Tag: Sarah Bloom Raskin

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle

Posted on by Brad DeLong

Must-Read: Sarah Bloom Raskin (2013): Aspects of Inequality in the Recent Business Cycle: “An issue of growing saliency…

…how… economic marginalization and financial vulnerability, associated with stagnant wages and rising inequality, contributed to the run-up to the financial crisis and how such marginalization and vulnerability could be relevant in the current recovery…. I want to zero in on the question of whether inequality itself is undermining our country’s economic strength according to available macroeconomic indicators….

I will argue that at the start of this recession, an unusually large number of low- and middle-income households were vulnerable to exactly the types of shocks that sparked the financial crisis… 30 years of very sluggish real-wage growth… unusually large share of their wealth in housing… debt…. exposure to house prices had increased dramatically. Thus, as in past recessions, suffering in the Great Recession–though widespread–was most painful and most perilous for low- and middle-income households, which were also more likely to be affected by job loss and had little wealth to fall back on. Moreover, I am persuaded that because of how hard these lower- and middle-income households were hit, the recession was worse and the recovery has been weaker. The recovery has also been hampered by a continuation of longer-term trends that have reduced employment prospects for those at the lower end of the income distribution and produced weak wage growth….

I want to explore these issues today because the answers may have implications for the Federal Reserve’s efforts to understand the recession and conduct policy in a way that contributes to a stronger pace of recovery…. I hope my remarks spur more inquiry and discussion. I should also note that the views I express are my own…. To be sure, the increase in mortgage debt prior to the recession occurred across all types of households. But it was families with modest incomes and wealth largely in their homes that were the most vulnerable to subsequent drops in home values…. Given these developments, when house prices fell, household finances were struck a devastating blow. The resulting fallout magnified this initial shock, ushering in the Great Recession….

About two-thirds of all job losses in the recession were in middle-wage occupations–such as manufacturing, skilled construction, and office administration jobs–but these occupations have accounted for less than one-fourth of subsequent job growth…. It is not only the occupational and industrial distribution of the new jobs that poses challenges for workers and their families struggling to make ends meet, but also the fact that many of the jobs that have returned are part time or make use of temporary arrangements popularly known as contingent work. The flexibility of these jobs may be beneficial for workers who want or need time to address their family needs. However, workers in these jobs often receive less pay and fewer benefits than traditional full-time or ‘permanent’ workers, are much less likely to benefit from the protections of labor and employment laws, and often have no real pathway to upward mobility in the workplace….

My approach of starting with inequality and differences across households is not a feature of most analyses of the macroeconomy, and the channels I have emphasized generally do not play key roles in most macro models…. The narrative I have emphasized places economic inequality and the differential experiences of American families, particularly the highly adverse experiences of those least well positioned to absorb their ‘realized shocks,’ closer to the front and center of the macroeconomic adjustment process…. Circumstances–the outsized role of housing wealth in the portfolios of low- and middle-income households, the increased use of debt during the boom, and the subsequent unprecedented shocks to the housing market–may have attenuated the effectiveness of monetary policy during the depths of the recession. Households that have been through foreclosure or have underwater mortgages or are otherwise credit constrained are less able than other households to take advantage of the lower interest rates, either for homebuying or other purposes. In my view, these effects likely clogged some of the channels through which monetary policy traditionally works…

