Friday, March 4, 2011

African Americans, Economics and the American Corporation

My scholarship has examined aspects of the economic health of black America in general, and the important and complex relationship between African Americans and the American corporation in particular.

Any consideration of the economic wellbeing of twenty-first century African Americans must begin with the African slave trade that brutalized millions of Africans for centuries. There is an inextricable connection between the poverty in which disproportionately large numbers of present-day African Americans live and the fact of slavery during which millions of African ancestors worked to establish the U.S. as an economic giant. The work of Africans generated considerable wealth for white enslavers – wealth that has passed from generation to generation. Enslaved Africans, of course, had no wealth to pass on to their children because they received no compensation for their labor. My grandmother turned 107 on December 2nd, 2010. She was raised by her grandparents, Albert and Sally Booker, both of whom were born into slavery. The family for whom my great-great grandparents worked passed onto each subsequent generation a legacy of economic wellbeing. It is not surprising that my mother will inherit nothing from my grandmother, the granddaughter of slaves. The institution of slavery is only one of several factors that explains the significant wealth gap between today’s African Americans and their white counterparts.

Economic deprivation of African Americans continued after enslaved Africans were emancipated in 1865. Most African Americans in southern states became sharecroppers. “In the sharecropping system, it was the planter who took the crops to market or the cotton to the gin. The sharecropper had to take the planter’s word that the planter was crediting the sharecropper with what he was due. By the time the planter subtracted…the seed, the fertilizer, the clothes and food—from what the sharecropper had earned from his share of the harvest, there was usually nothing coming to the sharecropper at settlement….In some parts of the South, a black tenant farmer could be whipped or killed for trying to sell crops on his own without the planter’s permission….There was nothing to keep a planter from cheating his sharecropper. ‘One reason for preferring Negro to white labor on plantations…is the inability of the Negro to make or enforce demands for a just statement or any statement at all. He may hope for protection, justice, honesty from his landlord, but he cannot demand them. There is no force to back up a demand, neither the law, the vote nor public opinion.’”[1]

Because of the blatant injustices and unfairness inherent in the south’s sharecropping system, several generations of African Americans migrated to the north where they found work in factories and urban workplaces. But, even in the north, African Americans faced discrimination and racism that made it impossible for them to earn what they deserved from the labor they contributed. These inequities have endured for decades. In the mid and late 1990s, African American employees brought two of the largest race discrimination class actions in American history against Texaco and Coca-Cola. African American workers at Texaco alleged pervasive discrimination in hiring, promotion, and pay. Texaco settled the class action in 1996. African American employees made similar allegations about unfair hiring, promotion and pay practices against Coca-Cola just a few years after the Texaco settlement. Coca-Cola settled the suit for $192.5 million in 2000.
Hundreds of African American employees filed the race discrimination class actions against Texaco and Coca-Cola. African American plaintiffs have filed individual suits and much smaller class actions in the years after the Coca-Cola settlement, but none of the recent suits come close in size to the Texaco & Coca-Cola actions. The fact that there have been no race discrimination class actions as large as the Texaco and Coca-Cola suits in recent years seems like good news. But the reason why recent race discrimination litigation has shrunk is best explained by the sophistication of corporate employers who learned how to protect themselves from this kind of litigation. Employers are not discriminating less. They are more adept at ensuring that there is no evidence of discrimination. In fact, one of the explicit lessons from the Texaco class action, according to one lawyer writing on the subject, was that corporate employers should not memorialize certain decisions.
A more recent phenomenon that has decimated the economic health of African Americans is the predatory lending that occurred in the first decade of the twenty-first century. State and federal investigations in the U.S. have revealed that mortgage brokers and loan originators targeted people of color for predatory subprime mortgages. African Americans were “four times as likely as whites to pay subprime rates on their mortgages.”[2] Even middle and upper income African Americas were twice as likely as similarly situated white Americans to receive high cost loans, and this occurred even when they qualified for prime loans. African Americans have lost billions during the height of the predatory lending crisis.
Disparities in wealth between white Americans and African Americans have grown in the last few decades even though more African Americans have college educations. For every dollar the median white family owns, the median Black family owns ten cents. Slavery and the exorbitant discrimination that ensued after the institution was abolished explain this wealth gap. Fairness would dictate the payment of reparations for the descendants of enslaved Africans whose uncompensated labor made the U.S. an economic powerhouse. Fairness would require the bailout of African American victims of predatory lending so that they can keep the homes they lose in foreclosure.
Reparations and bailouts for African Americas are extreme and unlikely resolutions for the economic deterioration of the Black community. In their place are tepid reforms such as those found in Section 342 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The Act creates an Office of Minority and Women Inclusion at various agencies including the Securities and Exchange Commission, The Federal Depository Insurance Company and each of the Federal Reserve Banks. These newly created Inclusion Offices are charged with monitoring diversity efforts at federal agencies, the entities they regulate and the businesses with whom the agencies contract. It is not likely that Section 342 will change much of anything. Covered agencies and companies will submit reports about the diversity efforts in which they engage. But diversity efforts do not confront the continuing problems of discrimination and racism. This section of the Act, however, makes it seem as though women and people of color are getting special access and consideration, and the section does not deal with the unique problems that African Americans in financial services have faced. This is most unfair.
[1] ISABEL WILKERSON, THE WARMTH OF OTHER SUNS 53-54 (2010)
[2] Alan M. White, “Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing”, 60 S.C.L.REV. 677 (2009).

