Pulling Inequalities Up By the Roots

Housing Policy. Lax regulation of the mortgage lending industry allowed predatory lenders to ride roughshod in low-income communities and to do so with impunity.  Nobody was targeted more aggressively by these lenders than communities of color.

The United States needs a balanced, comprehensive set of housing policies that not only protects low-income families from predatory lenders, but offers them access to credit under favorable terms, while also providing more low-income families with rental housing assistance.

The deep recession the United States entered in 2007, sometimes described as the Great Recession, started with the deflation of a housing bubble. To understand what went wrong in the housing market, one has to understand the role of subprime mortgage lending—loans designed for borrowers with blemishes on their credit records. In 2005 and 2006, subprime mortgage loans made up 23 percent of all home loans written. Yet as recently as the mid-1990s, they were an insignificant share of the mortgage lending market.

The subprime mortgage market is an egregious example of the impact of social and economic inequalities in the United States. To a startling extent, it was government policy that made it possible.  Federal regulations essentially sanctioned the bifurcation of the credit market into a regulated prime market for people with assets and an unregulated subprime market mainly for low-income borrowers. In the subprime market, predatory lending was able to flourish; traps in the fine print like the one Carol Mackey encountered were just part of the deal. Those consigned to the subprime market either played by these rules or lived without access to credit.

The United States needs a balanced, comprehensive housing policy that not only protects low-income families from predatory lenders but offers them access to credit and loans with favorable terms. The “American Dream” of homeownership may not sound so joyous now with record numbers of foreclosures. Yet homeownership is still a vital institution for promoting healthy families and communities. Numerous studies show that homeownership promotes financial stability and upward mobility in low-income households.

Homeownership may be the apotheosis of achieving the American Dream. But the true test of whether the American Dream is alive and well is whether economic mobility is alive and well. The fact is that 42 percent of children born to parents in the bottom income quintile and 39 percent of children born to parents in the top quintile will end up in those same income brackets a generation later. Economists call this phenomenon “stickiness at the ends.” In other words, for a large group of people at the top and bottom of the economy, economic potential is set at birth. The American Dream of those at the bottom is too often just a dream.

Refundable tax credits are a way to provide assistance to people with little or no tax liability. Almost half of all children live in homes with no tax liability, of whom 80 percent are in single-parent households. Here is how refundable tax credits work: Suppose someone owes $500 in income taxes and is eligible for a $1,000 tax credit. If the tax credit is refundable, it will reduce the person’s tax liability to $0 and the remaining $500 will be refunded. If the tax credit were nonrefundable, it would reduce the person’s tax liability to $0, but she would not be refunded the additional $500.

Plenty of low-income families are living on the edge, always one piece of bad luck away from not being able to meet their basic needs.  It could be a job loss, a medical emergency, a car breaking down, or an unexpected home repair. It could be the rising cost of health insurance, a freezing cold winter that brings higher heating bills, or a sudden surge in gas prices. It’s difficult for anyone to achieve economic mobility without first establishing financial stability. Savings are a buffer to keep families from falling off the edge.

In 2001 and 2003, Congress passed sweeping legislation to reduce the tax burden on American households and businesses. The logic behind the tax cuts was that when families had increased resources available, they would have more to spend, which would in turn create demand for more goods and services. Businesses would be able to respond to this increased demand by creating more jobs. Thus, the promise was that everyone would benefit from these tax cuts. But that’s not the way it turned out.

Like housing and tax policy, U.S. health care policy is badly in need of reform. The United States spends more on health care than any nation in the world. Within a few decades, the escalating costs of health care could prove catastrophic for the economy as a whole. Every year, tens of millions of Americans go without health insurance, mainly because they can’t afford it or because they lose a job and with it their insurance coverage. Some people discover that their insurance company has suddenly decided to stop covering them.

One could hardly find a starker, more grievous example of inequality than the difference between those families with health insurance and those without. Without health insurance, the risk of financial ruin is ever present. Health care policy exemplifies a system in which families can play by all the rules—go to work, spend their money responsibly, provide for their children as best they can—and still be denied the lowest common denominator of economic security. Since 1999, employer-based health insurance premiums have increased by 120 percent, and health care debt is now the main cause of personal bankruptcy.

Every American should be guaranteed a basic level of health care coverage. For those who earn too little to pay for insurance, the government will need to offer subsidies to help them afford the cost of a basic plan. Universal coverage is not just a goal of reform—it must be a requirement. Determining what constitutes a basic level of care should be left up to unbiased experts.

“I have routinely asked doctors and hospital administrators how much of the health care services we provide is pure waste,” says Guy Clifton, MD, the author of Flatlined: Resuscitating American Medicine. “They would usually pause to think, and then I would suggest, “Thirty percent?” They invariably responded, “Oh, at least that.”

“Nationally, a quarter of [insurance] firms cancel coverage immediately when an employee suffers a disabling illness; another quarter does so within a year,” states a report by the Cambridge Health Alliance, investigating why 60 percent of all U.S. bankruptcies are linked to medical problems. The victims are not usually poor but rather fit into the middle class. Ironically, most have insurance, at least at the beginning of their ordeal.

Major health care reform has been attempted by several presidents. President Franklin Delano Roosevelt made the first serious attempt to establish a national health care program, but was discouraged from pushing for it when he faced strong opposition from the American Medical Association (AMA). At the time, health care costs made up a much smaller share of family expenses than they do today. The public was not clamoring for a national health care program, and Roosevelt decided that his administration had enough problems to address without taking on a bruising battle with the AMA.

In the early decades of the 20th century, the United States was intent on becoming the most educated country in the world. No other country had the goal of providing a free high school education to all. Other nations supported free primary school enrollment, but the United States stood alone in its support for free secondary education.

Education is one of the strongest predictors of lifetime earnings. College graduates earn more than high school graduates, and high school graduates earn more than high school dropouts. Parents are as keenly aware of the importance of education now as they were a century ago. The campaign for free secondary education was led by parents who saw that children with a high school education were getting the best jobs. In the late 20th century, the charter school movement was another parent-led effort to improve children’s chances of getting ahead.

We don’t have to wait until kindergarten to begin breaking down socioeconomic inequalities. Education, the great equalizer, is the best defense against intergenerational poverty. The earlier formal education begins, the better the odds of breaking the cycle. That’s what researchers, including a Nobel laureate economist, have found from decades of studies on children in high-poverty areas who are exposed to high-quality early education programs. This finding is not surprising since the swiftest progress in a child’s intellectual and social development occurs in the early years of life. The key to sustaining the benefits of early education is for children to move from good early education programs straight into good elementary schools and on to good middle schools and high schools.