Power to (Altruists Concerned With) the Poor?

by Larry Bartels on August 13, 2013 · 17 comments

in Policy,Political Economy,Political Parties

Ezra Klein wants you to know that the “conventional wisdom on Washington,” that “corporations win every fight and everyone else—particularly the poor—gets shafted,” is “wrong, or at least incomplete.” The “comforting” fact, according to Klein, is that the ”altruists” who champion the poor have “quite a lot” of political power, “at least in recent years.” Not the poor themselves, it goes without saying, but “the people, and the political party, most concerned” with improving their lot.

If this is an indirect way of saying that Democrats have accomplished some important things in the past five years, fair enough. In support of his view, Klein notes that Obamacare is scheduled to deliver a lot of very expensive health care to poor and working class people over the next decade, paid for partly with new taxes on top income earners. That’s true, and hugely important (though a significant slice of that expense reflects solicitude for insurers and health care providers—corporations).

Klein also notes that spending on food stamps has increased a lot. That’s also true, but less relevant, since the escalating cost is due to escalating need, hardly evidence of anyone’s political clout.

What Klein seems to me to be missing here is the big economic and political context in which class politics has played out “in recent years.” Here is what has happened to the net wealth of people at different points in the U.S. wealth distribution over the past decade (from a recent paper by Fabian Pfeffer, Sheldon Danziger, and Robert Schoeni):

wealth


Stop a moment to think about what those numbers are telling us. Millions of people in the bottom tier of the working class have lost, on average, 85% of their net worth. (Their average net wealth, which was already falling before the onset of the Great Recession, went from $6700 as recently as 2007 to $1500 in 2011). People even lower in the wealth distribution don’t appear in the graph because their net worth was negative all along; but in real terms, they have been hit even harder (at the 5th percentile, $39,000 in debt in 2011 as compared with $13,000 in 2007). Meanwhile, those near the top of the wealth distribution have been held harmless.

The story with respect to income is less dramatic, but qualitatively similar. From 2007 to 2011, the average real income of households in the bottom four income deciles declined by 9% (from $22,234 to $20,222), while the average income of households in the top 5% of the distribution plummeted from $311,524 to $311,444.

Against that background, it seems  more than a little bit obtuse to celebrate the “often overlooked” power of “the people, and the political party, most concerned with directly improving the lot of the poor.”

{ 17 comments }

Ryan Enos August 13, 2013 at 4:05 pm

Larry, I don’t disagree with your general assertion that the poor are relatively less politically powerful than than the rich and corporate interests, however, I’m not sure I agree that your data here is good evidence against Klein’s point (not that Klein’s evidence was great either). It seems like the relevant data would be something that shows the counter-factual of how the poor would fair if they did not have any of the programs that Klein cites – after all, it might be that the programs have actually caused the poor to be far better off than they would be without them and thus, arguably, represent political power. Admittedly, this would be difficult to demonstrate, but I think it is one of the relevant counter-factual.

Larry Bartels August 13, 2013 at 4:50 pm

For good evidence regarding the relative power of the poor and the rich, type “Gilens” in the search box above. But that is not Klein’s point, or mine. His point is that political allies of the poor (aka Democrats) sometimes win, or have done lately. My point is not that his point is wrong, but that it is “more than a little bit obtuse” in light of the broader economic and political situation. This is a difference not of counter-factuals, but of perspectives.

Ryan Enos August 13, 2013 at 5:01 pm

fair enough

Scott Monje August 13, 2013 at 4:13 pm

It might be quibbling, but there are plenty of people out there these days who, if they had more clout, would see to it that spending on food stamps did not increase merely because of escalating need.

LFC August 13, 2013 at 8:55 pm

In fact, iirc, the House Republicans recently managed to strip food stamp funding out of the big/omnibus agriculture bill. (And I haven’t followed what happened after that, though that particular action obvs. won’t go further.)

Alex Garlick August 13, 2013 at 6:06 pm

Larry,

Is the PDS graph exaggerated by the results of the financial crisis that pummeled the 401K’s of the working class?

