Posts Tagged ‘Great Depression’


Mark Tansey, “Source of the Loue” (1988)

Two giants of mainstream economics—Joseph Stiglitz and Lawrence Summers—have been engaged in an acrimonious, titanic battle in recent weeks. The question is, what’s it all about? And, even more important, what’s at stake in this debate?

At first glance, the intense, even personal back-and-forth between Stiglitz and Summers seems a bit odd. Both economists are firmly in the liberal wing of mainstream economics and politics—as against, for example, Gene Epstein (an Austrian economist, who accuses Stiglitz of regularly siding with left-wing populists like Hugo Chávez) or John Taylor (a committed supply-sider, who has long been suspicious of “demand-side discretionary stimulus packages”). Both Stiglitz and Summers have pointed out the limitations of monetary policy, especially in the midst of deep economic recessions, and have favored relatively large fiscal-policy interventions, a hallmark of mainstream liberal economic policy.

One might be tempted to see it as merely a clash of outsized egos, which of course is not at all rare among mainstream economists. Their exaggerated sense of self-importance and intellectual arrogance are legion. Neither Stiglitz nor Summers has ever been accused of being a shrinking-violet when it comes to debates in the many academic and policy-related positions they’ve held.* And there’s certainly a degree of personal animus behind the current debate. Apparently, Summers [ht: bn] successfully lobbied in 2000 for Stiglitz’s removal from the World Bank, reportedly as a condition of the reappointment of Jim Wolfensohn as President of the World Bank. And, in 2013, Stiglitz came out strongly in favor of Janet Yellen, over Summers, for head of the Federal Reserve.**

That’s certainly part of the story. And the personal attacks and evident animosity from both sides have attracted a great deal attention of onlookers. But I think much more is at stake.

The current debate began with the critique Stiglitz leveled at the notion of “secular stagnation,” which Summers has championed starting in 2013 as an explanation for the slow recovery of the U.S. economy after the crash of 2007-08. The worry among many mainstream economists has been that, given the severity and duration of the Second Great Depression, capitalism could no longer deliver the goods.*** In particular, Summers invoked the specter of persistently slow growth, which had originally been put forward in the midst of the first Great Depression by Alvin Hansen, created by demography: the decrease in the number of available workers, itself a result of the declines in the rate of population growth and the labor force participation rate. The worry is that, looking forward, there simply won’t be enough workers to sustain the rates of potential economic growth we saw in the years leading up to the most recent crisis of capitalism. In the meantime, Summers, in traditional Keynesian fashion, expressed his support for raising the level of aggregate demand, through public and private spending, even at low real interest rates (which, in his view, were incapable of fulfilling their traditional role of boosting spending).****

Stiglitz for his part has dismissed the idea of secular stagnation, as “an excuse for flawed economic policies” (especially the inadequate stimulus package proposed and enacted by the administration of Barack Obama), and put forward an alternative analysis for capitalism’s slow growth problem: its inability to manage structural transformations of the economy. According to Stiglitz, the shift from manufacturing-led growth to services-led growth characterized the U.S. economy in the years before the most recent crash, analogous to the manner in which the crisis in agriculture “led to a decrease in demand for urban goods and thus to an economy-wide downturn” in the lead-up to the depression of the 1930s. Thus, in his view, World War II brought about a structural transformation in the United States (“as the war effort moved large numbers of people from rural areas to urban centers and retrained them with the skills needed for a manufacturing economy”) but nothing similar was undertaken in the wake of the crash of 2007-08.

The Obama administration made a crucial mistake in 2009 in not pursuing a larger, longer, better-structured, and more flexible fiscal stimulus. Had it done so, the economy’s rebound would have been stronger, and there would have been no talk of secular stagnation.

These are the terms of the theoretical debate, then, between Stiglitz and Summers: a focus on sectoral shifts versus a worry about secular stagnation. The first concerns the way the private forces of American capitalism have been inept in handling structural transformations of the economy, while the second focuses on ways in which “the private economy may not find its way back to full employment following a sharp contraction.”

For my part, both stories have an important role to play in making sense of both economic depressions—the first as well as the second. The problem is, neither Stiglitz nor Summers has presented an analysis of how American capitalism created the conditions for either crash. Stiglitz does not explain how the crisis in agriculture in the 1920s or the move away from manufacturing in recent decades was created by tendencies within existing economic institutions. Similarly, Summers does not conduct an analysis of the changes in U.S. capitalism that, in addition to producing lower growth rates, led to the massive downturn beginning in 2007-08. Their respective approaches are characterized by exogenous event rather than the endogenous changes leading to instability one might look for in a capitalist economy.

