Skip to main content

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.


Post a Comment

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…