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Steve Fazzari on Inequality, the Great Recession, and Slow Recovery

Mainstream discussion of the 2007-08 recession in general do not discuss income inequality, even though it was central to explain the increasing indebtedness of the private sector. Steve Fazzari, with Barry Cynamon, have written a paper that puts inequality at the center of the slow recovery. From the abstract:
Rising inequality reduced income growth for the bottom 95% of the income distribution beginning around 1980, but that group’s consumption growth did not fall proportionally. Instead, lower saving put the bottom 95% on an unsustainable financial path that eventually triggered the Great Recession. An original decomposition of consumption and saving across income groups shows that the consumption-income ratio of the bottom 95% fell sharply in the recession, consistent with tighter borrowing constraints. The top 5% ratio rose, consistent with consumption smoothing. In the recession’s aftermath, the inability of the bottom 95% to generate adequate demand helps explain the slow recovery.
The role of increasing debt in the consumption boom is illustrated by the two figures below, which show that personal consumption demanded a higher share of disposable income, particularly after the 1980s, and that household debt also increased after the 1980s.

Read the whole paper here


  1. There is also a good paper by Van Treeck and Sturn on inequality and the great recession. Nice comprehensive survey:

    I really liked your paper with Perry on the great depression, by the way. I teach Romer in my econ history class because it seems that it heavily influences modern debates on monetary policy, for example Krugman's (1998) Brookings Paper on Japan directly references Romer as the major influence for his conclusions.

    But your criticisms of her approach are well-taken and I will be using your study, as a complement, in the future for sure.

    1. THanks! The funny thing is that while Romer suggests that fiscal policy was not relevant for the recovery from the Depression, she was basically put in charge of the fiscal package in 2009, and was actually shooting for a larger fiscal stimulus.


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