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Riot or Renaissance? Black America’s Capital to Labor Ratio

Final Call, New Analysis, Cedric Muhammad Posted: Aug 19, 2008

2008 may be a fateful year in American race relations.

And not only because of the phenomenal rise of Senator Barack Obama and his approach to the U.S. presidency.

As important as that accomplishment is, it may pale in comparison to two other factors: the dramatic changes in America’s wealth distribution as a result of the housing market collapse and the re-entry into society of hundreds of thousands of previously incarcerated persons.

These two events cut across the American population, but no segment is affected more than this country’s Black population—slowest to accumulate capital, and last hired and first fired from gainful employment.

It is helpful to look at the crises from the lens of the capital to labor ratio—an unofficial gauge of economic health.

Capital—the wealth available to produce goods and services—was accumulated as never before in Black America, as a result of the dramatic rise in home and stock ownership electrified by President Clinton’s signing of the 1997 Taxpayer Relief Act, passed by a Republican Congress, which simultaneously exempted the sale of a primary residence from capital gains tax treatment while lowering the tax on the capital gain from the sale of assets from 28 percent to 20 percent.

Black homeownership, according to the U.S. Census Bureau went from 44.8 percent in 1997 to a peak of 49.1 percent in 2004, before settling at 47.2 percent in 2007. Experts predict it will drop to 42 percent by 2009. According to the Ariel-Schwab Survey, Black stock ownership spiked from 57 percent, in 1998, the first year of the survey, to 74 percent in 2002. By 2007 it was back at 1998 levels—57 percent.

Labor—the amount of human effort available to produce goods and services—has also experienced a roller coaster ride over the past 10 years. The Black unemployment rate, which was 7.6 percent in December of 2000, now stands near its 1997 levels—9.7 percent, as of July 2008, according to official Department of Labor statistics.

According to the U.S. Congress Joint Economic Committee, in 2004, 72 percent of Black male high school dropouts in their 20’s were unemployed. As of January 2007, the unemployment rate for African-American men age 20 and older was 7.5 percent.

And one must keep in mind that those who have given up looking for work, and the prison population, not counted in official government unemployment statistics. A Brookings Institution study estimates the unemployment rate for Black men would rise a full point if incarceration, among other factors, were included in the measurements.

The analysis of these stock and home ownership levels, and unemployment and incarceration rates—when taken together—show that capital is becoming scarce relative to labor, the reverse of what one would like to see.

When capital is plentiful and labor scarce, the seeds for economic growth are in place. More Black men are employed, able to assume their responsibilities as fathers and productive members of society; crime is down; entrepreneurship and risk-taking flourishes; and small businesses survive and grow.

We are now moving away from that vision of stability.

The home, which became the epicenter of capital—tapped for college tuition payments, start-up capital for entrepreneurs, and personal debt refinancing—is now both burden and headache for Blacks who came into small fortunes through real estate investing. Whole neighborhoods are losing wealth. A 2001 Temple University study found that homes located within 150 feet of vacant properties in Philadelphia lost an average of $7,627 in value. Just imagine the wealth destroyed in Philadelphia, for example—a city poised to witness 1,000 foreclosed properties brought to auction each month.

Lower property values and a shrinking tax base are telltale signs of problems on the way. Already many have noticed the associated spike in crime that unoccupied homes enable. Compounding this loss of capital is the elephant in the room—the return of 700,000 previously incarcerated individuals to communities all over this country. In distressed rural and urban areas this dramatic increase in the labor supply is especially acute—as the returning unqualified and unprepared arrive in job-scarce neighborhoods.

This state of affairs finds both major party candidates for President offering solutions not realistic or radical enough to confront the problem.

They are not alone.

Although history shows that Republicans are more sensitive to capital, while Democrats respond to labor, not enough politicians nor bi-partisan coalition have come forth, with the right combination of insight and policy prescriptions.

A few do stand out, however.

On the side of capital, Rep. Paul Ryan of Wisconsin—a former speechwriter for Jack Kemp—comes to mind. “We have to lower the cost of capital in distressed inner-cities and rural areas. That is key to economic growth and the rise of entrepreneurs,” he told me in 2002.

On the side of labor, Sen. Charles Schumer of New York—the most prominent elected official ever to hold a hearing on the crisis of Black male unemployment—comes to mind. “A Black male in his late twenties without a high school diploma is more likely to be in jail than to be working,” he stated at his March 8, 2007 Joint Economic Committee hearing.

In a strategy that could pay dividends in the election booth with Black Independents, small business owners, and communities falling behind in the wealth distribution, Senator Obama or Senator McCain could campaign on an expansion of the number of Empowerment Zones and Renewal Communities that receive incentives for economic development in distressed communities.

A small step with enormous potential to flood wasting cities with capital would be to reduce the holding period necessary to qualify for capital gains tax exemption, on the sale or trade of small business stock. If the current prohibitive level of 5 years were reduced to 6 months, it would unleash capital within and outside of the Black community that would be matched with entrepreneurs and an idle but talented unemployed Black force.

Either candidate could strengthen the promising Second Chance Act legislation recently signed into law by President Bush, or campaign boldly on ideas like Philadelphia’s brand new $10,000 worker tax credit for any business which hires a previously incarcerated person (Philadelphia is expecting the return of 35,000 ex offenders this year alone.)

Many have strained to force an analogy between 2008 and 1968 but few have had the courage to compare today’s economic realities with the hopeless circumstances that faced the Black community 40 years ago - leading to riots in over 100 cities.

If we look past personality and campaign commercials, and deeper into the socioeconomic conditions of the very same Black communities that were set on fire in 1968, we may understand that we are approaching a fork in the road—riot or renaissance—a consequence of how we manage the relationship between capital and labor.

It’s time to sound the alarm, before history repeats itself.

Cedric Muhammad is a business and political economist who advises entrepreneurs and small businesses through his company, CM Cap. His weekly “Cedric Muhammad and Black Coffee Program” can be viewed every Wednesday from 12 p.m. to 4 p.m. EST at The Black Coffee Channel, http://www.blackcoffeechannel.com.)

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