Two milestones occurred last week: the 10-year anniversary of the crash of Lehman Brothers (which helped usher in the worst of the Great Recession) and the Census Bureau’s release of data on household incomes in 2017.
This release confirmed that the median income for U.S. households is still lower than it was in 2007 — the first year before the Great Recession hit. We should take away three big lessons about this lost decade of American income growth:
- The financial sector needs tight supervision that it did not get in the early 2000s;
- fighting recessions and spurring recovery with fiscal stimulus works really well — but only when it is tried; and
- the decades-long policy assault on the leverage and bargaining power of low- and middle-wage workers hasn’t just led to inequality and made economic life too-hard for them and their families, it’s also made the economy vulnerable to future crises.
The role of the financial industry in the crisis has been widely discussed. Too often, however, this discussion focuses only on destructive or fraudulent behavior undertaken by individual financial institutions.
To be clear, this behavior deserves attention, and the failure to hold these institutions and their leaders accountable in any serious way is the single clearest signal that there really are two sets of rules in the United States — one for the rich and one for everybody else.
But besides supervising individual institutions, we also need policymakers willing to second-guess and actively lean against entire financial markets when they start generating destructive financial bubbles.
Whether driven by a sincere belief in the efficiency of financial markets, or by reluctance to get in the way of hyper-wealthy financiers getting richer as the bubble expanded, policymakers’ inaction in the face of all of this was a disaster.
The role that fiscal austerity played in throttling growth over the recovery isn't as widely recognized. People remember the Recovery Act, and they might know that the national debt rose a lot after 2008, and this often leads to characterizations of the recovery as one where fiscal stimulus flowed. That’s 180 degrees from the truth.
The Recovery Act was a needed down payment on recovery, but a Republican Congress defaulted on the rest of this payment. We didn’t just end up doing too little public spending to recover from the worst economic crisis since the Great Depression, we did less spending than in any other recovery since World War II.
Even a completely run-of-the-mill trajectory of public spending over the recovery would have seen us at today’s 4-percent unemployment years ago.
This austerity was a political choice made by congressional Republicans, and they didn’t make it because they were truly concerned about the buildup of debt. Instead, they decided that a sluggish economy hurt the Democratic president more than it hurt them.
How do I know this? Because as soon as a Republican took the White House, we got a large boost of stimulus —both inefficient (a tax cut tilted toward the rich) and efficient (across-the-board increases in discretionary federal spending).
Finally, the decades-long rise of inequality that preceded the crisis meant that more and more of the economy’s income was concentrated in the hands of already-rich households that tend to save a lot more money than their low- and middle-income peers.
But until we reverse this rise in inequality, we’ll have to continue to rely on financial market recovery or a sensible Congress to generate enough spending to pull us out of recessions. This has made many of us economists nervous indeed about future crises.
The root cause of this rise in inequality was a policy assault on the labor market leverage and bargaining power of typical workers and a resulting near-death experience of growth in these workers’ pay. Reversing this rise in inequality will therefore require measures to restore some market power to these workers.
No one policy intervention will do this, instead it will require a portfolio of measures. One such measure should be a commitment to keep unemployment as low as possible for as long as possible until actual — not just fretted-about — inflation rears its head.
Another measure would be a significant increase in the federal minimum wage, while yet another would be reform of labor law to keep the playing field level in the face of growing employer hostility to unions.
But lots of other policy measures would help as well. The common root among all of them is to rebuild the leverage and power the majority of American workers have been robbed of in recent decades (and they’re often robbed of this leverage on the very first day on their job).
A lost decade of income growth for typical American families was not inevitable. It was instead a profound failure of the American political system and the policymakers that advise it. Both need fundamental change to rebuild the flawed economic foundations that made us so vulnerable.
Josh Bivens is the director of research at the Economic Policy Institute.