6 comments:

  1. Interesting post – you’ve given me a lot to think about. I’d like to comment on one sentence in particular that jumped out at me: “Fairness would require the bailout of African American victims of predatory lending so that they can keep the homes they lose in foreclosure.”

    That predatory lending took place in the US is a tragedy to the individuals involved and to the nation as a whole. The article you cite (“Borrowing While Black”) says that African Americans were roughly 4 times as likely to receive a subprime loan as whites, but it also adds that Hispanics were nearly 3 times as likely as whites to receive such a loan.

    These loans were known to be disadvantageous (disasterous?) to the borrower and were recklessly made. If we are making bailouts to individuals, it seems to me that “[f]airness would require” that we bail out ALL of the individuals who received predatory loans. Unfortunately, it seems that our lawmakers have neither the political will nor the financial resources to undertake such an action.

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  2. A more recent phenomenon that has decimated the economic health of African Americans is the predatory lending that occurred in the first decade of the twenty-first century. State and federal investigations in the U.S. have revealed that mortgage brokers and loan originators targeted people of color for predatory subprime mortgages. African Americans were “four times as likely as whites to pay subprime rates on their mortgages.
    That predatory lending took place in the US is a tragedy to the individuals involved and to the nation as a whole. The article you cite (“Borrowing While Black”) says that African Americans were roughly 4 times as likely to receive a subprime loan as whites, but it also adds that Hispanics were nearly 3 times as likely as whites to receive such a loan.
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  3. Another underlying problem stemming from African Americans and Hispanics being more likely to receive subprime loans arises in the context of corporations using credit reports in hiring decisions.

    A survey by the Society for Human Resource Management found that close to fifty percent of employers who were surveyed stated that they use credit checks for certain applicants, while thirteen percent of employers stated that they use credit checks in assessing all job applications.

    Subprime loans have a disastrous effect on the credit reports of many individuals, but the fact that more African Americans and Hispanics receive these types of loans may demonstrate why a Brookings Institute study found that counties with credit scores ranging from 850-720 (very low risk) had a 5% African-American and Hispanic population while counties with credit scores from 500-559 (very high risk) had a 49% African-American and Hispanic population.

    While the reasons for these discrepancies are not entirely clear, subprime loans may contribute to the lower credit scores of African Americans and Hispanics. As a result, those minority groups may be disproportionately impacted by the use of credit reports in hiring decisions. While the direct effects of subprime loans can be seen in home foreclosures, the underlying problem of subprime loans and the effects they have on credit reports, and subsequently job opportunities needs to be addressed by either state or federal legislatures.

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  4. Patrick B. UC made the last comment

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  5. That's a great point Patrick B. The disastrous effects of subprime loans can be felt in areas not always immediately apparent.

    While the state and federal governments certainly have a place in addressing this issue, I believe the systemic problem of predatory subprime loans can also be addressed in the corporate context. Since shareholders are able to propose changes to corporate policy in the proxy statement, concerned citizens should start to pay attention and push for these reforms. I think shareholder pressure on boards will result in better proposals and quicker improvement than waiting for the state to act will.

    Angela N. - UC

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  6. These are some very good points and a very interesting topic to consider. Along the lines of Angela N.'s comment, I believe addressing subprime lending though shareholder proposals is an excellent suggestion, but I wonder how the practical implication would work. I also considered this in the bailout context, but I believe in each scenario, the corporate machinery would keep these proposed changes from going into effect.

    In terms of the bailout, should the corporation strive to address the issue itself, it seems there could be potential backlash by the shareholders. As we saw through an example, the first time a corporation strove to enhance the corporation’s good will and donate to a local institution, shareholders brought suit for failure to maximize profits. In the same light, should corporations attempt to issue their own bailouts, I have a strong feeling many shareholders would object to its effect on their profits.

    As for the shareholders making proposals to amend subprime lending practices, could the corporation not simply keep the proposals off proxies as an ordinary business matter? I also wonder what real motivation the directors and officers would have to implement such a change, or at the least not block its addition to a proxy?

    I fear the answers to these questions mean that while it would take much longer time before states enact changes, that may be the only practical solution.

    Andrew C. - UC

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