What Made the Great Recession ‘Great’?

Sam Pizzigati

Sam Pizzigati Editor, Too Much online magazine

Another new study on the devastating impact of the Great Recession — on the middle class — has just come out, this one from the Hudson Institute, a conservative-leaning think tank.

America’s richest 10 percent, this latest analysis shows, lost 7 percent of their wealth between 2007 and 2013. The bottom 90 percent lost 22 percent, over triple the top 10 percent’s loss.

In 1929, just before the Great Depression, the top 0.1 percent share of America’s wealth hit a record 24.8 percent. The top 0.1 percent share was peaking again just before the Great Recession.

The Great Recession essentially wiped out virtually every cent of the new wealth that middle class households had added between 1983 and 2007.

In the earlier of these two years, the typical American household held, after adjusting for inflation, a modest net worth of $80,200. By 2007, this net worth had grown to just under $136,000. The Great Recession knocked that total back down to $81,400.

Middle-class household income shows the same basic pattern as household wealth. Typical families, again after adjusting for inflation, took home $48,000 in 1983, then only about $46,000 in 2013.

By any yardstick, the Great Recession dealt households in America’s economic middle a devastating blow. The United States has emerged from it, notes the new Hudson Institute study, “noticeably more unequal,” with the nation’s top 10 percent now holding three-quarters of the nation’s wealth.

What made the Great Recession so dreadfully “great”? To start getting at the answer, suggests other recent research, we first have to acknowledge how remarkably unequal America had become just before the Great Recession.

The authors of this other new research — economists Kurt Mitman of Stockholm University, Dirk Krueger of the University of Pennsylvania, and Fabrizio Perri of the University of Minnesota — have all immersed themselves in that pre-Great Recession inequality. They’ve crunched the data from a national University of Michigan survey of 5,000 American families that’s been ongoing ever since 1968.

This survey’s figures show that American household inequality had, by the eve of the Great Recession, hit a “postwar high.” In 2006, the upper 20 percent of U.S. households held a little under 83 percent of the nation’s wealth. The nation’s poorest 40 percent, all combined, held “no net worth at all.”

And households in America’s middle class? Households in the nation’s middle 20 percent owned just 4.4 percent of the nation’s wealth.

Economists Mitman, Krueger and Perri hold this deep inequality directly responsible for the crushing depth of the Great Recession. Inequality, their research concludes, “has a significant impact on business cycle fluctuations.” Inequality makes those cycles fluctuating downward — recessions — worse. Much worse.

Americans have witnessed 11 recessions since 1945. Most of them came and went quickly, leaving behind no lasting damage. Most of these economic downturns also came at a time when the United States more equally distributed the nation’s wealth.

Macro Shock

Why should the distribution of wealth make any difference on the severity of an economic downturn? Mitman, Krueger, and Perri have an explanation.

In 2006, they point out, the nation’s bottom 40 percent of households may have held no net worth. But the households in this bottom 40 percent did, of course, have income. With this income, they consumed a significant share — close to 25 percent — of the nation’s goods and services.

The low-wealth households of the middle 20 percent consumed another sizeable chunk. Together, the households in the nation’s bottom 60 percent in 2006 accounted for just over 40 percent of the nation’s consumption.

But then the economy experienced a “macro shock.” Unemployment rose precipitously, and households started cutting back on their consumption. Nothing particularly unusual there. Households almost always cut back on consumption when an economic downturn hits.

The difference this time? The extent of the cutback.

The deeply unequal America of 2006 had a greater proportion of low-wealth households than the America of earlier postwar decades — and that contrast turns out to really matter.

Self Insurance

In an economy with wealth more equally distributed, most households will be able “self-insure” against the calamity of unemployment. They will have enough saved up to weather the loss of a job and income without having to cut back drastically on their consumption.

But in an unequal economy, with so many families with so little in wealth, many households will “have a lesser ability to self-insure.” In this economy, note Mitman, Krueger, and Perri, low-wealth households will start to cut back significantly on their personal consumption once unemployment rates start rising, even if their own family income “has not dropped yet.”

And that’s what happened during the Great Recession. With so many households spending significantly less, the recession that began in 2008 soon became the Great Recession, the worst economic downturn in the United States since the Great Depression of the 1930s.

In other words, as our three economists formally put it, “an economy with a large fraction of low-wealth households will experience a sharper reduction in aggregate consumption expenditures in response to a given macroeconomic shock.”

This trio of researchers can back up that conclusion with a wealth of complex analysis. But we can keep things simple. America’s two worst economic catastrophes of the last century — the Great Depression and the Great Recession — each came right after America’s wealth had significantly and ferociously concentrated at the nation’s economic summit.


This was reposted from Our Future.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality. He is an associate fellow at the Institute for Policy Studies in Washington, D.C. Last year, he played an active role on the team that generated The Nation magazine special issue on extreme inequality. That issue recently won the 2009 Hillman Prize for magazine journalism. Pizzigati’s latest book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives (Apex Press, 2004), won an “outstanding title” of the year ranking from the American Library Association’s Choice book review journal.

Posted In: Allied Approaches

Union Matters

Freight can’t wait

From the USW

From tumbledown bridges to decrepit roads and failing water systems, crumbling infrastructure undermines America’s safety and prosperity. In coming weeks, Union Matters will delve into this neglect and the urgent need for a rebuilding campaign that creates jobs, fuels economic growth and revitalizes communities.

A freight train hauling lumber and nylon manufacturing chemicals derailed, caught fire and caused a 108-year-old bridge to collapse in Tempe, Ariz., this week, in the second accident on the same bridge within a month.

The bridge was damaged after the first incident, according to Union Pacific railroad that owns the rail bridge, and re-opened two days later. 

The official cause of the derailments is still under investigation, but it remains clear that the failure to modernize and maintain America’s railroad infrastructure is dangerous. 

In 2019, 499 trains that derailed were found to have defective or broken track, roadbed or structures, according to the Federal Railroad Administration’s database of safety analysis.

While railroad workers’ unions have called for increased safety improvements, rail companies have also used technology and automation as an excuse to downsize their work forces.

For example, rail companies have implemented a cost-saving measure known as Precision Scheduled Railroading (PSR), which has resulted in mass layoffs and shoddy safety protocols. 

Though privately-owned railroads have spent significantly to upgrade large, Class I trains, regional Class II trains and local, short-line Class III trains that carry important goods for farmers and businesses still rely on state and local funds for improvements. 

But cash-strapped states struggle to adequately inspect new technologies and fund safety improvements, and repairing or replacing the aging track and rail bridges will require significant public investment.

A true infrastructure commitment will not only strengthen the country’s railroad networks and increase U.S. global economic competitiveness. It will also create millions of family-sustaining jobs needed to inspect, repair and manufacture new parts for mass transit systems, all while helping to prevent future disasters.

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There is Dignity in All Work

There is Dignity in All Work