INET Lecture - Income inequality, the great recession, and slow recovery
INET Lecture - Income inequality, the great recession, and slow recovery
In 2008 and 2009, the US economy experienced its deepest recession since the 1930s and the recovery, from what is now called the “Great Recession,” has been disappointing. Growth has been slow; the employed share of the working age population remains much below its level before the recession even though interest rates have been kept unusually low in an attempt to bolster the recovery. Moreover, a central feature of the US economy in recent decades has been a historic rise of income inequality.
I could do the same righto Santa see Bonasera to t so no good evenin ladies and gentlemen my name is Rosetta but really from Sullivan T quadrotor I'm here tonight to give the fault of Stephen for salary from the u.s. from Wisconsin with Italian ancestors he is the head of the Department of Sociology at the Washington University in st. Louis he's a professor of economics and also an associate of public policy and so on tonight we'll talk about inequality in wages as an obstacle to recovery I would like to also talk about his experience as a scholar he has many interests his tide of studies in many fields even if his main interest is macro economics he contributed remarkably to empirically define the influence of financial restrictions which are the difficulties found by those who ask for loans he examined the impact of such restrictions on the behavior of companies and the decision to invest to accumulate new assets we know that imported scholars as just digging so Minsky have their theories on the subject he on the contrary provided statistical evidence collected on the field which is extremely convincing those who followed the activities of the European Central Bank now if that limit to loans is much more than high interest rates companies as a matter of fact obtain the funds and Bay's on their ability to deserve credit this depends in term the balance sheets and their the fact that they are known by banks usually banks in Italy and banks if are not very familiar with the customer varied they'll have lots of difficulty in given credit so there is an issue of information as symmetry which has to be considered so guaranteeing the good functioning of financial channels is very difficult stimulating the economy demands more than low interest rates because those asked for alone should have strong balance sheets and a good relationship with a bank FERS I demonstrated with a practical data of those phenomenon starting from 1988 the speaker is considered one of the first members of the post Keynesian school of thought that school of thought that of teens indeed because of the the issue of uncertainty in the financial world so what's that try to summarize that based on professor Inka we speak a fundamental uncertainty to mean that the economy is not only risky as a rolling stone or a rolling dice in our position we do not know even the number of faces that the dice has post Keynesians are reflecting on fundamental uncertainty and on in the importers of aggregate demand tonight will speak of a number of issues the difficulty of having access to credit and the inequalities in wages horrific recent work beifuss re together with Barry cinnamon studies the extent to which increasing wage inequality is an obstacle to the economy of the u.s. economists studied the causes of Great Recession or 2008 and the collapse of consumptions low growth rate and stagnation can be linked to increasing wage inequality in the study the two economists explained that starting from 1980 the first 95 percent of wages is losing ground towards the 5% which are at the top of the scale in order not to lag behind in the lifestyle 95 percent started a borrowing money till 2008 when the financial crisis was exploding so they could no longer borrow money 5% of the wealthiest could increase the wage or the revenues and improve their quality of life the loss of purchasing power of the many is according to the scholars job killer and that is a depressing effect which will last for a number of years so I'd like to give the floor to Professor facade with whom interpreter invite not to speak too fast so what are the factors were generated a social inequality and why that is so dangerous for the future of American economy you have the floor thank your osela for that very generous and extensive interesting introduction I'm talking about lots of the work that I have done over the years and moving towards the things I'll be speaking about tonight you see on the on the screen here the English title of the talk tonight income inequality the Great Recession and slow recovery and underneath at least the first part of the Italian translation I found in the official program la luce and fungal alto no I didn't quite understand why we had the light at the end of the tunnel as part of this title but after a little bit of thought I used my limited Italian skills going back to my grandparents to make a modification so the Italian official Italian title I would like to make is this la luce and fungal alto no spell llamo cane own a lute a gnome and for you English speakers that means if there's a light at the end of the tunnel we hope it's not a train so we'll see how that plays out I'm not quite sure what the answer is here with with respect to our discussion today okay so first let me acknowledge the co-authorship that Rosella mentioned from Barry cinnamon of the work that I'll be talking about tonight is it's very much a joint product and a lot of the creative ideas I'll be discussing come from Barry it also acknowledge the generous support of the Institute for new economic thinking which is the co-sponsor of this lecture tonight so let me begin by talking about the message that I want to share with you it's linking two major features or aspects of the US economy one is the macroeconomic experience of the last several decades this is a period of reasonably good economic performance at least up until 2007 starting in the mid-1980s that in the US has been called the Great Moderation a period of relatively calm economic growth a few wrists two recessions but but fairly mild recessions and reasonably strong growth low inflation relatively low unemployment for much of that period especially in the late 1990s and early 2000s what followed that calm period of the Great Moderation was a historic recession in 2008-2009 known in the US as the Great Recession sometimes called the global financial crisis and then a surprisingly slow recovery six years of what I think could be accurately called secular stagnation that's the first set and the macroeconomic set of facts that I want to you know start with tonight the second major piece that I want to tie together is rising inequality of income and for those of you that saw the very interesting presentation of tamaki Cote just a couple of nights ago you saw a lot about the statistics of inequality across the world but in particular in the United States and I'll have more to say about that as we go forward let me foreshadow where I'm headed with several conclusions I think I can make a strong case that rising inequality played a central role in the increase in u.s. household debt that ultimately triggered the financial crisis in the US and throughout the world also rising income inequality helps explain the persistently stagnant recovery in the aftermath of the crisis and I'll have more to say to justify that claim for those of you that know a little bit about the macroeconomic data you might be thinking well the u.s. is doing relatively well and that's true the u.s. is doing relatively well but I wouldn't want to argue here that in an absolute sense we could be doing better and we'll talk a bit at the end about how the lessons from these experiences extend beyond the US I apologize for coming to Europe and talking almost exclusively about the United States but it is what I know so it's probably what what I should talk about okay let me begin on the substance here