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Senate Banking Committee Hearing on Racial Wealth Gap

Senate Banking Committee

Wall Street vs. Workers: How the Financial System Hurts Workers

and Widens the Racial Wealth Gap

Thursday, March 4, 2021

Witnesses

  • Abbye Atkinson, Assistant Professor, UC Berkeley Law School
  • Darrick Hamilton, Founding Director, Institute on Race and Political Economy, The New School
  • Professor Glenn Loury, Merton P. Stoltz Professor of Social Sciences, Professor of Economics, Brown University

Opening Statements
Chairman Sherrod Brown (D-Ohio)
In his opening statement, Brown said the economy is made up of people who make choices about their values and what type of society they want to live in. He argued that most Americans hold the same values, including a fair, just economy where hard work pays off for everyone and everyone has the economic security to raise a family and retire with dignity. He continued that our economy does not currently reflect such values because workers are getting a small portion of the profits they create, and the racial wealth income and wealth gap has not budged in years. Brown said this economic society did not appear from the “invisible hand” of the market alone, but rather because big banks, hedge funds, private equity firms, and insurance committees have been “calling the shots” through their lobbyists, rigged rules, and union-busting. Brown said there are some people who believe we should let Wall Street dictate the economy. Brown said if we want a fair and just society with a growing middle class, we cannot continue letting Wall Street run the economy. Brown said if we stop siphoning off much of the prosperity to people at the very top, there will be enough to go around for everyone and we unleash all workers’ talents by giving them more economic security. Brown concluded that if we want to take on economic inequality and shrink the racial wealth gap, we need to build an economy based on the dignity of work, including paying all workers a living wage, giving them power over their schedules, providing good benefits and safety on the job, allowing them to organize a union, giving them their fair share of the wealth they create, building an economy that reflects our values, not wall street values, and building the kind of society we want to live in.

Ranking Member Pat Toomey (R-Pa.)
In his opening statement, Toomey said the title of this hearing expresses a world view, held by many on the left, that capitalism is failing too many Americans and that the proposed cure is to expand the power and role of government and reduce the economic freedom of the American people. Toomey argued against this proposition, saying that capitalism produces the best conditions for the largest number of people. He said there are serious problems and challenges, including communities that struggle, persistent racial disparities, and serious social pathologies, but he argued that capitalism is not the primary cause of these problems. Toomey said that while wages are important, they are not the complete story, arguing that the standard of living, which has improved dramatically over the last decades, is more telling. He said before the COVID-19 pandemic, wage growth was occurring across the board, especially with respect to minorities and workers without a high school degree. Toomey said the tax code reform and rollback of excessive regulation during the Trump administration led to an economic boom with the lowest unemployment rate in fifty years. Toomey argued that the current financial system enables businesses and consumers to access credit and capital, which flows to businesses supporting job creation, technology advancement, and provision of goods and services to consumers. Toomey concluded that as we work to address the economic, social, and cultural problems we face, we need to promote economic growth and freedom, not stifle it, by ensuring everyone has the education and opportunity to obtain economic mobility, not by creating policies that undermine capitalism.

Testimony
Abbye Atkinson, UC Berkeley Law School
In her testimony, Atkinson said credit and debt have become the critical means of carrying out federal social welfare policies, especially for socially-marginalized Americans. She said these marginalized people are encouraged to rely on the consumer credit markets to make ends meet and to improve their life circumstances. Atkinson discussed higher education and student loans, which limits marginalized people’s ability to become socially mobile, a reality inconsistent with the story that getting an education allows individuals to “pull themselves up by their bootstraps.” Atkinson said that credit and debt are a channel through which wealth drains out of marginalized communities toward more affluent entities, including lenders and their institutional investors. She said that credit and debt as a source of retirement security siphons the value that is perversely created by lending to vulnerable individuals, families, and communities who have to borrow to survive or be upwardly mobile. Atkinson argued the real winners are financial intermediaries, like private equity firms, who take their fees and cut from laborers’ capital on the front end and reap disproportionate profits on the back end, relative to their own investment and risk; most of which occurs behind the veil of relatively minimal federal oversight. Atkinson said that because credit and debt has become so critical to federal social welfare policies, Congress should not delegate the regulation of credit and debt to private profit-motivated interests whose very stock and trade is credit and debt. These entities, she said, have their own duties to increase the “bottom-line” for their investors and themselves, which undermine their ability to center on equality-focused goals, like shrinking the gender- and race-gap. Atkinson concluded that we need policies including robust relief when debt threatens to overwhelm the socioeconomic benefits of borrowing.

