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Income, Wealth, and Debt and the Great Recession October 2012 the Russell Sage Foundation and the Stanford Center on Poverty and Inequality

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Income, Wealth, and Debt and the Great Recession October 2012 the Russell Sage Foundation and the Stanford Center on Poverty and Inequality A GREAT RECESSION BRIEF Income, Wealth, and Debt and the Great Recession October 2012 The Russell Sage Foundation and The Stanford Center on Poverty and Inequality TIMOTHY SMEEDING, UNIVERSITY OF WISCONSIN, MADISON he Great Depression is often cast as the concentrated among young and minority KEY FINDINGS Tbeginning of the end for the late Gilded men with less than a high school degree, Age. Because it brought on the institutional which means that the bottom of the income • During the Great Recession, reforms of the New Deal, it led to dramatic distribution has not fared all that well. Wealth the wealthiest Americans lost the most wealth in absolute reductions in income inequality and set the inequality has also increased. The wealthy terms, whereas the middle stage for a long period of comparatively low did suffer large losses in wealth early on in classes lost the most in pro- inequality. The purpose of this recession the recession, as the financial crisis unrav- portional terms. This pattern brief is to ask whether the Great Recession, eled the stock market, but since then they arises mainly because middle like the Great Depression, is likewise shaping have recovered. Meanwhile, middle class class losses in the housing up as a compressive event that will reverse home owners lost much wealth with the market have been substan- tial. some of the run-up in inequality of the so- housing crisis, especially the emerging Black called New Gilded Age. This question can be and Latino middle class who bought first • Whereas the Great Depres- taken on by examining recent and long-term homes in the mid-2000s. sion ultimately brought trends in wealth inequality, income inequal- about substantial declines in ity, median incomes, and debt. We review these and other effects of the income inequality, the Great Recession has not yet had a recession in four sections covering wealth similarly compressive effect. The evidence presented below will suggest inequality, income inequality, median The recently released Sur- that the Great Recession has not typically incomes, and debt. The theme throughout: vey of Consumer Finances worked to reduce inequality. The labor mar- The Great Recession has been a “business shows, for example, that ket has been slow to recover, with job losses as usual” recession in which those at the the middle classes suffered steeper income losses than bottom have fared espe- the top of the distribution. cially poorly while those at FIGURE 1. Changes in Wealth (in 2009 Dollars) at Various Percentiles the top have, after heavy of the Wealth Distribution, 1962–2009 • Median household income initial wealth losses, recov- has declined from the begin- ered rather quickly. ning of the Great Recession Recession years through to 2011. 10 9 Wealth Inequality 8 It is useful to begin by 7 considering changes in 6 the distribution of wealth 5 (where wealth is under- stood as the value of all $ IN MILLIONS 4 3 assets less the value of all 2 outstanding debt). Figure 1 1 shows average wealth 0 at the 50th, 90th, and 99th 1962 1983 1989 1992 1995 1998 2001 2004 2007 2009 percentiles of the wealth YEAR distribution between 1962 50th percentile 90th percentile 99th percentile and 2009. From 1962 to Source: Kennickel, Arthur B. (2011). 2007, wealth in the middle RECESSION TRENDS • The Russell Sage Foundation and The Stanford Center on Poverty and Inequality 2 Income, Wealth, and Debt and the Great Recession of the distribution grew by 171% (from $46,000 to $125,000). Income Inequality But this growth was dwarfed by accumulation at the top. Is there any evidence of compression in the income distribu- Wealth at the 90th percentile grew by 242% (from $276,000 tion? Figure 2 shows income shares of various quintiles in the to $945,000), while wealth at the 99th percentile grew by a U.S. from 1967 to 2009 using household-size adjusted data staggering 452% (from $1,634,000 to $9,016,000). from the Census Bureau. It’s anchored at 100 percent in 1967 to highlight changes in income shares over time. What has happened since the recession? From 2007 to 2009, the wealthiest Americans have lost the most in abso- We find that the bottom quintile’s share of income was 5.2 lute terms (approximately $1.74 million at the 99th percentile), percent in 1967, but it fell to 3.6 percent by 2008 and then to whereas the middle class has lost the most in proportional an all-time low of 3.4 percent in 2009 (a drop from start to fin- terms. Those at the 50th percentile lost 23% of their wealth, ish of about 45 