Did Income Inequality Make the Great Recession Worse?

That’s the argument made by Bas Bakker and Joshua Felman of the International Monetary Fund in  recent research summarized at voxeu.org:

  • It was not just the drop in housing wealth that made the Great Recession so deep, but also the decline in financial wealth. The decline in total wealth was key to explaining the depth of the recession, not the decline in housing wealth only.

  • The rich were not merely passive spectators, generating excess saving to finance the middle class, but active participants in the consumption boom-bust cycle. The saving rate of the rich actually went through a similar cycle as that of the middle class, as rising wealth first spurred their consumption and then falling wealth restrained it. And as the rich accounted for such a large share of aggregate income, this cycle had a profound impact on overall consumption. . . .

. . . . In fact, the rich now account for such a large share of the economy, and their wealth has become so large and volatile, that wealth effects on their consumption have started to have a significant impact on the macroeconomy. Indeed, the rich may have accounted for the bulk of the swings in aggregate consumption during the boom-bust.

The full article (graphs & all) can be found here.  (via Kevin Drum.)

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