From Portside <[email protected]>
Subject The Last Recession Led to an Unequal Recovery. We Can Choose a Different Path.
Date March 25, 2020 12:30 AM
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[We are experts in income inequality, and our new book,
“Divested: Inequality in the Age of Finance,” argues that
inequality from the Recession has a lot to do with how the government
designed its response.] [[link removed]]

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Ken-Hou Lin & Megan Neely
March 20, 2020
The Conversation
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* [[link removed]]

_ We are experts in income inequality, and our new book, “Divested:
Inequality in the Age of Finance,” argues that inequality from the
Recession has a lot to do with how the government designed its
response. _

A screen shows the graph of the Dow Jones Industrial Average after
closing bell at the New York Stock Exchange on March 18, 2020, at Wall
Street in New York City., JOHANNES EISELE / AFP via Getty Images


As the coronavirus continues to spread around the world
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it is abundantly clear that the global economy is entering a recession
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– the first we’ve seen since 2008.

Some officials have compared
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the last period of economic decline – also know as the Great
Recession – to the Depression
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which began in 1929.

Yet it is clear that these two downturns differed not only in severity
but also in the consequences they had for inequality in the United

Though the Depression was bigger and longer than the Great Recession
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the decades following the Great Depression substantially reduced the
wealth of the rich and improved the economic security of many workers.
In contrast, the Great Recession exacerbated both income and wealth

Some scholars [[link removed]]
have attributed this phenomenon to a weakened labor movement, fewer
worker protections and a radicalized political right wing.

In our view, this account misses the dominance of Wall Street and the
financial sector and overlooks its fundamental role in generating
economic disparities.

We are experts [[link removed]] in income inequality
[[link removed]], and our new book, “Divested:
Inequality in the Age of Finance
[[link removed]],”
argues that inequality from the Recession has a lot to do with how the
government designed its response.

The Depression

Reforms during the Great Depression restructured the financial system
by restricting banks from risky investment, Wall Street from gambling
with household savings and lenders from charging high or unpredictable

The New Deal
[[link removed]], a series
of government programs created after the Great Depression, took a
bottom-up approach and brought governmental resources directly to
unemployed workers.

On the other hand, the regulatory policies since the financial crisis
that began in 2008 were largely designed to restore a financial order
that, for decades, has been channeling resources from the rest of the
economy to the top.

In other words, the recent recovery was largely focused on finance.
Governmental stimuli, particularly a mass injection of credit
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first went to banks and large corporations, in the hope that the
credit eventually would trickle down to families in need.

The conventional wisdom was that banks knew how to put the credit into
best use. And so, to stimulate economic growth, the Federal Reserve
increased the supply of money to banks by purchasing treasury and
mortgage-backed securities
[[link removed]].

But the stimulus didn’t work the way the government intended. The
banks prioritized their own interests over those of the public.
Instead of lending the money out to homebuyers and small businesses at
historically low interest rates, they deposited the funds and waited
for interest rates to rise.

Similarly, corporations did not use the easy credit to increase wages
or create jobs. Rather, they borrowed to buy their own stock
[[link removed]] and channeled
earnings to top executives and shareholders.

As a result, the “banks and corporations first” principle created
a highly unequal recovery.

Who Lost in 2009?

The financial crisis wiped out almost three-quarters of financial
sector profits, but the sector had fully recovered by mid-2009, as we
covered in our book.

Its profits continued to grow in the following years. By 2017, the
sector made 80% more than before the financial crisis. Profit growth
was much slower in the nonfinancial sector.

Profits after the Great Recession
By 2017, financial profits were at 500% of their 2007 level, while
non-financial profits still lagged behind.

See chart
[link removed]…
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Companies outside of the financial sector were more profitable because
they had fewer employees and lower wage costs. Payroll expenses
dropped 4% during the recession and remained low during the recovery.

Capital's share vs. labor's share

See chart
[link removed]…
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The stock market fully recovered from the crisis in 2013
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a year when the unemployment rate was as high as 8% and the
single-family mortgage delinquency still hovered above 10%.

Median household wealth, in the meantime, had yet to recoup from the
nosedive during the Great Recession.

The racial wealth gap only widened
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as well. While the median household wealth of all households dropped
around 25% after the burst of real estate bubble, white households
recovered at a much faster pace.

By 2016, black households had about 30% less wealth than before the
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compared to 14% for white families.

As the government debates a stimulus package, officials can either
decide to continue the “trickle-down” approach to first protect
banks, corporations and their investors with monetary stimuli.

Or, they can learn from the New Deal and bring governmental support
directly to the most fragile communities and families.

Ken-Hou Lin [[link removed]]
is Associate Professor of Sociology at the University of Texas at

Megan Neely [[link removed]]
is a Postdoctoral Researcher at Stanford University.


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* [[link removed]]







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