We are entering a recession—but what did we learn from the last one?

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

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SOURCEThe Conversation

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

Some officials have compared the last period of economic decline – also know as the Great Recession – to the Depression, 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 States.

Though the Depression was bigger and longer than the Great Recession, 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 inequality.

Some scholars 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 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.

The Great Recession exacerbated a persistent wealth gap in the U.S. Xinhua News Agency/Getty Images

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 interests.

The New Deal, 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, 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.

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 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.

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.

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%.

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

The racial wealth gap only widened, 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 crash, 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.

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Ken-Hou Lin, Associate Professor of Sociology, University of Texas at Austin and Megan Neely, Postdoctoral Researcher, Stanford University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Ken-Hou Lin's main areas of interest are inequality, finance, race and immigration. He is the co-author of Divested: Inequality in the Age of Finance. Megan Neely studies gender, race, and social class inequality in the workplace and the labor force. I am a Postdoctoral Researcher at Stanford University’s VMware Women’s Leadership Innovation Lab and a Senior Researcher at Exponential Talent. From 2017-2019, I was a Postdoctoral Fellow at the Clayman Institute for Gender Research at Stanford University. In 2017, I graduated with a PhD in sociology from the University of Texas at Austin. My research examines rising economic inequality in the U.S. through the lens of gender, race, and class. I pursued sociology after working as a Research Analyst for BlackRock, Inc. from 2007-2010. This experience inspired me to study the financial services industry, specifically the mechanisms that reproduce workplace inequality on Wall Street and how the financial sector perpetuates inequality in society at large. My current book project, Hedged Out (under contract with the University of California Press), presents an insider’s look at the inner workings of the notoriously rich and secretive hedge fund industry. Hedge funds comprise one of the most lucrative and powerful industries in the U.S. The average pay at hedge funds falls well above the top one percent of earners. Like other high-paying work, women and minority men are underrepresented. Firms managed by white men manage the vast majority—97 percent—of hedge fund investments. I conducted in-depth interviews with 48 workers and field observations at 12 workplaces and 23 industry events from 2013 to 2018. Hedged Out investigates the deep and often-hidden mechanisms preventing women and racial and ethnic minority men from gaining equal access to this wealth. A second project compares hedge fund, venture capital, and technology startup firms using data from interviews and field observations. The finance and technology sectors have unprecedented access to capital yet cultures that are remarkably different. Even though technology espouses a culture of social disruption and inclusion, technology firms have low numbers of people of color and white women in leadership positions, which makes them neither more diverse nor more inclusive than financial firms. I compare the social organization of the three fields to understand why. With Ken-Hou Lin, I have a forthcoming book on why current trends in rising inequality cannot be understood without examining the rise of big finance. Divested: Inequality in the Age of Finance will be released by Oxford University Press in December of 2019. My academic research is highly relevant to those in government, policy, and industry. I have been invited to present my work at the United Nations Research Institute for Social Development’s Overcoming Inequalities summit, Tax Justice Network conference, and TechCrunch Disrupt meeting. My work has been featured in the American Sociological Association's Work in Progress, the Clayman Institute for Gender Research's Gender News, D&I in Practice, Economic Sociology and Political Economy, the Bernard and Audre Rapoport Center for Human Rights and Justice's Human Rights Working Paper Series, and UT Austin Soc.

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