Income Inequality Peaked Before Both The Great Depression And Great Recession

Unemployed men queued outside a depression soup kitchen opened in Chicago by Al Capone, 2/1931.National Archives Catalog

Income inequality in 2018 is significantly higher than it was prior to both of these devastating economic downturns.

Following the financial crisis of 2008 and ensuing recession, congressional leaders issued a report detailing the role income inequality played in setting the stage for economic turmoil – and their conclusion is unsettling.

The U.S. Congress Joint Economic Committee’s 2010 ‘Income Inequality and the Great Recession’ report found that extraordinarily high income inequality precipitated both the Great Depression of the 1930s as well as the Great Recession.

As it currently stands, income inequality is greater in the U.S. than it was prior to each of those economic disasters, and there is no sign that the trend will slow.

> Income inequality peaked prior to the United States’ two most severe economic crises – the Great Depression and the Great Recession (See Figure 1). At the peak of the stock market bubble that capped the Roaring Twenties, in 1928, the share of income accruing to the top decile peaked at 49.3 percent. The crash that followed set off the cascade of events that would ultimately land the United States in the deepest recession in history. Nearly 80 years later, on the eve of the Great Recession in 2007, the share of income held by the wealthiest 10 percent topped its earlier high when it hit 49.7 percent.

According to a 2016 report from the Congressional Budget Office, the percentage of wealth held by America’s top 10 percent had risen to 76 percent by 2013 – eclipsing the previous high by a wide margin.

Considering that lesser degrees of income inequality helped usher in America’s two greatest recessions, the current levels are particularly ominous.

The 2010 congressional committee report indicated that policy measures would be necessary to keep such a situation from leading to another recession; however the Trump administration and Republican leadership have taken steps to shore up the top 10 percent’s ability to continue its wealth accumulation.

> Economist Emmanuel Saez, winner of the 2009 John Bates Clark Award for his contribution to economic thought and knowledge, argues that income inequality will remain stubbornly high “unless drastic regulation and tax policy changes are implemented.” Saez makes a strong case for the importance of policy in mitigating the rise in income inequality, arguing that “the retreat of institutions developed during the New Deal and World War II – such as progressive tax policies, powerful unions, corporate provision of health and retirement benefits, and changing social norms regarding pay inequality” may be responsible for the explosion in inequity in our nation.

At present, there is nothing in place to mitigate rising income inequality and, further, a Republican push toward policies that would exacerbate the issue. Taken together, the U.S. is left vulnerable to another potentially devastating recession.