  • Congressional Budget Office (2011), Trends in the Distribution of Household Income between 1979 and 2007 (PDF) (Washington: CBO, October).
  • Orazio P. Attanasio and Guglielmo Weber (2010), ‘Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy,’ Journal of Economic Literature, vol. 48 (September), pp. 693-751.
  • Dirk Krueger and Fabrizio Perri (2006), ‘Does Income Inequality Lead to Consumption Inequality? Evidence and Theory,’ Review of Economic Studies, vol. 73 (January), pp. 163-93
  • Mark A. Aguiar and Mark Bils (2011), ‘Has Consumption Inequality Mirrored Income Inequality?’ NBER Working Paper Series 16807 (Cambridge, Mass.: National Bureau of Economic Research, February)
  • Orazio Attanasio, Erik Hurst, and Luigi Pistaferri (2012), ‘The Evolution of Income, Consumption, and Leisure Inequality in the US, 1980-2010,’ NBER Working Paper Series 17982 (Cambridge, Mass.: National Bureau of Economic Research, April).
  • Marianne Bertrand and Adair Morse (2013), ‘Trickle-Down Consumption,’ NBER Working Paper Series 18883 (Cambridge, Mass.: National Bureau of Economic Research, March).
  • Jason DeBacker, Bradley Heim, Vasia Panousi, and Ivan Vidangos (2011), ‘Rising Inequality: Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006,’ Finance and Economics Discussion Series 2011-60 (Washington: Board of Governors of the Federal Reserve System, December).
  • Raghuram Rajan (2010), Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton, N.J.: Princeton University Press)
  • Michael Kumhof and Romain Ranciere (2011), ‘Inequality, Leverage and Crises,’ CEPR Discussion Paper 8179 (London: Centre for Economic Policy Research, January)
  • Michael D. Bordo and Christopher M. Meissner (2012), ‘Does Inequality Lead to a Financial Crisis?’ NBER Working Paper Series 17896 (Cambridge, Mass.: National Bureau of Economic Research, March)
  • Neil Bhutta (2011), ‘The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods,’ Journal of Law and Economics, vol. 54 (November), pp. 953-83
  • Neil Bhutta (2012), ‘GSE Activity and Mortgage Supply in Lower-Income and Minority Neighborhoods: The Effect of the Affordable Housing Goals,’ Journal of Real Estate Finance and Economics, vol. 45 (June), pp. 238-61.
  • Atif Mian, Kamalesh Rao, and Amir Sufi (2011), ‘Household Balance Sheets, Consumption, and the Economic Slump (PDF),’
  • Karen Dynan (2012), ‘Is a Household Debt Overhang Holding Back Consumption?’ Brookings Papers on Economic Activity, Spring, pp. 299-358.
  • Rudiger Ahrend, Jens Arnold, and Charlotte Moeser (2011), ‘The Sharing of Macroeconomic Risk: Who Loses (and Gains) from Macroeconomic Shocks,’ OECD Economics Department Working Papers 877 (Washington: OECD Publishing, July).
  • Carmen DeNavas-Walt, Bernadette D. Proctor, and Jessica C. Smith (2012), Income, Poverty, and Health Insurance Coverage in the United States: 2011 (PDF), U.S. Census Bureau Current Population Reports P60-243 (Washington: U.S. Government Printing Office, September).
  • National Employment Law Project (2012), ‘The Low-Wage Recovery and Growing Inequality,’ Data Brief, report (New York: NELP, August), http://nelp.3cdn.net/8ee4a46a37c86939c0_qjm6bkhe0.pdf.
  • See Nir Jaimovich and Henry E. Siu (2012), ‘The Trend Is the Cycle: Job Polarization and Jobless Recoveries,’ NBER Working Paper Series 18334 (Cambridge, Mass: National Bureau of Economic Research, August)
  • Christopher L. Foote and Richard W. Ryan (2012), ‘Labor-Market Polarization over the Business Cycle,’ Public Policy Discussion Paper 12-8 (Boston: Federal Reserve Bank of Boston, December).
  • U.S. Department of Labor, Commission on the Future of Worker-Management Relations (1994), ‘Contingent Workers,’ in Fact Finding Report.
  • Steven J. Davis and Till von Wachter (2011), ‘Recessions and the Costs of Job Loss,’ Brookings Papers on Economic Activity, Fall, pp. 1-55.
  • Jesse Rothstein (2012), ‘The Labor Market Four Years into the Crisis: Assessing Structural Explanations,’ ILRReview, vol. 65 (July), figure 11, p. 486.