to talk about what I'm calling a nasty recession and a slow recovery give you an overview of my take on the data of the US economy in the recent years so what begin here and let's see if this works I believe well probably gonna be hard to see if you're looking there so I'll try not to use this extensively but if you look at the chart it's a look I'd rather a complicated looking chart but let me explain what it is I have taken employment for every u.s. recession beginning in 1974 1975 and indexed it to a hundred at the beginning of the recession so they all started a hundred during the beginning of the recession employment Falls and then employment recovers and I've tracked each recession until the employment level gets back to the level it was at the beginning of the recession so for example if you can see my little cursor there this is 1974-75 there's a sharp drop in employment and then it comes back very quickly the early 1980s does this this is early 90s this is the early 2000s a somewhat more extended recovery but the basic story here and I could talk a lot about the nuanced differences between these these different business cycles but the basic story is they all largely lie on top of each other the drop in employment is about probably average is a little less than 2% across these recessions 7475 was a little deeper some of the others were a little more shallow the recoveries were more extended in the last two but you know at the end they all seem to come back in about three to four years back to the level that they we were before the recession began so this was a sense of a kind of standard-looking recession in the u.s. up until this point now what happens in 2008 and 2009 a big difference so you can see a completely different kind of experience in the Great Recession instead of employment falling one and a half to two percent it fell about 6 percent in the in the beginning in the very first few months of the recession it looked pretty much like what had happened in the previous business cycles in the second half of the of the well the last quarter of the 20th century but then it really crashed starting her in the fall of 2008 with the failure of Lehman Brothers and the emergence of the global financial crisis moreover there is this extended slow recovery it's taken now finally I can finish my chart we the US has gotten back to the number of jobs it had at the beginning of the recession in December of 2007 but it took about 76 months to get there in May of 2014 we finally hit that point also I should point out that the this is not adjusted for the growth in the labor force so if the recession is relatively short you can pretty much ignore the fact the labor force is expanding but for such a long period of time the fact the labor force is growing makes a difference and if you adjusted this for growth in the labor force you'd find that the recovery is is hardly even noticeable yes maybe in the last year a little bit but relative to the size of the labor force has been hardly any recovery in the number of jobs in the US so this starts to support my my claim that the u.s. is still underperforming even if it's doing better than other countries in the world let me look at actual output in this context and the chart you're seeing right now is is based on some official statistics that come from the US government the solid blue line I hope it looks blue to you is is actual GDP the dotted line is something that the government calls potential output it's an estimate of where the economy would be producing if it were fully utilizing its resources and you can see that through most of this most of this time the actual gets pretty close to potential there is this period in the late 1990s which according to the US government the US was producing above its potential I actually would somewhat disagree with that view but that's not so important for our discussion right now here's the recession of the early 2000s here's the recession of the early 1990s you can see that the gap yeah Beach in in the in the Great Recession is much larger according to this measure it's starting to close but still remains quite significant as of late 2014 the gap was still estimated at 3.2 percent but I think even this underestimates the the extent to which the US has fallen behind where it could be so let me show another slide which is a bit technical but bear with me this is a something I don't think you would have seen before most of you this is a let me explain where this comes from by law the Congressional Budget Office in the United States is required to forecast potential output of the economy ten years forward and the government uses these numbers for budgeting purposes and for evaluating the effects of different kinds of policy changes so we can actually go back and look to see what the forecast the government forecast was for the economy more or less as we are right now actually this is the third quarter of 2014 and what I have done here on the heavy downward sloping line is traced those forecasts for the same point to trace the forecast for the third quarter of 2014 as they evolved over time so the first one was done in 2004 and then every year after that and this is the actual estimate or at least the estimate of a few months ago of the GDP in that quarter and so at the end the very end you see the 3.2 percent gap which looks quite small on this chart so what is this telling you that in a sense looking back in in the say 2004 six five six and seven before the Great Recession the US government was projecting the potential output would be dramatically higher than it actually is at this point in time in fact if you take the gap as I've shown on the chart and as estimated at the eve of the Great Recession in 2007 you have just under a 25 percent difference between what actually happened to what the the government thought would be the the you know the long-term trend so this is a really dramatic statement for how the economy has in a sense underperformed now what explains this change let me show sheriff a few thoughts with you I sit in front of you as a representative of what in the United States we call the baby boom I was born in December of 1955 in the two decades following World War two more or less at the peak of a large time of very high birth rates in the United States now of course the baby boom is getting older I'll be 60 years old this December and the leading edge of the baby boom especially people born in the in the mid to late 1940s are clearly of retirement age and are beginning to retire so one of the thoughts here is that that the the retirement of the baby boom will slow the growth of the economy will reduce the size of the labor force well there's a lot of things one could say about that but let me tell you this this is not a surprise the fact that I am getting older is no surprise to anybody and the and the same thing for everybody else in my cohort the Congressional Budget Office who makes these projections knew in 2007 that the baby boom would get older that's not a surprise that can't really explain why they were not why the forecast was so far along what about some other economic factors well slower capital accumulation so one of the one of the important factors that goes into the estimate of potential output is the in business investment of the addition of factories and machines and and computers and office buildings and all these kinds of things that we we call the capital stock and indeed when the recession hit there was a big drop in business investment let me show you a chart then I'll come back here there's actually two big drops in capital accumulation on this chart the first one occurs after the bursting of the technology bubble in the early 2000s the bigger one occurs right ads and actually you look at it hardly drops in the very few first few quarters of the Great Recession but one thing once the recession hits it drops dramatic and it's actually come back quite significantly but there's a massive drop and if you think of this as somewhat normal experience this this