(or also the “housing crash” as Klein himself just mentioned in a tweet: https://twitter.com/ezraklein/status/367402200055939072)

The decline of the lower tiers sure accelerates in 2007/8 .

Larry Bartels August 13, 2013 at 6:53 pm

I’m not sure what you mean by “exaggerated”–the financial crisis is what happened to people.
The paper I linked to includes another figure (2b) showing the same trends excluding real estate. In that one, people at the 95th percentile are 11% ahead of where they were in 2003 (though behind where they were in 2007); people at the 25th percentile have lost 99% of their non-real-estate wealth since 2003, and the decline is roughly linear (i.e., beginning well before the Wall Street crash).
For the latter group, we’re not talking about 401Ks, which these people never had. (The decline in wealth was from $2262 in 2003 to $25 in 2011.)

Nadia Hassan August 13, 2013 at 10:19 pm

I can see why Prof. Bartels would start with 2003, but one might argue that the housing bubble was starting. Would using 2001 or 2000 or the late 1990s change the overall picture much?

Nadia Hassan August 13, 2013 at 10:50 pm

*why Pfeffer, Danzinger, and Schoeni would begin with 2003. Figures 1 and 2 strongly suggest that the context has been dire for the lower income tier of the working class and the housing bubble per se is not the entire story, but it would be of interest to see a plot of net worth excluding real estate from an earlier date as well given the build up of household debt over that period.

Nameless August 14, 2013 at 2:05 am

I concur. 2003 is very nearly the peak of the housing bubble (it technically peaked in 2005, but bubble areas had their housing prices way out of touch with fundamentals already by 2003). Lower income groups saw disproportionate gains due to fictituous valuations of their real estate, compared to high income groups. In sufficiently bubbly areas, it was not uncommon to see households with $2,000 or less in liquid assets and $200,000 in unrealized capital gains. (It is quite normal for the bottom 50% to have less than $10,000 in stocks/savings/etc. ex 401k, and it was also quite normal for houses in low-income bubbly areas to gain upwards of $100,000 and sometimes upwards of $200,000 in valuation between 1997 and 2003.)

Larry Bartels August 14, 2013 at 8:54 am

There is no clear class pattern in the role of real estate in the wealth crash. For people at the 25th and 50th percentiles of the wealth distribution, more than 70% of wealth losses between 2003 and 2011 were in real estate; for people at the 5th and 75th percentiles, less than half; for people at the 95th percentile, big losses in real estate balanced by big gains in other assets.
More generally, there was no real increase in the net wealth of people at the 25th percentile at any point between 1984 and 2003; so if they were enjoying “fictitious” (more accurately, temporary) gains in real estate wealth, they were losing significant ground with respect to other assets even while the bubble was inflating.
Even more generally, if you don’t want to think about bubbles, crashes, or trends of any sort, please just focus on the fact that a statistically typical household in the bottom half of the wealth distribution in 2011 had $1500 in net worth , of which $1475 was illiquid (home equity). If this sounds like a “comforting” political system in action, then by all means carry on.

Nameless August 14, 2013 at 1:08 pm

The first statement is not hard to explain. People at the 50th percentile or below have very little liquid wealth and disproportionate amounts of fictituous real estate gains (compared to their incomes). For people at the 5th percentile, the impact of the housing crash is blunted by the fact that many of them don’t own real estate at all (they are primarily renters).

Yes, it is sad that people at the 25th percentile were not making any ground. It is sad that households at the 5th percentile have negative net worth (by the way, how much of it is student debt?) I just think it’s necessary to have the causation clear. The story is focused on the losses suffered by the lower classes in 2003-11, but these losses really originate further back and housing bubble only obscures some of the dynamics.

Rick Matland August 14, 2013 at 9:07 am

The high point of housing ownership was somewhere around 68% of families and that inflates the number a bit. If over 30% of families have never owned their homes, then it is hard to believe that “it was quite common for the low income to gain $100k to $200k in value.”. Certainly this happened but it wasn’t among the bottom 40%, instead it was the 30-40% above, between the 40th and 80th percentile where this happened.

