10 Years After: The Post-Recovery Economy

The recovery from the Great Recession didn’t bring back some previous state of prosperity and resume growth from there. It created a new economy that, in some ways, may never again be what it was.

In addition to 9-11, which was a Tuesday this year, this week included one other important anniversary: Saturday marked ten years since the collapse of the Lehman Brothers investment bank, the spark that ignited the financial crisis that started the Great Recession.

Like most major world events, the Great Recession didn’t begin in an instant and didn’t have a single cause. Just as Europe had started sliding towards World War I long before Archduke Ferdinand’s assassination, the world financial system had been showing signs of strain long before Lehman declared bankruptcy. But Lehman had been one of the biggest players in the international financial markets, so its insolvency was a huge shock: If their debts weren’t good, whose were? Who knew what other financial institutions were insolvent, now that Lehman wouldn’t be repaying its loans? Suddenly, banks were afraid to loan money even to other banks, and the dominoes began to fall.

The worst financial panics are marked by cascading waves of bankruptcies. Alice can’t pay Bob, and Bob had been counting on Alice’s money to pay Charlie and Darlene, who now won’t be able to meet their payrolls. Charlie and Darlene’s employees, in turn, won’t be able to pay their rent, and so their landlords won’t be able to make their mortgage payments to the bank, which may also become insolvent. Where does it stop?

Wikipedia sums up the effects:

While the recession technically lasted from December 2007-June 2009 (the nominal GDP trough), many important economic variables did not regain pre-recession (November or Q4 2007) levels until 2011-2016. For example, real GDP fell $650 billion (4.3%) and did not recover its $15 trillion pre-recession level until Q3 2011. Household net worth, which reflects the value of both stock markets and housing prices, fell $11.5 trillion (17.3%) and did not regain its pre-recession level of $66.4 trillion until Q3 2012. The number of persons with jobs (total non-farm payrolls) fell 8.6 million (6.2%) and did not regain the pre-recession level of 138.3 million until May 2014. The unemployment rate peaked at 10.0% in October 2009 and did not return to its pre-recession level of 4.7% until May 2016.

This week, the New York Times ran a series of articles pointing out all the ways in which the economy has still not recovered. Or, putting it another way, how the economy has changed. We haven’t simply returned to some previous state of prosperity and continued growing from there. We have entered a new economy, parts of which may never return to previous levels of prosperity.

The most significant change is an increase in inequality. The lower your pre-Lehman income and net worth, the longer it has taken the recovery to reach you. People at the top of the economy are far better off than they have ever been. But people at the bottom are still waiting to get back to where they were, and some never will. In fact, if you take the top 10% of earners out of your statistics, the 90% who are left are only just now getting back to their 2006 incomes, and that’s only because of tax cuts and government programs like unemployment insurance, Food Stamps, and ObamaCare. If you just look at pre-tax income, it’s still underwater.

Wikipedia noted that household net worth was back to its pre-Lehman levels by 2012. But that number has been pulled up by the huge gains of the richest households. Median household net worth, the net worth of the households in the middle of the economy, has still not recovered. In fact, it is still below its level at the beginning of the previous recession, the one that started when the dot-com bubble burst in 2000 and 2001.

GDP recovered by 2011, but Wednesday the Census Bureau announced that median household income had only just recovered by 2017.

[T]he details of the report raised questions about whether middle-class households — which have experienced an economic “lost decade” — are now likely to see actual income gains or if they will simply tread water. One reason for concern is that income growth slowed in 2017, to 1.8 percent. Median income had grown more rapidly in previous years, by 5.2 percent in 2015 and 3.2 percent in 2016.

Another NYT article (by Nelson Schwartz) digs a little deeper:

Data from the Federal Reserve show that over the last decade and a half, the proportion of family income from wages has dropped from nearly 70 percent to just under 61 percent. It’s an extraordinary shift, driven largely by the investment profits of the very wealthy. In short, the people who possess tradable assets, especially stocks, have enjoyed a recovery that Americans dependent on savings or income from their weekly paycheck have yet to see. Ten years after the financial crisis, getting ahead by going to work every day seems quaint, akin to using the phone book to find a number or renting a video at Blockbuster.

