destabilizing stable economics

Author: Oscar Valdes-Viera

Trump’s Cuba Policy Will Hurt, Not Help Cubans

Trump’s Cuba Policy Will Hurt, Not Help Cubans

In a speech showing no regard to Cuban’s historical sensitivities, Trump announced from Miami that he was “canceling the last administration’s completely one-sided deal with Cuba.” By that he meant reversing from Obama’s policy of engagement with Cuba to the old sanctions-based approach. The decision has been extensively criticized, from both the […]

The Borrowed Science of Neoclassical Economics

The Borrowed Science of Neoclassical Economics

Another “Econ 101” story we hear in microeconomics classes is that, as consumers, individuals are always involved in a rational, hedonistic competition trying to maximize their own utility. The utility principle was brought to the forefront of the economics profession with the Marginal Revolution of the 1870s. The Marginal Revolution, the story […]

Removing the Blinders: Trump Voters and Racial Inequality

Removing the Blinders: Trump Voters and Racial Inequality

A friend recently told me that he voted for Donald Trump, despite the candidate’s racist approach, because racism is “something that hasn’t existed [in America] for sooo long.”

We know some groups of voters—e.g. the KKK—deliberately organized and voted not to “make America great again” but to make America white again. While we don’t know how many of this type there are, we know they couldn’t have elected Trump on their own. They had help from people like my college-educated friend, who thinks racism is confined to history books. This tells us a lot about the degree to which voters are misinformed. Millions of people decanted towards a racist candidate even though they don’t consider themselves to be racists. The election made it clear that there are enough people like my friend to get Donald Trump elected.

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Illustration: Heske van Doornen

In our last piece we discussed Dean Baker’s book, which shows that many policies and institutions disproportionately benefit the social elite, and in effect, further marginalize the already marginalized and perpetuate inequality. People of color have long been kept down by policies and institutions that favor the hegemonic class. Racism will not be an issue of the past as long as we have a rigged socio-economic system that systematically breaks down communities of people of color, concentrates poverty to their neighborhoods, cripples their educational opportunities, and limits their access to better incomes and wealth accumulation. The numbers below speak to such current racial disparities.


Wealth and income inequality

Figure 1 shows the disparities between selected races, in terms of wealth, income, home equity, and savings for retirement. As can be seen in the figure, in 2013 net worth for white households was almost 13 times larger than that of African-Americans and 10 times higher than that of Hispanics.

Figure 1. Median Household Wealth, Income, Home
Equity, and Retirement Savings by race, for 2013

Figure 1
Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Not only did whites hold more wealth, but whites also receive higher incomes. A black or Hispanic household in the middle of the income distribution is likely to receive only as much as 58 percent as its white counterpart. While the amounts of savings for retirement for average white households are 4 times larger than those for black or Hispanic.

White households not only have larger sums saved for retirement, but also over 54 percent of these households have some kind of savings. Meanwhile the percentage of black or Hispanic households with savings is considerably lower, as shown in Table 1 below.

Table 1. Percentage of households
with savings and home equity, by race for 2013

  Savings Retirement Savings Home Equity
White 54 57 70
Black 39 34 38
Hispanic 37 26 38

Source: Authors’ calculations per
The Survey of Consumer Finances (2013)

Table 1 also shows that average white households are more likely to have equity on their homes. While in 2014 homeownership rates for whites households was at least 26 percentage points larger than the other two groups analyzed here, making whites 1.6 times more likely to own a home—the principal source of wealth-building for most Americans.


Educational Attainment

People of color see their access to incomes and wealth building opportunities severely crippled by educational attainment. Figure 2 below offers a breakdown of educational attainment within each race, using household data. It shows, for example, that 77 and 87 percent of all blacks and Hispanics household heads have less than a College degree as their highest level of education, respectively, while 62 percent of white household heads have less than a completed college education. These differences increase for higher levels of education. As the figure shows, only 7 percent of blacks and 5 percent of Hispanics obtain a graduate degree.

Figure 2. Highest Educational Attainment of Household Head Within Each Race

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Source: Authors’ calculations per The Survey of Consumer Finances (2013)

Moreover, a college degree is not a guarantee of financial success in the future, at least not for non-white families. Even if they attend college, the median wealth return to college graduation for Black and Hispanic households is 9 and 8 percent, respectively, of the returns that accrue to white households, as shown in Table 2. Meaning that for every $1 in wealth that accumulates to Black and Hispanic families, white families accrue $11.5 and $13.33, respectively.