I would quibble with Dr. Bartels on the food stamp program. The fact that it is not a program with a set budget that it uses and then shuts down (which is what Pell Grants do) but instead covers everyone who meets the eligibility requirements is hugely important and a sign that sometimes the poor are helped. Of course the Food Stamp program is being hammered and may not survive in its present form…….. Google Bob Dole/George McGovern to read Dole’s statement about working with McGovern on these issues (one of the classiest eulogies you will read and proof that sometimes people can work across ideological divide).

Wonks Anonymous August 14, 2013 at 10:14 am

If increased food-stamp expenditures is evidence of recession rather than political power, isn’t that just as true of declining net worth?

John P. August 15, 2013 at 5:17 pm

@Wonks,

Yes and no.

Yes, the recession hit everyone and wealth declined across all income strata. But, mere fact that wealth declined across the board due to the recession is irrelevant since the rate of decline in each percentile was NOT constant.

The 95% suffered little in the recession (0.004% decline in wealth) as compared to the 50% percentile (0.447% decline), and in turn, the 50% percentile suffered far less than the 25th percentile (0.847% decline). Why? That’s for further study and speculation. My speculation is that the top 25% could liquidate declining assets faster and more efficiently early in the financial crisis than the remaining portion of the population. The remaining wealth holders was more closely tied to assets they could not directly control (e.g., 401(k) assets), easily liquidate (e.g, real estate) and/or could not de-leverage fast enough (e.g., selling highly leveraged real estate that was declining below the mortgage balance). The bottom 25% had little or no hard assets, but their income took a severe nose dive with massive layoffs, meager unemployment benefits, and pensions either worth pennies on the dollar or wiped out.

Of course, my speculation is not definitive, all-encompassing or even correct by any stretch of the imagination.

anon August 14, 2013 at 10:38 am

Pease define power, counterfactual, and make a clear argument. Are you saying that if poor had more power, whatever that is, they would not have lost as much wealth, or they would have received compensatory transfers? Or what exactly?

Maybe they have too much power. Enough power to get cheap credit suported by Fannie and Freddie, and, ultimately, tax payers (not the poor). So on minimum wage they get a 300K morgage, buy at top of bubble, and after 2 years, when house is worth 200K have negative wealth.

I am not saying this is what happened, I haven’t a clue. But without better definitions and theory, anything goes.

John P. August 15, 2013 at 5:38 pm

@anon,

Cheap credit supported by Fannie and Freddie? Mortgages originate at banks, which then bundle them into large denomination packages purchased by Fannie and Freddie, who in turn issue bonds backed by the income stream generated by borrowers paying the underlying mortgage loans. No one held a gun to any banker’s head and said, “Bill, you gotta make this loan because I’m from the government and I demand you give this non-creditworthy applicant a mortgage loan.” And, the crisis first made its appearance not with Fannie and Freddie, but in the private sector competition – Bears Stern ring a bell?

Let’s allocate blame where it belongs. Did Greenspan’s Fed keep rates too low for too long? Yes. Did it over-prime the money flows? Yes. Did the Fed fail to have even a reasonable skepticism about “self-policing” and “self-regulation” by financial institutions? Yes.

But, it was the banks that had the ultimate control over where, when and who got loans, not the federal government. The banks all on their own made bad decisions, over and over again, chasing profits to fuel Wall Street ever increasing demands, and the hubris of financial institution management.

[Regarding the unstated but implied fault of the CRA: Despite Fox News, there is not only no legal requirement under the CRA for a bank to lend to a non-creditworthy borrower, but an explicit provision stating that the Act does not compel any financial institution to make a loan to such borrower. The CRA had nothing to do with the financial crisis. See, e.g., http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinv.html.

Mortgages originated at the banks, then handed off to Fannie and Freddie, not vice versa. The former got their fees and got out, passing the buck to the government agencies and their bond holders.

Comments on this entry are closed.

Previous post:

Next post: