Eco­nomic re­cov­ery threw mid­dle-class dream un­der bus


Once a year or so, econ­o­mist Diane Swonk ven­tures into the base­ment of her 1891 Vic­to­rian house out­side Chicago and opens a plas­tic box con­tain­ing the items that mean the most to her: awards, wed­ding pic­tures, the clothes she was wear­ing at the World Trade Cen­ter on the day it was at­tacked. But what she seeks out again and again is a bound di­ary of the events of the fi­nan­cial cri­sis and their af­ter­math.

“It’s use­ful to go back and see what a chaotic time it was and how ter­ri­fy­ing it was,” she said. “That time is seared in my mind. I looked at it again re­cently, and all the pain came flood­ing back.”

A decade later, things are eerily calm. The econ­omy, by nearly any of­fi­cial mea­sure, is ro­bust. Wall Street is flirt­ing with new highs. And the hous­ing mar­ket, the epi­cen­ter of the crash, has re­cov­ered in many places. But like the di­ary stored in Swonk’s base­ment, the scars of the fi­nan­cial cri­sis and the en­su­ing Great Re­ces­sion are still with us, just be­low the sur­face.

The most pro­found of th­ese is the un­even na­ture of the re­cov­ery com­pounded a long-term im­bal­ance in the ac­cu­mu­la­tion of wealth. As a con­se­quence, what it means to be se­cure has changed. Wealth, real wealth, now comes from in­vest­ment port­fo­lios, not salaries. For­tunes are made through an ini­tial pub­lic of­fer­ing, a grant of stock op­tions, a buy­out or another form of what high­net-worth in­di­vid­u­als call a liq­uid­ity event.

Data from the Fed­eral Re­serve show that over the past decade and a half, the pro­por­tion of fam­ily in­come from wages has dropped from nearly 70 per­cent to just less than 61 per­cent. It is an ex­tra­or­di­nary shift, driven largely by the in­vest­ment prof­its of the very wealthy. In short, the peo­ple who pos­sess trad­able as­sets, es­pe­cially stocks, have en­joyed a re­cov­ery tAmer­i­cans de­pen­dent on sav­ings or in­come from their weekly pay­check have yet to see. Ten years af­ter the fi­nan­cial cri­sis, get­ting ahead by go­ing to work ev­ery day seems quaint, akin to us­ing the phone book to find a num­ber or rent­ing a video at Block­buster.

The fi­nan­cial cri­sis didn’t just kill the dream of get­ting rich from your day job. It also put an end to a fun­da­men­tal be­lief of the mid­dle class: that own­ing a home was al­ways a good idea be­cause prices moved in only one di­rec­tion — up. The bub­ble, while it lasted, gave mil­lions in the mid­dle class a sense of val­i­da­tion of their fi­nan­cial acu­men, and made them feel as if they had done the Right Thing.

In the­ory, if you lost your job, or suf­fered some other kind of fi­nan­cial set­back, you could al­ways sell into a real es­tate mar­ket that was for­ever ris­ing. Ever-higher home prices be­came a steam valve, and the “greater fool” the­ory sub­sti­tuted for any con­ven­tional mea­sure of value.

The kin­dling for the fire that con­sumed Wall Street and nearly the en­tire econ­omy was mort­gages that should never have been taken out in the first place. Home­own­ers fig­ured the more house the bet­ter, whether or not their in­come could sup­port the monthly pay­ment, while greedy banks and mid­dle­men were all too happy to en­cour­age them.

When the bub­ble burst, the bedrock in­vest­ment for many fam­i­lies was wiped out by a com­bi­na­tion of falling home values and too much debt. A decade af­ter that de­ba­cle, the typ­i­cal mid­dle-class fam­ily’s net worth is still more than $40,000 be­low where it was in 2007, ac­cord­ing to the Fed­eral Re­serve. The dam­age done to the mid­dle-class psy­che is im­pos­si­ble to price, of course, but no one doubts it was vast.

For home­own­ers, there wasn’t much of a res­cue pack­age from Wash­ing­ton, and 8 mil­lion suc­cumbed to fore­clo­sure. Some­times, evic­tion came in the form of mar­shals with court or­ders; in other cases, fam­i­lies qui­etly handed over the keys to the bank and just walked away. Although home prices in hot mar­kets have fully re­cov­ered, many home­own­ers are still un­der­wa­ter in the worst-hit states such as Florida, Ari­zona and Ne­vada. Mean­while, more Amer­i­cans are rent­ing and have lit­tle prospect of ever own­ing a home.

Wors­en­ing the pic­ture, the post-cri­sis era has been marked by an in­creased dis­par­ity in wealth among white, His­panic and African-Amer­i­can mem­bers of the mid­dle class. That’s ac­cord­ing to an anal­y­sis of Fed data by the Pew Re­search Cen­ter, which found fam­i­lies in the His­panic and African-Amer­i­can groups were more de­pen­dent on hous­ing as their prin­ci­pal form of in­vest­ment. Not only were both mi­nor­ity groups harder hit by fore­clo­sures, but His­pan­ics were also twice as likely as other Amer­i­cans to be liv­ing in Sun Belt states where the hous­ing crash was most se­vere.

In 2016, net worth among white mid­dlein­come fam­i­lies was 19 per­cent be­low 2007 lev­els, ad­justed for in­fla­tion. But among blacks, it was down 40 per­cent, and His­pan­ics ex­pe­ri­enced a drop of 46 per­cent. For many, old-fash­ioned hard work has sim­ply not been a vi­able path out of that hole. Af­ter unem­ploy­ment peaked in the fall of 2009, it took years for job­less­ness to re­turn to pre-re­ces­sion lev­els. Slack in the la­bor mar­ket left the em­ployed and un­em­ployed alike with lit­tle lever­age to de­mand raises, even as cor­po­rate prof­its surged.

Maybe it was in­evitable that when half the pop­u­la­tion watches its wages stag­nate while the other half gets rich in the mar­ket, the re­sult is Pres­i­dent Don­ald Trump and Brexit, Bri­tain’s planned exit from the Euro­pean Union.

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