Financial crisis brutal on middle-class blacks

Zenitha Prince

WASHINGTON — The nation’s economic crisis has waged a particularly severe attack on the black middle class, experts say.

For African Americans, “2008 was not a good year,” said Algernon Austin, director of the Program on Race, Ethnicity and the Economy at the Economic Policy Institute, a Washington, D.C.-based research firm.

“And unfortunately, it looks like things will get worse,” Austin added.

The adage that when Amer­ica sneezes, black America catches a cold has held true during the recession, making it almost inevitable that African Americans would bear the brunt of the country’s financial woes, economists say.

“Whenever there is an economic downturn, African Americans are the most negatively affected,” said Jon Schmitt, senior economist at the Center for Economic Policy Research (CEPR).

The disparity can be explained by a persistent gap in wealth between blacks and whites, among other things, he added.

“The unique challenge for the African American middle class is they tend to have much less financial wealth [like stocks and bonds] and wealth in general, so they have much less of a margin to get through tough times,” Schmitt said.

It was just a decade ago that journalist Ellis Cose declared that “it’s the best time ever to be black in America.” A tight labor market saw marked increases in employment, higher wages and homeownership, and declines in joblessness and poverty that promised a robust growth of the community’s wealth base.

However, Austin said, unlike other Americans, blacks generally have not recovered what they lost during the 2001 recession, making them even more susceptible to the downswing in the economic cycle, which started late last year.

What makes this recession particularly painful, Schmitt said, is its origin in the housing market collapse. Homes comprise 80-90 percent of net worth of the average American, he added.

“The problem with housing is you have two-thirds of Americans who are homeowners, so when housing prices fall 15 percent to 25 percent, it has a bigger impact on the wealth of a typical person,” Schmitt said. “So this is a particularly hard recession, because [the source of people’s] wealth was directly attacked.”

For years, advocacy organizations like the National Urban League had warned that the increasing popularity of subprime mortgages — products originally intended for limited use by a limited number of people that were sold in large numbers in black and Latino communities — would lead to more foreclosures.

But few listened as the markets rode high on the growing housing bubble. Hungry to capitalize on the housing boom, financial servicers piled features onto the subprime loans, such as adjustable rates, balloon payments and penalties for early repayment, then packaged them into securities and sold them at high profits on the stock exchange.

When the bubble burst, however, homeowners began to default on their mortgage loans and foreclosures exploded, sending a cataclysmic shock through Wall Street that brought the industry — and the U.S. economy — to its knees.

On Black Main Street, however, the devastation was far worse.

“This represents the greatest loss of wealth for people of color in modern U.S. history,” declared United for a Fair Economy, the Boston-based nonprofit organization that authored the report, “Foreclosed: State of the Dream 2008.” As a result of defaults on subprime loans, black borrowers will lose between $71 billion and $92 billion, the report concluded, not including a ripple effect of consequences expected to exact an even higher toll.

“The spillover effect of the subprime crisis affects whole communities negatively, in terms of abandoned houses, increased crime, devaluation of neighboring houses and erosion of the tax base, causing revenue shortfalls that mandate service cuts,” according to the report.

At the base of the foreclosure crisis, analysts say, is a wage crisis that saw many African Americans living paycheck to paycheck and depleting their savings, which led them to take additional mortgages on their homes in an attempt to bridge the gap between their earnings and high costs of living.

“The reason why people don’t save, for the most part, is not because of some moral failing, but the main reason is their income is not enough to deal with their expenses,” the CEPR’s Schmitt said. “Income growth has been slow or stagnant for the last 30 years. To keep the standard of living up and to account for inflation, people have had to work more or use more credit.”

The lack of income growth among African Americans is attributable to many factors — chief among them, the industries in which they tend to work.

After World War II, and to a larger extent after the so-called civil rights era, the manufacturing industry played a significant role in feeding the growth of the black middle class.

As that industry began to decline, due to the impact of trade agreements like NAFTA, the export of American jobs abroad and other factors, black employment was hit particularly hard. The CEPR estimates that the share of African Americans working in manufacturing declined from 23.9 percent in 1979 to 9.8 percent in 2007, the largest drop of any group.

The nonprofit research group said dropping unionization rates have also played a part in black economic decline.

African American workers who belong to unions earn wages that are 12 percent higher — about $2 per hour — than their non-union counterparts. But the percentage of African Americans who are either members of or represented by unions fell by half over the course of 23 years, from 31.7 percent of all black workers in 1983 to 16 percent in 2006.

Additionally, Schmitt said, downturns in state and local employment have been especially important for the African American middle class. These have all led to staggering job losses for blacks.

Nationwide, since December 2007, the number of unemployed persons rose by 2.7 million to 10.3 million and the unemployment rate by 1.7 percentage points to rest at 6.7 percent, according to the U.S. Department of Labor’s Bureau of Labor Statistics. The black unemployment rate, however, nearly doubles the national figure at 11.2 percent.

Unfortunately, Schmitt said, there’s not much cause for optimism in the near future.

“Next year, I don’t think there’s a single analyst who does not think we’ll go [to] 8 [percent] or 9 percent unemployment, and the pessimists even predict 10 percent,” he said. “So given the fact that African American unemployment is usually twice that of whites, it could easily go to 16 percent or even up to 20 percent.”

When you add employment figures to the mix, the picture appears even grimmer.

According to the “Reversal of Fortune” report published in September 2008 by Austin and the Economic Policy Institute, employment rates for African Americans declined 2.4 percentage points. A number of reasons for the decrease have been suggested, including racial discrimination, high unemployment rates among black youth, lower educational attainment, geographic concentration, high rates of incarceration among black males, the unwillingness of some businesses to employ ex-offenders and malaise among frustrated workers.