Moreover, both Stiglitz and Summers presume that the appropriate stimulus project will fulfill the mainstream macroeconomic utopia characterized by levels of output and a price level that corresponds to full employment and price stability. There is nothing in either of their approaches that recognizes capitalism’s inherent instability or its tendency, even in recovery, of generating one-sided outcomes. For Stiglitz, “the challenge was—and remains—political, not economic: there is nothing that inherently prevents our economy from being run in a way that ensures full employment and shared prosperity.” Similarly, Summers emphasizes the way “fiscal policies and structural measures to support sustained and adequate aggregate demand” can overcome the problems posed by secular stagnation. In other words, both Stiglitz and Summers redirect attention from capitalism’s own tendencies toward instability and uneven recoveries and focus instead on the set of economic policies that in their view are able to create full employment and price stability.

Finally, while Stiglitz and Summers mention en passant the problem of growing inequality, neither takes the problem seriously, at least in terms of analyzing the conditions that led to the crash of 2007-08—or, for that matter, the lopsided nature of the recovery. There’s nothing in the debate (or in their other writings) about how rising inequality across decades, based on stagnant wages and record profits, served to dismantle government regulations on the financial sector (because those who received the profits had both the means and interest to do so) and to propel the tremendous growth (on both the demand and supply sides) of financial activities within the U.S. economy. Nor is there a discussion of how focusing on the recovery of banks, large corporations, and the incomes and wealth of a tiny group at the top was based on a deterioration of the economic and social conditions of everyone else—much less how a larger stimulus package would have produced a substantially different outcome.

The fact is, the debate between Stiglitz and Summers is based on a discussion of terms and a mode of analysis that are firmly inscribed within the liberal wing of mainstream economics. Focusing on the choice between one or the other merely to serves to block, brick by brick, the development of much more germane approaches to analyzing the conditions and consequences of the ways American capitalism has been characterized by fundamental instability and obscene levels of inequality—today as in the past.


*Stiglitz is a recipient of the John Bates Clark Medal (1979) and the Nobel Prize in Economics (2001). He served as the Chair of Bill Clinton’s Council of Economic Advisers (1995-1997) and Chief Economist at the World Bank (1997-2000). He is currently a professor of economics at Columbia University (since 2001). Summers is former Vice President of Development Economics and Chief Economist of the World Bank (1991–93), senior U.S. Treasury Department official throughout Clinton’s administration (ultimately Treasury Secretary, 1999–2001), and former director of the National Economic Council for President Obama (2009–2010). He is a former president of Harvard University (2001–2006), where he is currently a professor and director of the Mossavar-Rahmani Center for Business and Government at Harvard’s Kennedy School of Government.

**My choice, for what it’s worth, was Federal Reserve Governor Sarah Raskin.

***As I explained in 2016, contemporary capitalism has a slow-growth problem—”because growth is both a premise and promise of a particularly capitalist way of organizing our economic activities.”

****An archive of Summers’s various blog posts on secular stagnation can be found here.


From the beginning, mainstream macroeconomics has been a battleground between the visible and the invisible hand.

Keynesian macroeconomics, represented on the left-hand side of the chart above, has an aggregate supply curve with a long horizontal section at levels of output (Y or real GDP) below full employment (Yfe). What this means is that the aggregate demand determines the actual level of output, which can be and often is at less than full employment (e.g., when AD falls from AD1 to AD2, output to Y1, and prices to P2), with no necessary tendency to return to full employment and price stability. Therefore, according to Keynesian economists, the visible hand of government needs to step in and, through a combination of fiscal and monetary policy, move the economy toward full employment (at Yfe) and stable prices (at P1).

Neoclassical macroeconomists, like their classical predecessors, have a very different view of the macroeconomy, which is represented on the right-hand side of the chart. They start with a vertical aggregate supply curve at a level of output corresponding to full employment. Therefore, according to their theory—often referred to as Say’s Law or “supply creates its own demand”—aggregate demand does not determine the level of output; instead, it determines only the price level. Thus, for example, if aggregate demand falls (e.g., from AD1 to AD2), output does not change (it remains at Yfe)—only the price level falls (from P1 to P2). On the neoclassical view, the invisible hand of the market maintains full employment (through the labor market) and reverses price deflation (through the so-called real-balance effect) by boosting aggregate demand (back to AD1 from AD2).

Anyone who has read or heard the intense debates concerning capitalism’s recurrent crises, recently and going back to the 1930s, knows that there are significant theoretical and policy differences between Keynesian and neoclassical macroeconomists. For example, Keynesians focus on uncertainty (especially the uncertain knowledge of investors) and the important role of government (especially fiscal) policy, while neoclassicals emphasize the supply side (especially the role of correct “factor prices,” particularly wages) and the necessity of getting government out of the way of markets (relying, instead, on rules-driven monetary policy).*

But there are equally significant similarities between the two approaches. For example, both Keynesian and neoclassical economists tend to blame economic downturns on exogenous events. There is nothing in either theory that recognizes capitalism’s inherent instability. Instead, mainstream macroeconomists of both stripes direct their attention to equilibrium outcomes—of less-than-full employment in the case of Keynesians, of full employment for neoclassicals—such that only something outside the model can shift the underlying variables and cause the economy to move away from equilibrium. That’s why neither group was able to foresee the crash of 2007-08, let alone the other eighteen recessions and depressions that have haunted capitalism during the past century. Their theories literally don’t include the possibility, endogenously created, of capitalism’s ongoing crises.

