It isn't that nothing has happened in Washington since the credit markets froze and the economy tanked two years ago. Far from it. The combination of massive fiscal stimulus, bank bailouts, auto restructurings, and dramatic monetary easing stabilized an economy that was on the brink of a depression. Landmark universal health-care legislation was passed more than a century after it was first proposed in the U.S. Credit-card reforms abolished a number of egregious industry tactics.
Thirty-four months after the start of the Great Recessionâ??and 16 months after the official end of the worst downturn since the 1930sâ??Wall Street and the banking industry have been the focus of public policy reform initiatives designed to reduce the risks of a reprise. The most notable achievement is the financial services reform bill, recently buttressed by the Basel III accord on higher international bank capital standards. These two initiatives together represent a vast improvement over the previous regulatory regime.
Yet what about strengthening the Main Street economy for the longer term? It's underappreciated, but America's dramatic three decade-plus rise in income inequality was a fundamental economic force behind the 2007 though 2009 implosion in the economy and financial markets. For instance, after remaining relatively stable for much of the postwar period, the share of total income that went to the wealthiest 10 percent of households rose from 34.6 percent in 1980 to 48.2 percent in 2008. Raghu Rajan, economist at the University of the Chicago Booth School of Business, calls income inequality one of three major factors that still threaten to keep the economy unhealthy and crisis-prone in his 2010 book, Fault Lines: How Hidden Cracks Still Threaten the World Economy.
Of course, the lack of policy movement is understandable. Government officials are far more concerned with reviving job growth than heading off the next credit crunch. Partisan gridlock in Washingtonâ??a state of affairs exacerbated by the upcoming mid-term electionsâ??means little can get done on even that front, let alone the long term. Still, White House chief of staff Rahm Emmanuel hit the mark when he admonished legislators not to "let a serious crisis go to waste."
Put somewhat differently, "we need to start focusing on the long-term solutions now," says Rajan. "I would like to get out of this recession in a way that is sustainable, that does not merely pump up growth in the short term, only to see it collapse later."
The rise in income inequality is well-documented. Median income began stagnating in the early 1970s, and income inequality started to surge in the early 1980s. The benefits of America's economic growth since then have mostly gone to a wealthy minority, while the majority of workers have seen their earnings stagnate at best and decline at worst. The long-term trend is toward a small group of financiers, chief executives, professional athletes, entertainers, and other earnings titans pocketing much of the wealth generated by society.
To take the reading of another measure of the trend, average inflation-adjusted, or real, income per family grew from 1993 to 2008 at a 1.3 percent annual rateâ??an increase of about 21 percent over 15 years, according to data compiled by Emmanuel Saez, economist at the University of California, Berkeley. Remove the top 1 percent from the calculation, and average real income growth falls to 0.75 percent, an increase of only 12 percent over 15 years. Of course, incomes at the very top of the ladder have fallen along with the downturn, but the losses are temporary.
The trend had one unfortunate side effect: Households took on more and more debt even as their incomes stagnated to keep up living standards. Policymakers found it easier to embrace the "democratization of credit" rather than address the factors behind income stagnation. The motivation wasn't bad.
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