Table 2. Median Wealth Return to College Graduation, 2011

  White Black Hispanic
Median Returns to College $55,869 $4,846 $4,191

Source: Demos analysis of Survey of Income
and Program Participation (SIPP), 2011.


Mass incarceration

The rapid increases in incarceration rates in the U.S. beginning in the mid-1970s have disproportionately affected people of color. By 2008, African-Americans and Hispanics were being incarcerated at a rate 6 times greater than whites and they represented 58 percent of all prisoners, even though blacks and Hispanics only comprise around 25 percent of U.S. population. By 2010, 1 out of 3 high school dropout black male between 20 to 39 years old were imprisoned; compared to just 13 percent for whites with similar characteristics.

As an election-relevant impact of the era of mass incarceration, it is estimated that 1 in 13 African Americans of voting age are deprived of their right to vote as a consequence of voting restrictions imposed by twelve states, with the sole objective of disenfranchising individuals after they have completed their sentences; more than 7 percent of black adults are disenfranchised, while the same restrictions apply to 1.8 percent of non-African-Americans.

The result is that it is estimated that 1 in 3 black males born today is likely to spend some time in prison. And even after they serve their time, wages for black ex-inmates tend to grow 21 percent slower than those of white ex-inmates.


Red lining and exclusionary zoning

Exclusionary zoning and red lining are policies that effectively deny affordable housing and other services—e.g. banking, insurance, supermarkets—to certain groups of the population based on their incomes, race, or ethnicity. It has been widely reported how those policies make it difficult for people of color to find homes in good, safe neighborhoods with access to quality education, employment opportunities, and quality healthcare. The impact of these policies is the creation of race and income segregated areas, with poverty and wealth concentrating in different neighborhoods. It is estimated that a black person is over 3 times more likely to reside in neighborhoods with high poverty concentration than a white person, while Hispanics are twice more likely than whites.

A close reminder of how African-Americans suffer this issue is that the President-elect of the U.S. was investigated and eventually sued by the Justice Department for discriminating against potential black tenants in his company’s buildings; what The New York Times called “the color barrier of the Trump real estate empire.”


These are only a few selected facts, but there are many more; these facts are not as evident to everyone, nor do they capture headlines on TV and Facebook like, e.g., police shootings of unarmed African-Americans.

This piece does not address the reasons, causes, and policies that got us to this point. This is nothing close to a history of racism in America and these are by no means the only injustices that people of color suffer in this country. However, after seeing all this, it should be evident that racism is not an issue of the past—certainly not one for the history books. There are still many people today that lived in racially segregated states under the Jim Crow laws. They had to literally fight for their rights to vote, to access the same schools as whites, or just to sit in the front of a bus. We might not have legal Jim Crow-style discrimination anymore, but American institutions covertly retain remnants of the Jim Crow era. Meanwhile the rich and powerful have rigged American socio-economic institutions with a bias towards their class and race, perpetuating an oppressive system that pretty much defines our place in society according to the color of our skin and the class status of the families from which we are born.

Now, my friend, be careful with any “buts” you might want consider as retort. If you are still not convinced that there is a deeply-rooted-institutionalized race problem in America, then go further than this piece, be curious about it, turn to your black and brown friends—ask them about it, and hear what they have to say.

Post co-written by Daniella Medina and Oscar Valdes-Viera
Illustration by Heske van Doornen

Behind Optimism in the Economy, the Fed Fears the Next Recession

Behind Optimism in the Economy, the Fed Fears the Next Recession

After a two-day meeting concluding on Wednesday, Federal Reserve officials voted to keep interest rate unchanged at a target rate of 0.25 to 0.50 percent. According to Chairwoman Janet L. Yellen’s press conference, members of the Federal Open Market Committee (FOMC) feel they are closing-in on the Fed’s statutory mandate—to foster maximum […]

State of the Unions in the US Economy

State of the Unions in the US Economy

Debates about the disappearance of the middle class and the lack of opportunities for the majority of Americans have been at the forefront of the 2016 presidential election. However, discourse surrounding unions and ways to increase the bargaining power of workers are often overlooked in these discussions.These are integral components of the […]

Stability is Destabilizing

Stability is Destabilizing

In a recent  interview with Andrew Ross Sorkin, published in The New York Times, President Obama argued that the U.S. economy is in fine shape, despite public feelings that it might not be. Then a few days later the same newspaper ran an interview with William C. Dudley, the president of the Federal Reserve Bank of New York, in which he foresaw continued economic growth. And like the president of the Richmond Fed, Mr. Dudley made the case for slowly raising interest rates because the economy is “on track” and global conditions are “dramatically better.”