Dr. Darrick Hamilton, Institute on Race and Political Economy, The New School
In his testimony, Hamilton said the financial system actively produces inequality and that a moral devaluation of Black lives has been engrained in the American political economy and is long overdue for a reckoning. He said the biggest preexisting condition is wealth itself because wealthier families are better situated to finance education, access capital, finance expensive medical procedures, reside in higher amenity neighborhoods, exert political influence, purchase better legal counsel, leave a bequest, and withstand financial hardship resulting from emergencies. He said the white, asset-based middle class did not simply emerge but rather government policies, including entitlement and government giveaways, provided whites with the finance, education, land, and infrastructure to accumulate and pass down wealth, which is not a bad thing but is contrasted to a history of Blacks and indigenous people being vulnerable to government-complicit exploitation, extrapolation, confiscation, destruction, terror, fraud, and theft. Hamilton said the unjust racial wealth gap is an implicit measure of the racist past in which the government has privileged political and economic interventions to afford whites to ability to acquire resources and inter-generational accumulation. He argued that people use the terms “choice” and “freedom” to support the benefits of a proverbial market, but argued that choice is an illusion if people lack basic needs. Hamilton said economic freedom and authentic agency are routed in economic and political power, yet the framing around the racial wealth gap focuses on poor financial choices and decisions, in which we presume Blacks have an undervalue for, and a low acquisition of, education. He argued that it is more likely that meager economic circumstances, and not poor decision-making or deficient knowledge, constrains choice itself and leaves borrowers with no other option than to use abusive financial services. Hamilton said we need a profound change toward a more sustainable, moral economy with government interventions to facilitate the assets, economic security, and engagement of all of its people and a new industrial and trade policy that centers workers, coupled with an explicitly anti-racist and anti-sexist economic rights frame to promote prosperity. He concluded that those who can least afford finance end up paying the most for finance.

Professor Glenn Loury, Brown University
In his testimony, Loury said his focus was on the dynamics of human development and the foundations of racial identity. He said that human growth and development occurs in social institutions. He also said that racism is not inherent in nature, but is something that is “made.” He argued that durable racial inequality is a cultural phenomenon, implicating not only the transfer of financial resources but also decisions we make about with whom to associate and identify. Loury said human capital, such as skills, education, work experience, and social aptitudes, is a powerful determinant of earnings power and thus a determinant of the ability to accumulate and generate wealth. He said we should not create racially preferential public policy, but rather recognize that all Americans are in the “same boat,” sharing a common citizenship and humanity, which requires fashioning American solutions to American problems and ultimately getting beyond race altogether when deciding on public action. He said there is a fatal contradiction at the heart of the argument of group equality for outcomes, because people within each group do different things, believe different things, fit different things, and spend their time in different ways. He concluded that because groups have their own integrity, respecting groups’ integrity while demanding groups’ equality is a contradiction that leads to tyranny, disappointment, and more racism.

Question & Answer

Wealth Gap/Income Inequality
Sens. Toomey and Mike Rounds (R-S.D.) asked if the racial wealth gap is an indictment of our financial system. Rounds raised concerns that if we pick on equity markets, it can end up hurting public sector workers in areas of investing, university endowments, and pension funds. Loury said the goal is not to indict the financial system, stating it is a necessary part of economic growth, and pointed out that the gap is a result from a legacy of history and ongoing dynamics in our economy. Atkinson said when we think about wall street, we need to realize it includes helpful tools like pension funds and university endowments. She said her worry is, for example, when pension fund options are limited to investing in a business who’s profit margin depends on struggling people rolling over their bills. She said we shouldn’t take away choices from pension funds, but we must think about where the sources of wealth originate.