this gap here this big dip represents a loss in capital so over time this has been accumulating but you see it's the result of the recession it's not the cause of the recession the investment was actually quite strong up until the recession even in the first few quarters of the recession so that in a sense you could say well that this is a reason the potential outputs lower but it's because we've had it's because we've had weak economic performance in fact I've got a statistic here on the slide that says a recent report from the International Monetary Fund which is quite interesting it talks about the the shortfall and US investment is as being 20 percent in this period 2008 to 2014 relative to where they expected it to be pre crisis so again an example of how the economy is underperformed what about labour declining labor force participation so indeed there has been this effect let me show you another chart this one is the ratio of people working in the u.s. to two different measures of population the lower number blue line the kind of wavy blue line is I believe a number of people who are working divided by population over the age of 16 and you know you can see here that there was this period where the baby boom was entering the labor force and also there was a big increase in female labor force participation when there was this upswing in the number of people working I dropped off into all those drops in recessions it dropped in the 2001 recession but interestingly was beginning to recover there's a bit of an upward slope here as the economy came out of the rather long stagnant period in the early 2000s but when we hit the Great Recession it drops quite dramatically and hardly changes at all this is roughly what I always had in mind when I said if you adjust the jobs for labor force and labor force growth there's really hardly any recovery just to make the point a little more clearly about demography I've also shown this chart the upper line which is what in the jargon of the statistics that editions we call the participant participation rate of prime age employees so this is people between the ages of 25 and 54 so I'm well beyond the limit here and here you see even bigger upward trend but again the same kind of dynamics a drop off in 2001 some recovery we were moving back in the right direction but then a massive drop the point here let me just go back to the previous slide that said that both these factors more capital accumulation and declining labor force participation are the result of the crisis they're not the cause they did not have to happen and that leads to my conclusion of this first part the us could be doing better like I said there was fairly positive economic news in the United States in 2014 finally the monthly job creation numbers were enough to do a little more than then absorb the growth in the labor force but the this notion that the US economy was doing well in 2014 was more about changes than levels that is it was growth rates and said well we're doing better than we were the previous month or the previous quarter I would I would argue that the level of output that and employment we're still substantially below what we could have you know we could have had if we've not had the crisis of the Great Recession I and I would point out that there are some signs of weakness in the u.s. in the early 2015 data it's still pretty early to tell but some of the jobs reports have been disappointing and it was just reported a few days ago a revision of the first quarter output numbers GDP numbers to a negative 0.7 quite quite disappointing in many respects there's probably some seasonal factors at work and a tough winter especially in the Northeast but nonetheless well below what what many economists were projecting so I want to emphasize here it's the economic weakness of the crisis of the Great Recession that led to the reduction if there has been a reduction in but and I think there probably has and the economy could have been on a much higher growth path this is not some kind of natural or unavoidable phenomenon in my view and that's and that's fundamental to the argument I want to make with you this evening so before I get into explaining what actually happened and then leading to you know where we are right now let me just share with you this this one chart which I think is quite striking a motivating fact stagnant household demand looking at the purchasing of the US household sector so I've actually plotted here the actual value see if I can move my cursor around so what you see is a very stable upward trend in consumer spending this one happens to be estimated from 2000 to 2006 the peak of the previous business cycle to the peak of the more recent business cycle but you could go back further you could do this all sorts of ways you notice that the actual data just lie almost exactly along this trend this was the way the US economy was generating the sales and the demand businesses needed to employ the labor force to see some recovery and labor force participation to see a decline in the unemployment rate and I want to argue very forcefully here that in no sense was this this amount of demand excessive now people have pushed back on that I'm sure there will be some questions alike this wall you know we were financing with lots of debt they were building way too many houses and I'm happy to respond to those kinds of concerns but in the aggregate if you look at the US economy unemployment was falling that's good we got down to about 4.5 percent that's good thing but it wasn't them I don't think it was too low in any sense there was no acceleration of inflation if anything wage growth was relatively stagnant during this period interest rates were low the Federal Reserve for much of this was trying to stimulate the economy you know we needed this demand the trend you see in the first half of this chart is a trend of demand and sales growth the businesses needed to at least approximate full employment of the labor force by the end and look what happens after really the beginning this starts already in 2007 that we dropped way off the trend now it looks like the drop itself is not dramatic here but if you compare that to this history this is really is a historic drop you know the consumption spending tends to be tens of march upward over time at least it has in a very steady way to so to see this kind of stagnation for several years is actually quite unusual and yes the US economy has resumed growing and a consumption has resumed growing but notice that we're not closing this gap in fact if you look carefully the gap is actually growing the slope of the actual line is less than the slope of what the trend we were on prior to the recession now it would be right to say that this there's nothing more than a trend here there's not any deep structural x explanation for why this should be the right level but as a practical matter over a you know a period of time not not terribly long period of time this was the way the US economy was maintaining what became an approximation to full employment and we're not there anymore indeed this gap is 1.6 trillion dollars as of the end of my estimation which is about 10% of GDP way above that 3% gap that we estimated before this is a this is a big number and motivates where I want to go from here so what I want to argue is and if you if you know the jargon of macroeconomics this is the Keynesian macroeconomic theory we're spending and demand drive the economy that the US economy received a massive demand shock in the jargon of macroeconomics around the time of the financial crisis and the Great Recession the u.s. needed that demand of the 2000 to 2006 period to maintain a reasonably good economic performance it wasn't excessive but we had this historic drop of household spending this was the reason we had the Great Recession and that demand gap is the reason for the stagnation in the economy in recent years that I've been talking about it was entirely unanticipated before 2007-2008 as those forecasts I showed you indicate so