Basically, there are two dividing lines: About a fifth the households in America either own nothing to speak of, or have debts that are greater than their assets. They live paycheck-to-paycheck, and miss out entirely on that 39% of national household income that now comes from something other than wages.

A large chunk of households in the middle of the economy have a positive net worth, but that wealth is almost entirely in the form of home equity. (Their IRAs or 401(k)s may own a few shares of stock, but those shares are not a significant percentage of their assets.) After paying the mortgage, they also live paycheck-to-paycheck. In most of the country, house prices collapsed in the Great Recession, and (except in a few hot markets) they haven’t grown much (if at all) in the last ten years, so these families’ net worth has remained relatively stagnant.

But at the top of the economy, people own stocks. They get dividends and capital gains that are taxed at a lower rate. And the government’s economic-recovery policies worked much better for them than for homeowners.

Like the bankers, shareholders and investors were also bailed out. By cutting interest rates to near zero and pumping trillions — yes, you read that right — into the economy, the Federal Reserve essentially put a trampoline under the stock market. The subsequent bounce produced a windfall, but only for a limited group of beneficiaries. Only about half of American households have any exposure to the stock market, including 401(k)’s and retirement plans, and ownership of the shares of individual companies is clustered among upper-income families.

For homeowners, there wasn’t much of a rescue package from Washington, and eight million succumbed to foreclosure. Sometimes, eviction came in the form of marshals with court orders; in other cases, families quietly handed over the keys to the bank and just walked away. Although home prices in hot markets have fully recovered, many homeowners are still underwater in the worst-hit states like Florida, Arizona and Nevada. Meanwhile, more Americans are renting and have little prospect of ever owning a home.

The housing crash hit middle-class black and Hispanic families harder than middle-class white families, worsening the racial wealth gap.

[F]amilies in the latter two groups were more dependent on housing as their principal form of investment. Not only were both minority groups harder hit by foreclosures, but Hispanics were also twice as likely as other Americans to be living in Sun Belt states where the housing crash was most severe.

In 2016, net worth among white middle-income families was 19 percent below 2007 levels, adjusted for inflation. But among blacks, it was down 40 percent, and Hispanics saw a drop of 46 percent.

Young people have also been set back. With their parents’ home equity all but gone, they face a choice between entering the economy without marketable skills and borrowing heavily to go to college or get other training. Student debt, says the NYT, “is now the second-largest category of consumer debt outstanding, after mortgages.”

A personal view comes from NYT editor M. H. Miller, who tells of his parents attending his 2009 graduation while facing foreclosure. At an age when previous generations of Americans were taking on mortgages and building for the future, Miller still owes $100K of student debt. “The financial crisis remains the defining trauma of my generation,” he says.

Finally, we come to what has happened at the bottom levels of the job market, covered by Matthew Desmond. He follows Vanessa Solivan, a home health aide raising three children in Trenton, New Jersey.

In May, Vanessa finally secured a spot in public housing. But for almost three years, she had belonged to the “working homeless,” a now-necessary phrase in today’s low-wage/high-rent society. … After juggling the kids and managing her diabetes, Vanessa is able to work 20 to 30 hours a week, which earns her around $1,200 a month. And that’s when things go well.

These days, we’re told that the American economy is strong. Unemployment is down, the Dow Jones industrial average is north of 25,000 and millions of jobs are going unfilled. But for people like Vanessa, the question is not, Can I land a job? (The answer is almost certainly, Yes, you can.) Instead the question is, What kinds of jobs are available to people without much education? By and large, the answer is: jobs that do not pay enough to live on.

It’s not that safety-net programs don’t help; on the contrary, they lift millions of families above the poverty line each year. But one of the most effective antipoverty solutions is a decent-paying job, and those have become scarce for people like Vanessa. Today, 41.7 million laborers — nearly a third of the American work force — earn less than $12 an hour, and almost none of their employers offer health insurance.

