How the American Dream Steals from the Middle Class

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I most certainly didn’t start at this position. Like most Americans the idea of owning a home was tantamount to owning a chunk of Americana. But the recent discussions of wages got me thinking about what we value in this country. And while we claim to honor and value hard work the amount of wealth generated from labor begs to differ. Notice how I said wealth not income. This is an important distinction because so much of our discussion these days has focused on income inequality. Which while a part of the problem of inequality as a whole does not match in terms of impact compared to wealth inequality. General income inequality drives everyday social disparities, but wealth inequality drives generational disparities. So how do families generate wealth that intergenerational umami that gives substance to the real American dream? For many Americans it’s with their home. The problem is this has created several market distortion that literally change the way we live our daily lives and obscures policies designed to enrich the super wealthy at our expense.

Redlining

Let’s start with Redlining. For those unfamiliar with the practice redlining was the policy of approving home mortgages based on the racial profile of a given neighborhood. Redlining took place in many forms. There were neighborhood covenants that prevented owners from selling to certain ethnic groups. It also was backed by government policies that refused to back FHA loans issued to minorities or neighborhoods with minorities. The effect of these policies and practices was the creation of ghetto neighborhoods where property ownership was a losing gamble, the types of loans available were onerous with loanshark-like penalties. Worse still if you managed to survive the loan the property was unsellable due to the difficulty potential buyers would have to secure a loan. All this reduced the value of the property and therefore the wealth accumulated in the affected communities.

Collateralized Debt Obligations

The ink spilled covering the housing collapse could fill an ocean, but it’s important to remember what fundamentally went wrong. The shorthand we’ve been given is that irresponsible home buyers bought houses they couldn’t possibly afford. The problem with this story is that it assumes that the home purchasing system was designed around the fiduciary acumen of home buyers. The banks are charged with determining the financial viability of the home purchaser, and lest we forget financial institutions created products called collateralized debt obligations (CDO) with the intended purpose of obscuring the viability of any particular loan. This scheme made it impossible for anyone including the banks themselves to determine who would be capable of paying back their loans. When the banks schemes collapsed the banks were bailed out. Homeowners however, saw dramatic hits in their property value (their wealth) even if they did not miss any payments on their homes.

Luxury housing subsidies

Meanwhile on the high end of the real estate market there are numerous subsidies that simply make little sense. The mortgage interest deduction is designed to make it easier for people on the lower end of the wealth scale to afford home ownership, yet there is no ceiling to who qualifies for this deduction. Thus we as a nation end up subsidising the self-indulgent housing of higher society. On top of this we grant tax abatements in urban centers for luxury housing. This pushes the working class further away from their work environments and reduces the foot traffic to local businesses. The result is costlier cities with real estate that function more like the bond market than dwellings.

Protectionist legislation on housing.

This is not an indictment of home ownership. There is a ton of value in an ownership. It creates deep roots in the community and it provides families with a sense of stability. Still the American system is broken. It overly rewards speculation and has been a huge driver of inequality. There should be incentives to buy but they should be progressive declining as you reach the top of the economic ladder. The money you put into your home should come back to you but there shouldn’t be a cottage industry of people buying solely to drive up the cost of a property by adding a granite kitchen counter. Tax abatements for urban development should be to benefit the communities as a whole not just the wealthy developers and the wealthier buyers. These are policy choices that exacerbate the mechanism of capitalism which already has a tendency to drive inequality.

Balancing the scales

Changes to the real estate system will have a dramatic effect. The obvious worry though is what will happen to the millions of Americans who have bought into the system already. The goal of these changes isn’t to make home ownership a bad investment. Americans should be encouraged to own their homes but it shouldn’t be their largest asset.   We need to move to a system where people can actually afford their homes. To have a balanced budget families are recommend to only spend 30-40% of their income on their income on their home expenses. Most families fall way short of these goals. The result is overexposure to the volatility of the housing market. To balance the scales though middle class families need greater access to actual wealth. We need to acknowledge that labor generates wealth, and as such labor should be compensated with more than just a wage. We need to create policies that encourage business to compensate with profit sharing or stock ownership. Labor should have a seat on the board of directors, not to control the process but to be a part of it so when decisions are made they are made with the effects on labor taken into consideration.

These changes won’t erase wealth inequality. I’m not so sure that there is a way to create a society without some inequality, and I don’t think that is necessarily a bad thing. What is bad, and what does need to change is how dramatically unequal our society is now, and how that system is maintained.

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