the question is what what happened to caused this collapse which will be the next part of my talk and here I want to link income inequality and household debt and argue that those two factors really sowed the seeds of what became the Great Recession so let me begin with income inequality this is just a repeat of the chart you saw from one of the one of the producers of this remarkable data Piketty the other night I'm just showing a part of his numbers but in this case it's the share of the top 5% of the income distribution in the United States starting in 1960 and going through 2012 which is the last piece of data I could get and what you notice is there's really two regimes here sorry backward the the first part from 1960 to roughly 1980 when income distribution was remarkably stable that the the the share of the top 5% just just fluctuating between roughly 22 and 24 percent it hardly changed at all and then starting around 1980 a fairly persistent upward trend I'm using the data that include realized capital gains which tend to be quite volatile for the top 5% and so you see some some significant drops around recessions but the strong upward trend is is it's clear even in the last few years you see the recovery from the Great Recession that it appears that income distribution is again headed upward it will be interesting to see how this plays out the the total increase here on average is about 15 percentage points and I want to pause here for a moment to emphasize that is a very big number this these shares have to add up to one if you're shifting 15 percentage points of what is effectively the income of a large economy like the u.s. to one out of 20 people from 19 out of 20 people that is a massive shift in income distribution so here's the case for for rising income inequality now I want to talk a little about a little bit more detail of where this comes from so one thing is and this won't be a surprise but but this says its income growth dropped for most Americans so here's a few numbers where we're taking the the growth in inflation adjusted household income for the bottom 95 percent of households in the top 5 percent of households in that period of relative stability in the income distribution the bottom ninety five percent grew at an average 1.9 percent per year in the top five percent two point one percent not much different and that's consistent with the stable share of the top five what happens after 1980 is the bottom the growth rate drops quite significantly to 1.1 percent while the top accelerates and then of course we get this shift of the shares that I showed you in the previous chart another important factor during this period was the rise in real interest rates that took place in the night in 1980 there was a big increase in interest rates and the actual intra nominal interest rates that the Federal Reserve said in an effort to fight inflation and in fact that was to some extent a successful inflation fell dramatically so interest rates adjusted for inflation skyrocketed in in the early 1980s now here's the key point what is the requirement to keep the balance sheet of the household sector stable if income growth drops and interest rates go up well what has to happen is the the household sector with it is experiencing those those changes has to cut back on how much it spends relative to its income so for the bottom 95% anyway if they were going to avoid an explosion of debt relative to their income they had to cut back their spending otherwise debt would rise in an unbounded way and the recent paper that Barry and I have published derives these relationships from the basic accounting in a rigorous way okay so the question is did they do it the answer is no they did not cut their share of income they spent this is the aggregate number of consumption relative to after-tax income and you see it actually did fall but prior to the the superior we're talking about it fell in the 1950s in the 1960s was volatile but relatively stable in the 1970s and again around 1980 and there is this period around 1980 when lots of things change in these charts that I'm showing you you get a pretty sustained rise in consumption relative to income until until you get to the Great Recession when it drops and I'll have more to say about that in a minute let me go one step further because this the last two years of my life have actually been spent trying to come up with effectively this chart and the extension I'll show you in a few minutes because it's very very difficult to decompose consumption spending between different income groups we can do a pretty good job of looking at how income differs across different households but consumption data really are not very good but bury cinema and I have worked hard to put this together we're fairly confident we've got it right so what this shows is actually the consumption to income share of the bottom ninety five percent itself that's the red line right here and here that the increase is less dramatic it's a modest increase of two or three percentage points the main point though is that it did not decline that is that they did not decline they did not reduce their consumption share as the their income growth fell though the top five is interesting but I'll talk more about that you know in another chart when I have a little more data in a second so let's focus on the bottom ninety five first so so what we're showing here is that they did their income growth fell the interest rates rates they had to pay were rising and they did not cut back the consumption income ratio what is going to be the implication the implication is the debt will rise how did they pay for this they bet they pay for it by borrowing so here's a long history of US debt to income in the aggregate going back to around 1950 in the post-war period there was a buildup in debt but it ultimately stabilized a somewhat higher level this is largely in my view the baby boom families buying houses taking out mortgages but their income growth was high and everything stabilized pretty nicely by the mid-1960s and stayed stable until again about 1980 when income inequality starts to rise and interest rates rise income growth in the lower part drops and we start to get a quite significant rise in debt and then it even accelerates more in the late 1990s when the housing boom really is in full full force it Peaks about 2005-2006 and then does come down we have so-called deleveraging in the Great Recession just one other little point here there's two different lines if you know these data the the blue line is the official numbers vary and I have worked a lot to to improve the measurement of household disposable income and there are lots of things in the way the government measures disposable income better might seem a little strange to the average household for example I own my own which means according to the government I pay rent to myself and that rent to myself becomes part of my income well that's their reasons for that I don't want to get into the details but obviously that income is not available to me to service death and so you see the more dramatic rise in our adjusted figures that take these factors into account okay here is the same kind of data but now decompose for the bottom ninety five percent and the top five percent so the red line is the bottom ninety five percent and you see the the increase is concentrated among people outside of the top of the income distribution there's some movement maybe a tiny bit of an upward trend for the top five percent but the main action here is rising debt outside of the top which is not surprising but supports the view that this is the group that was falling behind in the income inequality problem and this is the group that was borrowing innocent what turned out to be too much so what was the result of this what I've done for you is lay out what I think were the seeds of the Great Recession actually let me go back to this chart this high debt level was in fact unsustainable you couldn't keep growing debt to income year after year after