Desmond did well to focus on Vanessa. I suspect that the majority of NYT readers (whom I picture as better off than most Americans) have little contact with low-wage workers. Janitors, dishwashers, and busboys are almost invisible. Farm workers are out there in the country somewhere doing God-knows-what. You can imagine that waitresses make a lot in tips, and a few of them actually do. When your personal experiences don’t connect you to people, it’s easy to accept stereotyped accounts of their lives and problems: It’s their own fault. They just need to work harder and stay off drugs. If they learned to practice middle-class virtues, they’d be middle class themselves soon enough.

But lots and lots of professional-class folks have had needed home health aides at one time or another, either while recovering from something themselves or when they were trying to keep aging parents out of a nursing home. I dealt with several in my parents’ final years, and I know the agency didn’t charge us enough to pay them very well. The aides are not nurses, but they do hard, necessary work. The ones I met did it cheerfully, without complaining. None of the negative stereotypes of low-wage workers — that they’re lazy, stupid, resentful, unreliable, irresponsible, and have to be watched every minute — applied to the aides who took care of Mom and Dad.

In short, when I picture a home health aide, I picture someone who deserves to have a decent life. (Whether anyone deserves not to have a decent life is another question. But surely home health aides shouldn’t fall into that abyss.) The thought of Vanessa doing all the work she can get and still living in her car — that’s jarring to me in a way that stories of other low-wage workers might not be. I can’t easily make up some excuse to explain it, or make it seem just. I suspect that a lot of NYT readers had a similar reaction.

Similarly, many professional-class people recall the low-paying jobs they held as teen-agers, or during the summers of their college years, and may regard the experience as a harmless hazing that welcomes young people into the workforce. But Vanessa is 33, and is not on the road to some future prosperity. This is her life, and it’s the life of a lot of adult Americans.

The Bureau of Labor Statistics defines a “working poor” person as someone below the poverty line who spent at least half the year either working or looking for employment. In 2016, there were roughly 7.6 million Americans who fell into this category. Most working poor people are over 35, while fewer than five in 100 are between the ages of 16 and 19. In other words, the working poor are not primarily teenagers bagging groceries or scooping ice cream in paper hats. They are adults — and often parents — wiping down hotel showers and toilets, taking food orders and bussing tables, eviscerating chickens at meat-processing plants, minding children at 24-hour day care centers, picking berries, emptying trash cans, stacking grocery shelves at midnight, driving taxis and Ubers, answering customer-service hotlines, smoothing hot asphalt on freeways, teaching community-college students as adjunct professors and, yes, bagging groceries and scooping ice cream in paper hats.

There was never a golden age when the American Dream (whatever it may have been in that era) was available to all on equal terms. Inequality has always been with us, and has been increasing since the late 1970s. It is not some new development of the last ten years, but class lines have increasingly hardened since the Great Recession.

If you are a child of wealth, your path to success is comparatively smooth: As a child, you will get whatever help you need to maximize your talents and your attractiveness to elite colleges. With appropriate effort on your part, you will graduate not just with a punched ticket to the professional class, but without debt. If at some point your further development requires either more training or the capital to start a business, that won’t be a problem. Quite likely, you will reach 40 in good shape, ready to give your own children similar advantages, but with no awareness of ever having taken a “handout”. You got the grades, you did the work, you started the business — by what right can these socialists tax “your” money away and spend it on the people who lost the games you won?

But if your parents are not rich, you face difficult hurdles and choices. Depending on where you live, public schools may or may not give you the grounding you need to move on and get an advanced education. If that path is available to you, will it be worth all the money you will have to borrow? Or should you take your chances in the unskilled workforce, knowing that jobs and wages can evaporate in an instant, and that the best you can hope for is to scrape by from one week to the next?

That is our “recovered” economy. It’s “booming”, we are told. And for many people, it is. But not for everybody.

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  • Creigh Gordon  On September 17, 2018 at 11:11 am

    If you want to live in a decent society, leave no one behind.

  • zonuts  On September 17, 2018 at 11:46 am

    Another lucid and insightful analysis, as usual.

  • Jerome Strom  On September 17, 2018 at 7:20 pm

    Yes, that is the way the economy recovered…top down unfortunately

  • knb  On September 19, 2018 at 8:45 pm

    one thing about the unemployment rate: for each person “employed” is just “yes or no.” If you lose your job as a welder and end up with a job as a dishwasher, that counts as “employed” despite the nosedive that your life took.


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