisible hand implies that the economy is self-regulating. Some economists use these inferences as supporting evidence for their argument in favor of a laissez-faire economy. In this type of economy, government intervention would be regarded as unnecessary and detrimental because, as the invisible hand theory suggests, when everyone in a society pursues individual interests, the public good is consequently promoted in a way that is even more effective than if individuals’ initial and primary intent were to procure social wellbeing. However, there is a constraint as to how much power the invisible hand has in equilibrating the economy, whether it is in regards to timeliness, scope of reach, or the extent to which societal wellbeing is increased relative to individual welfare. Therefore, government regulation is necessary to optimize the effect of the invisible hand in regards to some of these facets.

One contingency that is consequential to depending on the invisible hand alone (i.e.: without government regulation) is that the benefit conceded to the public good is not always sufficient. In the case of Wal-Mart’s recent announcement to raise the wages of its employees, this decision, albeit beneficial when compared to the existing standard, is not one that will allow workers to be economically self-sustaining. Wal-Mart’s primary purpose in increasing their minimum wage to at least $9 an hour is to pursue self-interest, specifically to make itself a more worthy competitor in its contest against rivals such as Ikea or Costco, which have provided fairer wages to its employees for years. Wal-Mart has constantly been under fire for not providing decent wages to its workers, many of whom who must depend on government aid such as food stamps and Medicaid to live. Several articles and headlines focusing on Wal-Mart’s recent decision frame the change in such a way that the media over-appraises the company and such that people perceive this change as an act of altruism, when it is more comparably a reparation or a change that should have been enacted long ago. Overdependence on the invisible hand dissuades people from actively petitioning for desired economic reform. Moreover, if Wal-Mart’s employees were to truly benefit from the rise in wages, other amendments would have to be made to the system of labor in place there. Employees at Wal-Mart have admitted that they would not gain much from a rise in wage simply because they are not assigned enough hours of work. Government regulation could have worked in conjunction with the invisible hand and optimized societal benefit by ensuring that Wal-Mart raise its minimum wage sooner and establish a minimum (in addition with the already existing maximum) number of hours that part-time and full-time employees can work.

In contemporary society, time is money. That is why people suffer while the economy is in this transitory period of time in which the invisible hand is shifting it towards a state of equilibrium. Government intervention is the ideal solution at moments such as these because it can work alongside businesses to ameliorate the hardships of underprivileged individuals while the economy fixes itself. Furthermore, the government can call out businesses that abuse time for their own profit. This comment is made with the Ford Pinto scandal in mind. In this incident, the faulty Ford Pinto model was being produced and purchased for nearly four years before lawsuits were filed and the model was recalled. Unfortunately, numerous people were hurt or killed before then due to the design of the car, which although cheap, made the vehicle more susceptible to rear-end-collision engine fires. Despite being made aware of the fault prior to the sales distribution of the car, Ford conducted a cost-benefit analysis from which they used results to claim that producing the defected car and paying for the lawsuits would prove less of a financial burden than paying an additional $11 per car to correct the design flaw. This cost-benefit analysis is an unreliable executive tool for various reasons. First, it is wrong because the optimization of behavior through cost-benefit analysis cannot always be guaranteed given the constraint to Ford’s access to information. Ford will only collect information until the perceived costs of obtaining additional information surpass the perceived benefits and even then, this amount of information may not be enough to make a proper analysis. Second, the cost-benefit analysis is unreliable because it is unethical and goes against the pursuit of social good. One could claim that in this specific incident, the invisible hand did not bring this microcosmic economy back to equilibrium because the plaintiffs (i.e.: the victims of the car accidents or their families) received monetary compensation. The opposing argument exists, however, that equilibrium cannot be achieved in instances such as these because a dollar value can never be accurately placed on a human life. Government intervention is helpful in instances such as these because it can guarantee the incorporation of altruistic intent in businesses policies when there would have only been self-serving motives otherwise.

The final reason for which government regulation is necessary in the economy is that the concept of the invisible hand is based on the assumption that every decision a person makes is rational. Given that individuals are influenced not only by reason, but also by emotions and their surroundings, it is fair to question the efficacy of the invisible hand. There can be instances in which actions that are fueled by self-interest may not amount to societal benefit, but instead result in greed. Under circumstances such as these, the federal government can act as the mediator between self-interest and societal interest and produce a compromise that is fair for all. When it comes to answering the question of whether or not the government has the right to intervene in the regulation of the economy, one must define the purpose of an economy. Many texts describe the economy as the systems through which parties cope with scarcity, but these texts never define the end goal of these series of systems. Using the definition established by the 20th century neoclassical model, we know that the economy is a “collection of profit-maximizing firms and utility-maximizing households” where the primary goals are influenced almost entirely by self-interest. Other definitions, such as that provided by economist Alfred Marshall are a bit more optimistic in that he claims that the economy is an expedient through which poverty can be ameliorated so that people can focus more of their expenditure of resources on luxuries, such as augmenting their ethical and scholastic facilities. Overall, the extent to which the government ought to be involved depends heavily on how the purpose of the economy is described.

Bibliography

Ashraf N., Camerer C.F., Loewenstein G. “Adam Smith, Behavioral Economist.” Journal of Economic Perspectives—Volume 19, Number 3—Summer 2005—Pages 131-145. http://www.cmu.edu/dietrich/sds/docs/loewenstein/AdamSmith.pdf (accessed April 2, 2015).

Federal Reserve Bank of St. Louis. “The Role of Self-Interest and Competition in a Market Economy – The Economic Lowdown Podcast Series, Episode 3.” Federal Reserve Bank of St. Louis Webs site. https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-3-the-role-of-self-interest-and-competition-in-a-market-economy (accessed April 2, 2015).

Krugman, Paul. “Walmart’s Visible Hand.” The New York Times.March 2, 2015. http://www.nytimes.com/2015/03/02/opinion/paul-krugman-walmarts-visible-hand.html?_r=2 (accessed March 31, 2015).

Samuelson, Paul A. “Chapter 7: Economic Behavior and Rationality.” Economics: An Introductory Analysis. http://www.ase.tufts.edu/gdae/pubs/te/mic/3e/mic_3e_ch7.pdf (accessed April 1, 2015).

Tabuchi, Hiroko. “Walmart Raising Wage to at Least $9.” The New York Times. February 19, 2015. http://www.nytimes.com/2015/02/20/business/walmart-raising-wage-to-at-least-9-dollars.html (accessed March 31, 2015).

Government Intervention and the Invisible Hand