year after year the question of what turns it around is interesting and beyond what I have the time to talk about this evening but but this is that this is the seeds of the financial crisis when this is no longer could continue when this group of people were cut off from credit they stopped buying houses the house prices stopped to rise the collateral for the loans fell we got what became the Great Recession we got a collapse in household spending and and this was the Great Recession the direct cause of the Great Recession who cut back when this happened so here's an extension of the chart I showed you earlier and what you see here is a big contrast between the bottom ninety five percent and the top five percent the bottom ninety five percent actually did cut back now finally they did they moved back down towards what turned out to be at least somewhat more sustainable spending pattern during this period did the top 5% do the same no they did exactly the opposite they increased consumption relative income so let me just share a little bit of economic theory with you economists like to talk about a model they call there's a lot of different terms for the lifecycle model of consumption the permanent income theory of consumption sometimes it's called consumption smoothing the basic argument is that people would like to keep their spending path their consumption the things they buy relat smooth relative to their income so if their income drops they hope that they can keep their consumption you know still pretty high not not have their consumption drop as much what that means is in periods of recession when incomes go down that the ratio of consumption to income should rise and that's exactly what happens if you're relatively affluent in the United States then here's a recession period here's a recession period here's a great recession period when they're in when the ratio consumption stayed pretty stable and consumption relative to income went up not so if you're everybody else if you're in the bottom 95% in fact when when theory economics on base against economic theory would have predicted that consumption income would be rise and in fact it fell why because they were cut off from the credit spigot that was feeding their consumption going forward just more evidence that this inequality these differences between these groups were quite significant in the macroeconomics that led to the Great Recession this is a just to show this is an aggregate chart the big black arrow there shows that when you adjust for our cash flow measures of consumption you get a massively bigger decline and so there's maybe even more there than in this picture which is based on the more official statistics but that's a technicality it doesn't change the main message from tonight so I want to finish up now in the last few minutes with a discussion of where we are and how inequality is playing a role in the stagnant economy of the United States in these last year's so the title here is a nuanced role for inequality because it's a little bit complex it's not straightforward there is a fairly straightforward story for why rising inequality would slow an economy and it is that as but as our data show high-income people spend a smaller share of their income than everybody else so if you redistribute income upwards total spending the economy will fall $1 taken away from the bottom 95% given to the 5% reduces total spending and if you believe that spending is an engine of the economy and I do think there's a lot of evidence that that is correct then then this could create a drag on the economy the problem with this simple story however is that is one of timing in the in fact so many many of you here will hear Paul Krugman tomorrow and Paul Krugman says that when looking at some of these arguments that he is sympathetic to the idea that inequality is holding back the economy in principle but he just doesn't think the data work I somewhat disagree I actually fundamentally disagree my research for the last three years has been trying to show the opposite case and in the the timing problem you have to think about what what happened in in the actual history does that the u.s. experienced that this borrowing behavior the borrowing to spending of the bottom 95% postponed the demand rags caused by rising inequality that the it was true that their income was growing more slowly but they did not cut back on their consumption because they they had the motivation to and the ability to borrow and here I want to emphasize that this required the financial system when I tell this story as I have around the world a number of times in recent years I often get a question well I thought the Great Recession was all about you know collateralized debt obligations and shadow banking and deregulation of the financial system the falling out the ending of the depression here a glass-steagall regulation etc etc etc and in some broad sense I agree with that that is that it was the access to finance it was absolutely fundamental to this though bottom 95% needed to be able to borrow and the financial system provided that credit indeed many people would argue and I would agree with this the financial system encouraged it that because it was profitable this financial innovation encouraged people to take on more debt so therefore allowing them to spend more and therefore postponing the demand reg from rising inequality but this ended with the Great Recession in the Great Recession the middle class was forced to cut its demand they could no longer borrow and in some sense spend beyond its means the problem is we needed that demand going back to the chart I showed you know seven or eight slides ago we needed that demand to stand at full employment we lost it we didn't replace it so you can get the basic story here and let me just summarize the evidence for it one is that debt Rises when inequality began to increase the timing is right on you know right on in this respect to the extent that it I think it's all it's almost certainly true that financial fragility was central to the dynamics that caused the Great Recession this financial fragility was concentrated in the bottom ninety five percent it was that group that has that saw the slower income growth the bottom ninety five percent was the group that cut back in the recession the top five percent were actually increasing their consumption relatives their income behaving really differently and one additional piece of evidence which is already implied by the trend I showed you before the consumption recovery has been remarkably weak in my point being the high inequality is now constraining demand growth as this chart will will try to show so this is another one of my index charts where instead of indexing employment i've indexed consumption and this is our adjusted household demand measure of consumption the actual cash spending that households are undertaking adjusted for inflation so for the last five recessions I've indexed them all to begin at a hundred and what you see is I could pull my curser up again that there's you know some differences in the in the previous recessions you know a bit of declining consumption and some of them actually in the early 2000s no decline at all but recovery was relatively quick and quite strong so that once you got seven years out from the beginning of the recession that in every other business cycle in the US going back to the 1970s that consumption was in the neighborhood of one hundred and fifteen percent to one hundred and twenty percent higher than it was at the beginning of the recession what's the experience now it's 2% higher 2% cumulatively over the entire seven-year period so it's clear that the consumption recovery is remarkably stagnant and I want to argue that that's the the source of the kind of the difficulties in employment in an output and in incomes in the aggregate that I've emphasized for the US economy at the beginning of the talk so wrapping up here a bit what are the consequences one thing is just to make a very simple argument if