Many compare the Great Recession to the Great Depression for its severity and scale. Yet, a decade later, it is clear that their consequences on the distribution of economic resources in the United States cannot be more different.
The decades following the Great Depression substantially reduced the wealth of the rich and improved the economic wellbeing of many workers.
The Great Recession, in contrast, has exacerbated both income and wealth inequality. The mortgage crisis eroded the wealth of middle- and working- class families, who tend to invest most of their savings in housing. Meanwhile, the median wage remained stagnant until 2015. Since then, wage growth has been weak, despite record-low unemployment.
The crisis was not only wasted. It made the United States even more unequal. Why did the Great Recession exacerbate rather than mitigate inequality? Some have attributed this phenomenon to a weakened labor movement, fewer worker protections, alongside a radicalized political right wing.
This account misses the power of finance to rebound and overlooks its fundamental role in generating economic disparities.
The rise of finance represents a paradigmatic, regressive shift in how American society organizes economic resources. The increase in productivity first and foremost benefits the financial sector and investors. Growth became wed to heightened inequality.
The process through which financialization generates inequality unfolds in three primary ways. First, the financial sector creates extractive intermediaries that drain resources from other economic activities without providing commensurate benefit. Examples include mega banks, shadow banks, and corporate financial arms. Second, it loosens the codependence between labor and capital, allowing investors to profit without production. Third, the proliferation of financial products among American households are invariably regressive: poor households pay the highest interests and fees, while rich households reap the largest investment gains.
While the reforms during the Great Depression fundamentally restructured the financial system, the regulatory policies since the financial crisis largely were designed to restore a financial order that, for decades, has been channeling resources from the rest of the economy to the top.
Whereas the New Deal took a bottom-up approach and brought governmental resources directly to unemployed workers, the recent recovery was largely top-down and finance-driven. Governmental stimuli, particularly a mass injection of credit, first went to banks and large corporations, in the hope that the credit eventually would trickle down to families in need.
The banks and corporations first principle created a highly unequal recovery. Even though the financial crisis wiped out almost three-quarters of financial sector profits, the comeback was startling. Before the end of the recession in mid-2009, the financial sector had brought in a quarter more income than 2007. Profits continued to grow in the following years. In 2017, the sector made 80% more than before the financial crisis. Profit growth was much slower in the non-financial sector, which recovered in 2010 and grew 38% in 2017.
The gain in profit was in part due to losses in wages and employment. Labor’s share of national income dropped 4% during the recession. Yet, it remained low during the recovery.
The stock market fully recovered from the crisis in 2013, a year when the unemployment rate was as high as 8% and the single-family mortgage delinquency still hovered above 10%. The median household wealth, in the meantime, had yet to recoup from the nosedive during the Great Recession. In 2016, a typical American family owned 30 less wealth than it did in 2007.
The racial wealth gap only widened in the past decades. The median household wealth of white, black, and Hispanic households all dropped around 25% after the burst of real estate bubble. But white households recovered at a much faster pace. The difference was most salient between 2010 and 2013, during which white households stabilized their wealth but minority households continued in a downward spiral. By 2016, black households still lost about 30% of their wealth, compared to 14% for white families.
The massive corporate tax cut of 2017 did little to stimulate real investment but only fueled widening inequality. The conventional wisdom was that banks—as well as corporations and investors—knew how to put the credit into best use. And so, to provide liquidity and stimulate economic growth, the Federal Reserve increased the supply of money to banks by purchasing treasury- and mortgage-backed securities.
What the banks did, however, was prioritize their own interests over those of the public. They were hesitant to lend the money out to homebuyers and small businesses, since the money would then be locked into long-term loans that paid historically low interest. Instead, they deposited most of the funds and waited for interest rates to rise.
Similarly, corporations did not use the easy credit and tax cut to increase wages or create jobs. Rather, they took advantage of the low interest rate to finance stock buybacks, channeling other people’s money to top executives and shareholders.
What is good for the stock market is not necessarily good for American families. More than 80% of the stock market is owned by only 10% of Americans and by foreign investors.
In retrospect, it would have been more effective to channel these funds into policies similar to the American Recovery and Reinvestment Act of 2009, which gave fiscal relief to state and municipal governments. But that was deemed politically infeasible under the market-oriented governing model dominating in the late 2000s.
In light of this unequal recovery, how robust is current economic boom? Despite promising economic statistics, analysts believe we are not far from the next recession. Many workers still experience job insecurity even in a booming labor market, and families are struggling to get by. A likely scenario is that the next economic downturn will hit before many American families fully recover from the Great Recession.
When it comes, we will have a decision to make.
We can either continue the trickle down approach to first protect banks, corporations, and their investors with monetary stimuli. Or, we can learn from the New Deal and bring governmental support directly to the most fragile communities and families.