Sen. Catherine Cortez Masto (D-Nev.) expressed her concern that inequalities start with the lack of wage growth. She said unemployment rates do not reflect who makes a livable wage, and for people who live check to check, they do not have the luxury of investing and saving their money to advance themselves financially. She asked witnesses if they agree wage stagnation is a core problem and how do we address and invest in our workforce to level the playing field. All witnesses agreed that while productivity has grown, wages have not. Hamilton and Atkinson said if people are not empowered, they will be vulnerable to the markets and they need to be able to utilize market attributes to thrive.

Sen. Brown asked how the CARES Act has affected income equality and how our system has enabled the wealth gap, specifically when involving the use of credit and debt. Hamilton said without the CARES Act we would have experienced even more dramatic inequality. Atkinson said using credit introduces risk and serves in the lender’s interest, not the borrower. She said lenders are profitable because of rollovers and high interest rates that suck the value out of already vulnerable communities.

Sen. Jon Ossoff (D-Ga.) expressed his frustration with large, powerful investment banks having quick and easy access to emergency cash, when instant credit facilities do not exist in the same manner for small banks and households. Ossoff asked if the rates these institutions receive are a function of their credit worthiness, risk management, and wisdom of capital allocation, or if its representative of the privilege they have in a system that has been structured to advantage them. Atkinson said this idea highlights the “too big to fail” notion for banks, and that we must start putting individuals on a similar pedestal of “too important to fail”.

Student Loans
Sen. Elizabeth Warren (D-Mass.) showed her interest in cancelling student loan debts, citing that more Americans have more student loan debt than any other category. She asked for clarification on who student borrowers are and how cancelling the debt can narrow the racial wealth gap. Atkinson said regional schools tend to have the highest level of debts, and the borrowers are not students going top tier more expensive schools. Atkinson and Hamilton both said the problem is telling Americans if they go get an education that they will be better off, because what they end up with is debt. Hamilton pointed to millennials during the last recession who were told to wait out the poor job market by going to school. He said millennials now have the largest racial disparity of any generation, and the lowest home ownership rate. Hamilton said he supports cancelling all student debt, and any amount cancelled is better than none.

Financial Education
Sen. Cynthia Lummis (R-Wyo.) wanted to focus in on how Wall Street can help workers. She asked if having a more innovative payment system can promote financial inclusion and make lives easier. Lummis said she want to form a financial innovations caucus and educate people about the egalitarian aspects of having T+0 settlement and digital currencies. Loury said it would be a small step in the right direction.

Sens. Toomey and Tim Scott (R-S.C.) said having a strong education system and better choices in schools are important parts of the whole equation as your educational achievement influences your job, your income, home ownership, and net worth. Both Scott and Tina Smith (D- Minn.) asked how to close the wealth gap specifically through home ownership. Loury and Atkinson said education and home ownership empower people of all races but alone will not close the racial wealth gap. Loury said giving people a stake in shaping their own futures is the direction to move in. Atkinson said increased access to credit, policies that support debt forgiveness, and the modification of mortgages in times of need are all useful tools.

Access to Banking
Sen. Toomey referred to a recent FDIC study that showed the rate of unbanked Americans decreased and reached a record low in 2019. He stated his support in increasing access to banks and credit and asked if this is a positive development for lower income communities. Loury said access to the system is certainly positive as it increases the ordinary working person’s chance to prosper.

Sen. Scott asked how owning stocks and overall democratization of the market closes the wealth gap. Loury reiterated that Wall Street is not our enemy necessarily and the more democratic and widely spread opportunity is for growth, the better.

Stock Buybacks
Sen. Chris Van Hollen (D-Md.) expressed his concerns around corporations using funds for stock buybacks and cashing out their own shares instead of investing into their employees and capital. He asked if curving the practice of stock buybacks and forcing companies to invest more in their workers will help narrow the gap. Hamilton said this a good example of where government intervention is not morally consistent with promoting social prosperity. He said the government has the capacity to do much better and should focus the money on growing and empowering our people. Van Hollen asked if the Federal Reserve should accelerate their efforts towards a FedNow real-time payment system, arguing that you should not have to pay for getting your paycheck in real time when you have tight debt deadlines. Atkinson was in support of an early paycheck option system.

For more information on this hearing, please click here.