you are willing to accept the demand is now too low and that's why we're having this stagnant economy and you're willing to accept that this the share of income spent declines as as we move up the income distribution so the rich generally spend a smaller share of their income than everyone else then it is true because of these two simple facts that high inequality is contributing to the stagnation I've given you a rather extensive sophisticated sense of data but the basic argument is really quite straightforward and the result is that we have a disappoint in recovery another consequence is that deleveraging is not by itself enough to restore demand growth there was a lot of discussion once it became clear how deep the Great Recession was and how how serious the problems were in the financial sector that was that we would need to have or there would be a relatively slow recovery because of the need to pay down this debt people may know of the work by Carmen Reinhart and Kenneth Rogoff that talks about the long histories of these things when we have financial crises recoveries are slower but they and I and I agree with that but it's not enough because it's not just the borrowing it's the fact that the borrowing was postponing the demand drag from rising inequality and to the extent that we still have is Thoma Piketty pointed out to us rising inequality then we still face a macroeconomic problem with stagnation it's also inconsistent in this world to be calling for government austerity that we are we have this demand gap from the private sector to suggest that the government should also be cutting back is just magnifying the problem that's true in the u.s. it's true in Europe we made a bit more about that and then also that recovery recovery relies to a large part on the spending of the affluent of the rich so this is my last chart this is taking our taking our data and presenting it in a somewhat different way so again an index starting in this case in 1989 when our disaggregated data begin and looking at the total consumption spending of the top 5 percent at least index to a hundred and the consumption spending of the bottom ninety five percent and what you see is in the first years in the early 1990s these were basically tracking now of course on a per household basis rich people spend more than everybody else but the growth rates were roughly tracking each other the the affluent begin to pull away from everyone else in the middle 1990s but still the bottom ninety five continues to grow until we get to the Great Recession when the bottom ninety five stagnate there is a bit of a dip a bit of a dip for the top five even though they raise consumption relative their income their total consumption did go down but you can see at the end just one data point but a strong recovery at the bottom the top five are coming back in the US and I think if I could extend to 2013 and 2014 we'd see even more of this but you know you see my little attempt at Italian here on the side questa known a lot mobility so jolly this is not social mobility this is this is a greater and greater share of the consumption of the production of the economy being allocated to at the top of the income distribution you see in my title their economic democracy with a question mark in the US we like to talk a lot about democracy it's a very big you know civic virtue in many respects it's talked a lot about on both the left and especially the right but in the economic sphere this is not democracy in addition I put the question where is the focus of innovation to the extent that the affluent are driving a larger and larger share of consumer spending in the demand that we have in the economy then that's where business is going to focus that's where they're gonna innovate they'll try to find new and better products that the that the people who have the money can purchase there's nothing new about that but you know it's problematic as this continues going forward so what are the broader lessons and I believe this is my last slide there are other countries facing secular stagnation Japan most obviously the eurozone where we are right now Italy in particular I looked at the data for Italy it was not cheap real GDP production is 9% below its recent peak in the early 2000s that's a stunning decline in a developed country so this is a the problem of stagnation is obviously not concentrated in the US I think some of the dynamics that I talked about of rising inequality and household debt certainly applied to countries like Spain and Portugal in the UK to a large extent maybe less so in Italy although as Piketty points out the inequality problem is certainly here in Italy as well so inequality is high and rising that would from this perspective slows demand generation so these lessons from the us analysis apply more broadly everybody wants to know and think about policies to reform this the situation and to generate a more equal distribution of income Toni Atkinson who is here and I heard one of his talks is a articulate and an informed person to talk about these things he discusses both the intrinsic and instrumental reasons we need to reduce inequality the intrinsic reasons are basically because it's the right thing to do in particular focusing on the bottom part of the income distribution who live in poor conditions in our rich economies and that is unacceptable for intrinsic reasons but there's also the instrumental reasons the idea that actually reducing inequality can improve the overall performance of the economy and that is the message of the work that I've taught shared with you tonight that is it's not I believe social justice is very very important in this context but also the overall performance of the economy is being compromised by the inability to generate demand coming from rising inequality so let me stop here I think we're pretty much on the time that we planned I'd be happy to take a few questions thank you very much for your attention hey Laura I saw chase possible work at the Wonder Boy now we can entertain capital we can entertain a couple of questions I also have a question and I think we probably all accept the basic conclusion that you're drawing that that if we can reduce the inequality particularly at the top that that's first of all the right thing to do and secondly it would be beneficial but let me just inject little more pessimism and into the discussion if we're looking at what we should expect the performance of the US economy to be over the next few years it seems to me that one thing we're observing is that we've had a big deal evering and that that deleveraging of debt is the right thing to do and it's permanent in other words the Great Moderation we can now see was built on shifting sands it was built on debt accumulation that was unsustainable so if we assume that going forward we're not going to go back to massive debt creation we're going to be held back in our growth potential by having a more rational allocation of death how much can we really expect to gain in terms of getting back to the old potential growth pattern out of dealing with the inequality problem it doesn't seem to me that it's likely to be that big okay sure so thank you Jim my new friend here in Bergamo very much don't though but our gamma was that was the earlier part of the trip so thank you for the for the interesting comment most of which I agree with so it is I agree we're in a deleveraging period I agree that that we need to be in a deleveraging period the household balance sheet was unsustainable the dynamics of it the way that debt was growing was unsustainable this had to change this is a lesson we would have gotten I should have mentioned one of my mentors and an important economist in the US and also in Italy Hyman Minsky who who talked about this this kind of dynamic more on the business side but applied to the household sector it had to go this way in many respects so this is in fact the reality it's the reality I expect for the for the next few years where I I somewhat disagree though is it could it