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

Get to Know AFL-CIO's Affiliates: National Association of Letter Carriers

From the AFL-CIO

Next up in our series that takes a deeper look at each of our affiliates is the National Association of Letter Carriers.

Name of Union: National Association of Letter Carriers (NALC)

Mission: To unite fraternally all city letter carriers employed by the U.S. Postal Service for their mutual benefit; to obtain and secure rights as employees of the USPS and to strive at all times to promote the safety and the welfare of every member; to strive for the constant improvement of the Postal Service; and for other purposes. NALC is a single-craft union and is the sole collective-bargaining agent for city letter carriers.

Current Leadership of Union: Fredric V. Rolando serves as president of NALC, after being sworn in as the union's 18th president in 2009. Rolando began his career as a letter carrier in 1978 in South Miami before moving to Sarasota in 1984. He was elected president of Branch 2148 in 1988 and served in that role until 1999. In the ensuing years, he worked in various roles for NALC before winning his election as a national officer in 2002, when he was elected director of city delivery. In 2006, he won election as executive vice president. Rolando was re-elected as NALC president in 2010, 2014 and 2018.

Brian Renfroe serves as executive vice president, Lew Drass as vice president, Nicole Rhine as secretary-treasurer, Paul Barner as assistant secretary-treasurer, Christopher Jackson as director of city delivery, Manuel L. Peralta Jr. as director of safety and health, Dan Toth as director of retired members, Stephanie Stewart as director of the Health Benefit Plan and James W. “Jim” Yates as director of life insurance.

Number of Members: 291,000 active and retired letter carriers.

Members Work As: City letter carriers.

Industries Represented: The United States Postal Service.

History: In 1794, the first letter carriers were appointed by Congress as the implementation of the new U.S. Constitution was being put into effect. By the time of the Civil War, free delivery of city mail was established and letter carriers successfully concluded a campaign for the eight-hour workday in 1888. The next year, letter carriers came together in Milwaukee and the National Association of Letter Carriers was formed.

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