Who Gets Excluded From the Modern Economy?

Experts on banking and labor markets offer their reasons for optimism and pessimism going into 2016.

Mary Altaffer / AP / Zak Bickel / The Atlantic

In the aftermath of the recession, researchers, academics, and bankers themselves analyzed and opined on the role that investment banks and the use of derivative products played in contributing to the crisis. Many wondered and theorized about what that sector of the economy would look like in a post-crisis era.

But as the economy has strengthened and inequality has grown, the questions of how financial and economic systems can and should operate, and if they exist to serve average people—not just those who can afford to use big-name banks and make high-priced investments—have become increasingly important ones. As the middle class shrinks, the cost of living rises, student-loan debt grows, and wages fail to keep up, the plight of those without sufficient financial education and access to affordable banking has become more and more apparent.

We reached out to some of the leading thinkers on banking and labor markets to ask them what gives them cause for hope and despair in the future. Below are their answers, lightly edited for length and clarity.

Mehrsa Baradaran, associate professor of law at the University of Georgia and author of How the Other Half Banks

Reason for despair: We have the largest and most profitable banking sector in U.S. history, and yet one that is the least beneficial to the lives of average Americans. The banks are too big, too risky, too dependent on government support, and too politically powerful. There are five financial-industry lobbyists for every member of Congress. All of this makes it incredibly difficult to achieve real reform.

Banks do not exist without the support of the government, and in exchange for that support banks have served the financial needs of people. But this social contract with banks has been dismantled. Giant financial institutions reap incredible private gains, but the burdens of those gains are absorbed by the public through neighborhoods abandoned by financial institutions, people who can’t afford a “free” checking account, and, of course, the occasional major bailout. And while all of this poses an incredible problem for our economic well-being, I despair even more about what it means for our democratic well-being.

Reason for hope: I’ve been advocating for a several years that one of the best ways for us to level the playing field in credit allocation is to re-enlist the post office to offer financial services. A few years ago, this idea was a possibility only to a handful of academics and policy makers, but I’ve become hopeful as I’ve seen the momentum build, as more people understand the scale of the problem and the logic of the solution. In the last few years, there's been a simultaneous refutation of a dominant ideology that banks operate without government intervention as well as a renaissance of books, studies, and ideas about banking history that have reawakened a somewhat dormant dialogue about reform. It gives me hope that so many people are digging up the words of Hamilton, Jefferson, Brandeis, Wilson, Roosevelt, and other reformers to revitalize an important historic struggle. It is exactly through learning about history, paying attention to present dynamics, and working toward making reforms achievable that the public can counter the growing reliance on payday lenders and the like. Postal banking is just such an innovation that has a vibrant history here in the U.S. and is a major contributor to financial inclusion abroad.

David Blanchflower, professor of economics at Dartmouth College

Reason for despair: Politicians, central bankers, and most economists seem to not to have adapted their thinking to the new economic realities. For example, the unemployment rate used to be the best single indicator of how much slack there was in the labor market, but no longer. As the downturn hit, there was a big rise in underemployment, where workers’ hours are constrained and many are stuck in part-time jobs but would like to be full-time. Too little new thinking is going on.

Reason for hope: The Swedish central bank, the Riksbank, funds the Nobel Prize in Economics. It is a young prize and for many years was given to economists who made fundamental and mostly methodological contributions. In recent years lots of the prizes were given for contributions in theory, which were untested in the data, which may or may not even turn out to be true. At long last we are starting to see the economics prize being given to economists who have actually found things about the real world. Rather than assuming we know how people behave, we are now observing and measuring what they do. Jim Heckman and Angus Deaton are good examples. It gives me hope that at long last the economics profession is moving to becoming an observational discipline rather than simply a branch of mathematics. Data matters. Nobel prizes in economics should be for finding stuff about the real world rather than for writing down elegant mathematical twiddles. Thankfully that is beginning to be the case.

Rob Levy, a director at the Center for Financial Services Innovation

Reason for despair: Despite our growing economy, the majority of Americans (57 percent) are still struggling to be financially healthy. Nearly 30 percent of American households lack the savings to cover their expenses for just three months in the case of job loss, and one-third of Americans either lack a credit score or have a subprime credit score, meaning they won’t be able to access affordable credit if they need it.

Central to financial health is having access to financial products that help people build resilience and take advantage of opportunities—things like handling an unexpected car repair, going back to college, or buying a house. And while technology seems to be changing everything around us, including the banking and financial-services industry, I fear that 2016 will see one pattern continue: Innovation ignores the people who need it most. So while the job market may be improving and technology may be revolutionizing banking, until the financial services industry makes improving consumers’ financial health (not just more accounts or more profits) one of its key goals, millions of Americans will continue to be overlooked.

Reason for hope: Despite these many challenges, there is a shift that’s happening that could help many achieve financial health, as a variety of financial-services providers see the business and social opportunity in serving this underserved market. Financial institutions such as KeyBank (partnering with HelloWallet) and USAA have begun offering customers variations of a “financial health score”—providing a holistic picture of their financial lives and offering tools and advice for support. FICO, the most prominent credit-scoring company, has recognized that traditional credit scores don’t provide a full enough view of a person’s creditworthiness, and is piloting a new score (FICO Score XD) that incorporates other kinds of payment history (such as rent and utilities) into their algorithm. This could lead to millions of previously unscorable consumers getting access to more affordable credit. Finally, there is great hope to be found in the rising number of FinTech start-ups that are designing apps and services that address the day-to-day financial needs of average Americans.