The Income Inequality and the Economic Downturns

When we look at the similarities between the Great Depression and the Great Recession, one stark phenomenon that only these two economic downturns saw was the high income inequality in the U.S. that preceded these economic disasters. If we look at the graph showing the historical percent share of income of the top 10%t, this share was at the record high levels right before the Great Depression, in 1928, and the Great Recession, in 2007. In fact, during those times, the income share of the top 10% was almost 50%. As we look from the graph, this high level of income inequality was not seen during the time between the two great crises. This high level of inequality was seen first time at the onset of the Great Depression, and the next one coincided with the beginning of the Great Recession.

Could the increasing income inequality have been a root cause of the greatest economic panics the U.S. economy has faced in the 20th and 21st century? Let me try to see the potential link between the high level of inequality and the economic downturn. When people at top of the income ladder get bigger share of the total income, the folks at the bottom of the ladder would get less share of the total income. However, when, the top, let’s say, 10% get more income, their propensity to consume would decrease. In other words, the money that would have otherwise been spent for the consumption by the bottom 90% wouldn't be spent for the consumption by the top 10%. This leads to a decrease in total consumption in the economy which could have caused the downturns.

The most interesting data we can see is that since the official end of the Great Recession, the income share of the top 10% has only gone up until 2012, in which the latest data is available. Not only did the income share of top 10% go back to the pre-crisis level, but also it is now greater than 50%. In 2012, the top 10%t collected more than a half of the total income for the first time during the time of data. In other words, the income inequality in the U.S. is going to the same direction as it went to before the crisis. In that sense, I doubt the recovery that U.S economy is going through is healthy one. Not only has the income inequality in the U.S. been increasing, but also that in other countries has increased since the 2007-2009 recession. ( Harold James, Project Syndicate) This increase in income inequality in the U.S. has been facilitated by the Fed's non-conventional monetary policy, which has been potentially creating an asset price boom. The Great Recession challenged everyone in the U.S. in some ways, but the top 1% has already recovered what it has lost during the recession. Meanwhile, the increase in the income of the bottom 99% has been very low if there was any.  (Moran Zhang, IB Times)