percent). The second quintile also lost share, as opposed to 13% and 20% at the 90th and 99th percen- falling 20 percent from 11.9 to 9.2 percent of total income in tiles, respectively. The most recent release of the Survey of 2009, again an all-time low. Even the middle quintile experi- Consumer Finances (which brings in 2010 data) bears out this enced a 10 percent drop in share over this recession, while general pattern: It shows that middle-class families lost the the fourth quintile showed little change, ranging between 22 most wealth in proportional terms while those at the top have, and 24 percent of total income. In contrast, the top quintile by 2010, recovered their wealth lost in the recession. This share rose from 42.5 to 49.4 percent of total income in 2009, pattern arises because middle class losses in the housing an all-time high (similar to that reached in 2006, before the market have been substantial and persisting. Indeed, home recession). Hence the top income share has risen through the values for the middle class (their biggest asset) dropped 30% recession, while the bottom has dropped precipitously, mainly nationwide from their 2006 peak, with little sign of recovery. due to job losses. In the two post-recession years (not shown in Figure 2), this general pattern of rising inequality contin- What about the very bottom of the distribution? The latest ues apace, with the lowest-quintile share falling to 3.2 in 2011 Survey of Consumer Finances shows that low-income fami- and the highest-quintile share increasing to 51.1 in 2011 (see lies, which tend to have very few assets, have also lost some DeNavas-Walt, Proctor, and Smith, 2012, Table A-2). of their wealth, albeit not as much in proportional terms as middle-class families. The latter result is the only compres- Other measures of income tend to tell a similar story. The sive one to be had. same trends emerge, for example, with data from the Con- gressional Budget Office, which include all types of cash and noncash income, employee benefits, realized capital gains, and the burden of all taxes, including tax rebates. The recently FIGURE 2. Percent Change in Shares of Adjusted Household Income by released Survey of Consumer Finances (SCF), which can be Quintile (Share of Income of Each Quintile Relative to Share used to compare trends from 2007 to 2010, again shows that in 1967) the middle classes suffered steeper losses than the top of the distribution, although the income going to the top decile in the Recession years 20 SCF did also decline. The main surprise from the SCF is that there are modest income gains between 2007 and 2010 at the 49.4% D 10 very bottom of the distribution, largely due to the expansion in enrollment and benefits of the food stamp (SNAP) program. OUSEHOL 0 H 22.9% OME C ENT N I C -10 The foregoing data do not include various forms of capital Y ER HARES OF P 15% S income that are not realized in a given year. An even more ONE -20 M thorough account of income from wealth—whether realized 9.2% or not—is useful for understanding the full distribution of -30 2009 QUINTILE economic resources, especially as far as the very top of the 3.4% -40 income distribution is concerned. To address this issue, Jeff Thompson and I recently developed a measure of “More Com- 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 YEAR plete Income” (MCI) using the Survey of Consumer Finances Highest quintile Third quintile Lowest quintile (SCF) from 1988-89 to 2006-7 and also using simulations to Fourth quintile Second quintile adjust for property and employment income losses in 2008 Source:DeNavas-Walt, Proctor, and Smith (2010), Table A-2, pages 40–43. and property income recovery in 2009. We first subtracted RECESSION TRENDS • The Russell Sage Foundation and The Stanford Center on Poverty and Inequality 3 Income, Wealth, and Debt and the Great Recession reported property income from the SCF, then systematically the income gains of recent decades have gone to the very top, added back the returns on financial wealth, retirement assets, we also want to know whether the middle classes have expe- housing, other investments (including real estate), and busi- rienced at least some income gains during this period. We turn ness income for owners and proprietors. Figure 3 shows the to this question next. trend in the Gini index of income inequality using the MCI measure, alongside a more traditional measure of income Figure 4 shows median family income from 1953 to 2009. also derived from the SCF. The figure suggests increasing Family income rose strongly and consistently up until about inequality in both measures, with inequality highest in 2006- 1973. It then stayed fairly flat until the mid-1980s, when it 07, but with 2008-09 higher than 2003-04 using either income began increasing again until the recession of the early 1990s.
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