Is Not Sustainable
A Top Heavy 1 Percent
Will Topple Without a Stable Middle Class
by Heather Boushey | Center for American Progress
President Obama inherited an economy in virtual meltdown,
with job losses at over 20,000 per day the month he was inaugurated. But the
problems ran much deeper than a typical run-of-the-mill recession. Long before
the Great Recession of 2007-2009, the old rules of the game — where if you work
hard and play by the rules, you can earn a decent life — had begun to fall by
The economic recovery of the 2000s — from the peak in 2000
to near the end of 2007 — Middle America didn’t benefit from the economy’s
Over that time period, the economy grew by nearly 18
percent, as measured by gross domestic product, yet median household income fell by 0.6 percent. Further, over the past few decades, with the exception of the
full employment years of the late 1990s, the U.S. economy became increasingly
unequal. The incomes of the families at the top grew by an average of 1.2
percent per year between 1979 and 2009, while those at the bottom saw incomes
fall by 0.4 percent per year.
The conservative narrative is that rising inequality is just
fine for America because the gains for those at the top will eventually trickle
down to Middle America. But that’s not what’s happened over the past few
decades. In fact, just the reverse occurred.
An economy top heavy with wealth is not good for our country
or our economy. Inequality isn’t just bad for the 99 percent who’ve been left
behind; it is actually responsible for some of the biggest problems facing
Americans today — high home foreclosures, high unemployment, and an inability
to get ahead. It’s critical that we reverse it.
Take, for example, the housing bubble of the 2000s. It was
facilitated in no small part by exotic mortgages that were sliced and diced and
sold to investors who pushed home prices to hitherto unknown heights. And when
it popped, millions of American families — through no fault of their own except
the decision to buy a home — were left with mortgages greater than the value of
their homes. High rates of foreclosure still plague our economy.
What is less-often discussed (until recently) is the role
that inequality played in making the Great Recession and the subsequent slow
recovery happen in the first place. Inequality has been rising for decades for
most Americans in the form of stagnating incomes for the majority and skyrocketing incomes for those at the very top. When income stopped growing, families
responded by working more and borrowing more. As consumer activist Elizabeth
Warren (with her daughter Amelia Warren Tyagi) documented,
American’s debts are the direct result of a hollowed out middle class. Families
borrowed to make ends meet, to cover health care costs, to put a child through
college, and to purchase a home in a neighborhood with good schools.
The financial sector was only too happy to oblige.
Increasingly unencumbered by regulation and flush with cash, Wall Street
created a variety of new ways to extend credit. Basically, America didn’t get a
raise and the financial sector said, “Don’t worry, buddy, we’ll loan you the
money to pay the bills.” Of course, the whole thing was unsustainable. Thus
came the Great Recession and the struggle ever since among everyday Americans
to make ends meet,
But we can reverse this destructive course — if we understand
what we are up against.
Recent research by economists Michael Kumhof and Romain
Rancière at the International Monetary Fund shows that
investors were recycling their higher incomes into loans, a process that is
inherently unstable in the face of stagnant incomes for low- and
moderate-income households. As demand dries up because of stagnating incomes,
those at the top have great incentives to expand credit to keep up purchasing
power, but if incomes do not recover, this, as we have seen, is an unstable
Wall Street also used its burgeoning wealth to benefit their
industry, not the nation as a whole. Recent research by University of Chicago
Booth School of Business professors Atif Mian, Amir Sufi, and Francesco Trebbi shows that
higher campaign contributions from the financial services industry are
associated with an increased likelihood of voting for legislation that
transfers wealth from taxpayers to that industry.
Sky-high incomes for those in finance allowed them to sell
loans to the 99 percent and buy legislation that transfers wealth from
taxpayers to themselves. And, on top of all this, these same sky-high incomes
increasingly encouraged the best and the brightest young people to enter finance instead of
engineering, medicine, or teaching, all which enhance our economy’s
But we know what works for all Americans. Growth that works
for all of us keeps going. IMF economists Andrew Berg and Jonathan Ostry find that
inequality is associated with poorer economic outcomes. They examined how long
spells of sustained economic growth lasted across 174 countries. What they
found was striking: The more equal the country, the longer it was able to
sustain economic growth.
What happens to 99 percent of Americans should be the focus
of our nation’s economic policy. But, too often, that doesn’t happen. Focusing
exclusively on deficit reduction is the wrong policy. Focusing solely on cutting
spending is the wrong policy. Focusing on jobs is the right policy now and in
the future. Investing in our future is the right policy — through government
spending that strengthens our economy and our economic competitiveness
alongside responsible action to reduce our long-term federal budget deficits
over time as the economy improves.
Have no fear. We can reverse inequality. The United States
remains one of the wealthiest nations on the planet. The notion that we cannot
afford to fix our economy is, quite simply, rubbish. We can if we have the
Heather Boushey is
Senior Economist at the Center for American Progress.