have been different in particular if we'd had faster income growth across the income distribution over the past 20 years I think the answer is it could have been different and I would point to the history of the u.s. in the post-war period where we had very very strong consumption growth but-but-but-but income growth across the distribution if anything a bit of a reduction in inequality during that period of time also just to share a statistic with my economist friend here so it's a more technical part of our research that I talked about with graduate students today but we've actually looked to see this kind of magnitude if we look at that share of the amount of shift that took place in the income distribution roughly 14 or 15 percentage points and make sensible estimates about what the different consumption behaviors would be in these different groups we actually can explain a gap in demand as the result of that shift of at least nine and a half percent and depending on people's views about consumption could even be larger but I'm moving up towards 15 percent so it actually can be quite substantial now and we're not this is a long-term phenomenon we're not gonna jump back there but in terms of the underlying potential of the US economy to produce I think we could be doing a lot better and it's the nature of this set of dynamics that's pulled us away what does that suggest from a policy point of view it says we need to be thinking about dealing with income distribution and and I think there are many many reasons to do that and I would not even argue that the material or the the work I've shared with you tonight is the most important reason but I think it is a it is an important reason and what our research is trying to do is is to develop this part of the story that is how rising in income inequality can be quite significant you know for a major economy like the US the only one I also have I also have a question can you expand on the comparison between US and Europe my impression is that in Europe the level of in depth meant of households it's much lower than that of the US households does that have implications so we have less inequalities or do we have inequalities even though the financial burden on households is lower so first off let me qualify my answer that I'm focused on the u.s. I study the US I know I don't have detailed knowledge of any really any other country in the world but travel here in Europe and talk to a lot of Europeans and it paid some attention to some of the developments here so I think that the answer to the question of the comparisons between the US and Europe and the similarities and differences depends a lot on which country you look at it but here I don't think Europe can be taken as a whole so as I mentioned in the I don't think it's on the slide here that's at the end but I did mention in my comments that Spain Spain in particular had a very similar dynamic with housing with Mauro I don't know that much about income distribution in Spain so today's not so right right so Spain had this Portugal had this UK had this and in UK I know a little more I think there you do have the rising inequality issue too so I think there there's maybe more of a parallel you know the Italian case it clearly clearly is somewhat different I wish I knew more about it I should be studying it more because of my affection for this country and I I agree but you know my sense is that for example mortgage debt it's not as big of an issue there there actually a number of studies going back to some of my earlier research 20 30 years ago which was looking at comparisons between the US and and and Italy in terms of the way that more houses were financed so there is a different story there I I do think though that this notion of demand stagnation has to be taken seriously and it you know again just to emphasize if that's the way you're going then the fiscal austerity which is coming from the to a large extent the the nature of the political and economic relationships in the European Union becomes you know a major problem you know you know for Italy in that in that respect so I actually think the framework could be used obviously I'm not in a position to actually do it but I think this kind of framework and way of thinking could be used and I would pay attention to the household the household sector here maybe not so much because of debt but looking at inequality and looking at housing and looking at at the way these kinds of dynamics are playing out in the Italian context Salva your buddy working so what do you think about the reasons or how is it possible to implement social equality I am a student who had a very active discussion concerning justice Robert Nozick Amartya Sen theories the issue of social justice there are different schools of thought I think it was Hayek who stated that the idea of social justice by itself has no value I mean I think that we have to defend social justice but how can we do that pretty aggressively that from a philosophical viewpoint and also from economic viewpoint is there a way to do that thank you for the question which I very competent translation I hope at least I understand it so hopefully I'm answering the question you think that how is it possible to implement social equality you know a reference to for the English speakers in the audience I should probably do this if you're not listening to the translation how do you know how does this link to theories of social justice of a Marcius Sen John Rawls may even maybe not be mentioned but it was there you know you mentioned Hayek and Nozick on the other on the other side of this and in my views on these kinds of things and how economists might respond to them so this is a big question a whole course in some sense at least could be could be used here it's an area in my own reading and thinking that it is relatively recent so one one part of the answer to the question is to talk a little bit about economics training and how it how it plays out in this context most economists don't read the things and this is something that economists have been ignoring largely as a you know as a group don't teach it don't read it don't talk about it don't deal with the issues of social justice and I think that's a huge problem I thought that was a huge problem for my entire career and part of what has attracted me to do the kind of work you see tonight was the the mixing of my interest in Keynesian macroeconomics with ultimately a concern with income distribution and social justice I'm not putting forward social justice directly is in my analysis but it's but it's there in my own view so I'd like to criticize my own profession of economics is not paying enough attention to these kinds of issues you know you ask the question of of how of how this can be done in many respects and I think to a large extent your questions seem to focus more on the philosophical aspects of changing the way that economics is discussed is taught is in many respects and that I support but but I think there's you know we do need to move in this direction here I would point to Atkinson in terms of policies designed to work in this and work in this way that we do need to pay attention to the the need to achieve a more equal distribution of income and more uniform growth across the distribution of income and you know there's a variety of ways to think about this you can think about this in terms of labor market institutions of institutions that are trying to protect wages and increase wages in the u.s. the minimum wage is is remarkably low and it's been falling after adjustment for inflation for many many years the ability of people to have jobs one of the best one of the best ways to increase wage growth is to have strong labor markets and the problem from the point of view that I've presented tonight is that that the weak labor markets stagnation high unemployment because of rising inequality leads to lower wage growth and so it's a vicious circle that even makes a stronger argument for things like fiscal stimulus to get the economy