The rhetoric coming from these top policymakers can seem rather soothing to most people, including many economists. However, we know that Hyman Minsky would have remained highly skeptical. In fact, Minsky famously argued that “stability is destabilizing,” and that is because periods of economic instability and recessionary episodes emerge naturally out of the normal functioning of a prosperous modern capitalist economy.

For  Minsky  the  nature  of  instability  is  linked  to  the  relation  between  finance  and investment in capital assets  during  the  business  cycle. Economic agents often compromise future incomes in order to secure the assets they need to undertake production. The accumulation of capital in the economy is largely financed by borrowing, which is recorded as liabilities on balance sheets. The liabilities represent a group of payment commitments on a future date, while the assets held represent a series of expected cash receipts from operations. The performance of the economy will later either validate or invalidate the structure of those balance sheets. Even though Minsky was talking about the capital development of the economy, his argument can be broadly extended to any economic unit; from a corporation borrowing to build its new headquarters to a person borrowing to buy a car or pay for college.

In his Financial Instability Hypothesis (FIH), Minsky identified the degree of financial fragility in the system by defining three income-debt relations for economic units: hedge, speculative, and Ponzi finance. For hedge financing units, the income flows from operations are enough to fulfill debt commitments outflows in every period. For units involved in speculative finance, the income flows are only enough to meet the interest component of their obligations and they will have to roll over debt because they cannot repay the principal. For Ponzi finance, the income flows from operations are not enough to cover the interest costs of their loans or the repayment of principal. Ponzi units highly depend on the possibility of refinancing their debt, otherwise they have to resort to the liquidation of assets or issuing new liabilities in order to meet their obligations.

The movement to more units engaged in Ponzi finance happens as a natural consequence of periods of stability and prosperity. During economic expansions, borrowers and lenders become confident in the ability of the former to meet cash commitments, which is a rational response based on recent past experiences and on the higher probabilities of success associated with the expansionary environment.

Thus, economic  units  are  not  likely to  have  difficulties  to  meet  their  payment commitments as they come due during economic expansions. However, such optimistic expectations  lead to  relaxing  lending  standards and  reducing margins of safety. They also validate riskier projects, the use of more debt relative to assets, and lower liquidity; all of which increase the fragility of the economic system (for more see here and here).

Borrowers and lenders seem to operate on a hit-or-miss basis; if a behavior is successful, it will be rewarded and it will be repeated. So the behaviors described above will continue, and in fact be encouraged, until the turn of the economic cycle. Thus, while the economy prospers, financial positions are becoming increasingly fragile under the stable surface. Indeed, according to Minsky, during prolonged periods of prosperity the modern capitalist economy tends to move from a robust financial structure dominated by hedge financing units, to what he called a “deviation amplifying system” dominated by abundant speculative and Ponzi financing units.  

The boom gives way to the bust when interest rates suddenly rise or when realized income flows fail to meet what was projected (note that economic units need not incur losses, but just have revenues depart from expectations – so basically any small shock to a fragile economy can potentially trigger a crisis). When the economic environment changes, income flows begin to fall and Ponzi units find it impossible to borrow to sustain their positions. They will then try to make position by selling out position; this means selling assets to meet their payments. The consequence of a generalized sell-off is to put downward pressure on asset prices, which can make the market prices too low as to generate sufficient income to meet the commitments – making this operation self-defeating. These dynamics, plus the excess supply, reinforce the necessity to sell and raise the real debt burden, leading to a potential Fisher-style debt deflation. These processes reset the system, starting again from a robust financial position – because all the fragile positions were washed off by the debt deflation – but will eventually give way to another crisis.

The idea that “stability is destabilizing” is summarized by Minsky’s two theorems of financial fragility in the FIH: (I) the economy has financing regimes under which it is stable (hedge) and financing regimes in which it is unstable (speculative and Ponzi); and (II)  over periods of prolonged prosperity, the economy  transitions from financial relations that make for a stable system to financial relations that make for an unstable system. In other words, the economy tends to move from a financial structure with abundant units engaged in hedge finance to a structure dominated by speculative and Ponzi units. The natural shift from hedge positions to speculative to Ponzi is a required condition for instability to arise, and, as explained above, the move (and the erosion of margins of safety) happens during periods of economic stability and prosperity. One of Minsky’s most important contributions was to point out that the process leading to an unstable system is an inevitable, endogenous, and evolutionary process of the modern capitalist economy.

So, what can we learn from all of this? Well, the next time you hear politicians or big shot economists talking about how stable the economy is and how on track it is, remember Minsky and remain skeptical.

Written by Oscar Valdes-Viera