Uneven Recovery, Monetary Policy and Inequality in the U.S.
Written by Yajing Tu, GEI Associate
Since 2009, the U.S. economy has experienced a steady yet uneven recovery. Although the overall household net wealth in America saw a 14% increase from 2009 to 2011, the mean net worth gap has enlarged between the top 7% and the lower 93% of the households. According to the 2009-2011 data from the Census Bureau, the mean net wealth of the upper 7% affluent households in the U.S. jumped by approximately 28%, while the 111 million households’ mean net wealth distributed in lower 93% was reduced about 4%. At the end of 2011, the mean net wealth of the most affluent household group (top 7%) was 24 times more than that lower 93% (see graphic below).
Actually, there are a number of reasons causing the increased polarization of the mean net wealth distribution. One of the most important explanations is the sluggish housing market recovery during 2009 to 2011. The lower 93% had a disproportionate amount of their wealth in the family home while the top 7% had a much greater exposure to other assets such as stocks. The S&P 500 index grew by 34% but the S&P/Case-Shiller Home Price index dropped by 5% 2009-2011. While the more heavily stock market invested higher wealth cohort was recovering significantly in the stock market, the lower 93% was still losing money on their residence, on average. Such unbalanced rise in asset prices contributed to the accelerated unevenness in wealth distribution in the U.S. (Fry, 2013)
However, this particular situation has raised potential questions about the post-crisis activity of the Federal Reserve. The unconventional and expansionary monetary policies, which were aimed at positively changing both short-term and long-term expectations through increasing asset prices, might share the blame for the growing income inequality. Thus we can ask the question: Is it reasonable to assert a causal relation among expansionary monetary policy, asset prices and inequality?
Related to the discussion above (from Frye), according to Census Bureau’s data on income distribution, the top 10% of Americans’ wealth and investments are more concentrated on the stock-related equities, whereas most middle-class households list their residence as the largest assets on their balance sheets. People tend to benefit and lose less unequally from the fluctuations of normal business cycles. However, when more systematic underlying risks exist before economic crisis, the shockwaves from the financial tsunami could hurt the poor disproportionally and, in addition, prevent them from gaining equally from the post-crisis recoveries.
What are the “underlying risks” for the Great Recession this time and how do they contribute to the rising inequality issue in the U.S.? The story begins in early 2000s. According to Wolff Leonard’s study on the subject of the “middle class meltdown”, a problem started to evolve with the rising debt to income ratio, which reached its highest level in almost 25 years. Other indicators, such as the debt to income ratio, also illustrated that people from the middle and low percentiles would become more vulnerable to economic crisis. As a result, when the burst of the housing bubble evolved into a worldwide economic downturn, with drastically diminishing earnings, middle-class households could only react by further increasing their debt to in order to finance their daily expenditures. Therefore, when the economic conditions have been rebounding these years, the first thing on those families’ to-do list has been to deal with debt issues. And a slow to develop and sluggish bounce-back of the U.S. real estate market did not provide the necessary momentum for all-class earnings recovery as well.
It is now easy to see that the expansionary monetary policy has been more beneficial for the rich during the gradual economic recovery. The severe debt-burdened financial conditions of middle-class households fundamentally contributed to the observed wealth divergence. When nothing was done to address the extreme debt burdens of the middle class at a time when earned income was also slipping away, the asset recovery for financial assets accruing to the top wealth cohort did little to help everyone else.
It is a very reasonable proposition that the monetary policies of the Federal Reserve have contributed significantly to growth in wealth inequality since 2009.
- Wolff, Edward N., (November, 2012), The Asset Price Meltdown and The Wealth of The Middle Class, Nber Working Paper Series.
- Rosa, C., (May, 2012), How “Unconventional” Are Large-Scale Asset Purchases? The Impact of Monetary Policy on Asset Prices
- Fry, R., (April, 2013), A Rise in Wealth for the Wealthy; Declines for the Lower 93%, Pew Research Social & Demographic Trends, Retrieved from http://www.pewsocialtrends.org/2013/04/23/a-rise-in-wealth-for-the-wealthydeclines-for-the-lower-93/