going to improve the labor market situation so wage growth Rises I've recently become very interested in programs to provide jobs at a living wage through some kind of public activity or a public-private partnership where the job pays a good wage you know has has good what we call the u.s. benefits medical care childcare some some provisions of retirement decent working conditions to set a floor on what's on what's an adequate you know what's an adequate job in a rich country I just read just an hour or two before coming in here an op-ed in The New York Times by a an interesting commentator by the name of Mark Bittman who writes a lot about food but in particular what he he was talking about food workers and some some movements in the US to raise the wages of food workers but he made a more general point which I very much agree with that is if the only way that a job can be viable in the economy is to pay the worker a wage that it's dramatically below what's a reasonable living wage given the context of those you know the wealth of the society then that job shouldn't exist and and I and I strongly support that view and we need to move in that direction I actually don't think I don't think the evidence points to the fact that raising things like the minimum wage has a big negative impact on jobs but in the end if a few jobs go away that that are that are providing too low of a wage maybe that's the way it should be maybe we shouldn't be you know having that kind of production or at least paying those kinds of prices he was talking specifically about food workers picking lettuce and save our salads more expensive maybe that's the way it has to be to treat the workers who who pick the vegetables in a reasonable way so you know this is a big big big issue and it's outside the scope of my research but I I applaud your commitment to social justice and and think that there are just a wide range of compelling reasons to move in this direction it's cute put on a single economist or I'm not economist and I greatly appreciated your talk and I followed it very closely I was wondering whether the same conclusions couldn't be supported also by the study on the growing of savings or on focusing on wealth if that is possible the question is how could this perspective with you this evening maybe recast in terms of saving and wealth and this is a this is a tricky business I think it's an excellent question because you hear me and at least implicitly saying the American economy doesn't have enough consumption not enough consumption to get the full employment and that's that's a statement I'm gonna stand by but at the same time we know at the individual level if you want to provide a certain kind of security for yourself now and into the future and pass something on to your children you need to save not consume so how do you square these kinds of things and this is a deep question in economic theory and the answer which I've come to a few years ago and lots of discussions with a variety of interesting people is that that there is a kind of paradox between the microeconomics the the the individual behavior of the household and the aggregate that for any individual of course your wealth will be higher if you save more for the economy as a whole there is what we Keynesian is called a paradox of thrift that more saving in total does not improve the economy in fact it can make the economy weaker and if that leads to lower capital accumulation fewer homes constructed then in the end you have lower wealth so how do you reconcile that that basically what's happening with each household is that the individual saver is competing to own a share of the wealth created by investment in the economy as a whole and this is that you know is that conundrum so how do we deal with that in some respects I think that's a really deep question and in many respects I think it is important to have more wealth in at the lower part of the income distribution the middle part of the income distribution and beyond but we can't really get that by by reducing consumption so one thing of course is increasing income growth there so there is room we have to have more investment in the broad sense but I also think there's a role for government to play here I would be supportive of something that the phrase I would use for it but I'd certain it's not original with me it's a citizenship account which is actually a government provided fund of every person at Birth to start building wealth and maybe even investing in the economy as a whole I have the view that probably no we've seen profit shares rise but we need to spread the wealth of that profit share around a bigger group which means we need to find ways to have greater share of ownership spread out so this is a rather a vague answer it's something I haven't worked out all that much but the basic story is I do believe it's important not only to talk about Equalization and income which is what I emphasize tonight but also equalization and wealth for these kinds of reasons thank you I actually have a question about shadow banking that you mentioned earlier considering its effect on influence on the increasing of the inequality in the u.s. in your opinion what will the effect of the dodd-frank act will be thank you so I just want to make sure I got the first thing you just repeat the first sentence you said you have a question about well the effect of dodd-frank eggs that it will have the limits on the order regulation okay of the shadow banking the central bank okay shadow Baker yeah okay very good thank you okay so it's a good question you know again my part of this is looking more at the consumer side less of the financing side but you know I have paid a lot of attention to these issues in my in my teaching and you know I think the dodd-frank is a relatively weak control in many respects I do think there is an appropriate role for this kind of regulation a lot of the things that thought that American households were doing in credit markets especially in the last five to ten years of the financial crisis you know they shouldn't have been doing the kinds of loans that they were taking were inappropriate it makes no sense in my view for somebody to take out a mortgage that they cannot service at market interest rates with their income and so the there needs to be more effective protection along those lines I don't think we've really gotten that much from dodd-frank in that sense you know more is the focus on the part of the on the part of the system which I'm less I'm less familiar with the I like you say shadow banking and and the financial regulations themselves there is this this it's kind of attempt to stop to prevent systemically important institutions from being bailed out by the government my rough sense is that will not work the next time we have a financial crisis that it's these things tend to be very backward looking this is a perspective I learned from Hyman Minsky that financial institutions find ways to to innovate around these kinds of regulations so these regulations are always fighting of the last to the last battle the last crisis so I'm not terribly optimistic that this will work now I will say this that I think the financial system is somewhat is somewhat chastened by what happened here and this goes back to the first question about you know the potential for the US economy to grow going forward that we are not going to restart this kind of borrowing behavior and I actually think that's right at least for some time although I following my mentor Minsky will tell you that well will it be five years will it be ten will it be 20 but but even though we've had a big drop and there's a and there's a much more conservative financing structure out there these days not so much due to regulation but they do do do tow to actual behaviors in my view that will I suppose eventually change but probably not as quickly as it has in the past this has been a big change gotcha me leftover sir pizza thank you very much mr. fonsella and thank you very much for your kind attention