There’s another, perhaps even more important, similarity I want to draw attention to here: their shared utopianism. The premise and promise of both Keynesian and neoclassical macroeconomics is that, with the appropriate institutions and policies, capitalism can be characterized by and should be celebrated for achieving full employment and price stability. Those are the shared goals of the two theories. And their criteria of success. Thus, each group of macroeconomists is able to claim a position of expertise when the actual performance of the economy achieves, or at least moves closer and closer to, a utopia characterized by levels of output and a price level that corresponds to full employment and price stability.

It is precisely in this sense that the economic utopianism of mainstream macroeconomics conditions and is conditioned by an epistemological utopianism. Because they know how the macroeconomy works—because of their theoretical and modeling certainty—both Keynesian and neoclassical macroeconomists claim for themselves the mantle of scientific superiority. These are the lords of macroeconomic policy, domestically and internationally, moving back and forth among their positions as academics, corporate advisers, and policy experts. Hence the persistent claim on both sides that, if only the politicians and policymakers listened to them and adopted the correct economic policies, everything would be fine. Not to mention the ongoing complaints, again on the part of both groups of mainstream macroeconomists, that their advice has been ignored.

That, of course, is where the critique of mainstream macroeconomics begins—with a radically different utopian horizon. When the explanations and policies of either side are said to have failed, there’s a shift to the opposing viewpoint. Thus, for example, neoclassical macroeconomics held sway (in the United States and elsewhere) in the run-up to the crash of 2007-08—just as it had in the years preceding the first Great Depression. Leading macroeconomists and their students had moved away from and largely ignored anything that had to do with Keynesian macroeconomics (including, most notably, Hyman Minsky’s writings on financial instability). Then, of course, the tables were turned and at least some mainstream macroeconomists went back and discovered (many for the first time) the theories and policies associated with the Keynesian tradition.

It’s a familiar back-and-forth pendulum swing that we’ve seen in many other countries, in other times. From neoclassical free markets and deregulation to government stimulus and one or another form of reregulation—and back again. But we also need to recognize that the failures of mainstream macroeconomics, when examined from an alternative perspective, have actually succeeded. As I wrote back in 2010, the failure of neoclassical macroeconomists were apparent to many: they

failed to see the onset of the current crises; they have had little to offer in terms of understanding how the crises occurred even after the fact; and they certainly haven’t had much in the way of good policy advice to solve the problems of unemployment, poverty, and inequality. . .

On another level, mainstream economists have succeeded. Not only have they maintained their hegemony within the discipline; their models and policy advice have kept the discussion confined to tinkering with the existing set of capitalist institutions. In terms of policy: a bail-out of Wall Street and a mild set of financial reforms, a small stimulus program, and an expansionary monetary policy. And intellectually: a rediscovery of Keynes and an allowance of behavioral approaches to finance. They haven’t proposed even the public works programs and financial reorganization of the New Deal, let alone an honest debate about capitalism itself.

In this sense, the continued failure of mainstream economists has become a success for capitalism.

That’s why we need to question the shared utopianism of the two sides of mainstream macroeconomics. What has gone missing from much of the current debate, even outside the mainstream, is that full employment and price stability are consistent with the worst abuses of contemporary capitalism. As David Leonhardt recently explained,

The headlines may talk about growth, but we are living in a dark economic era. For most families, income and wealth have stagnated in recent decades, barely keeping pace with inflation. Nearly all the bounty of the economy’s growth has flowed to the affluent.

And if you somehow doubt the economic data, it’s worth looking at the many other alarming signs. “Deaths of despair” have surged. For Americans without a bachelor’s degree, one social indicator after another — obesity, family structure, life expectancy — has deteriorated.

There has been no period since the Great Depression with this sort of stagnation. It is the defining problem of our age, the one that aggravates every other problem. It has made people anxious and angry. It has served as kindling for bigotry. It is undermining America’s vaunted optimism.

In fact, an even stronger argument can be made: the various attempts to move the economy toward full employment and price stability have created the conditions whereby capitalism has both broadened and deepened its presence and made the lives of the vast majority of people even more unstable and insecure.

The utopianism of mainstream macroeconomics represents a dystopia for “most families” attempting to survive within contemporary capitalism.

What’s left then is a critique of the assumptions and consequences of mainstream macroeconomics—of both neoclassical and Keynesian economic theories. The goal is not just to tinker with the theories (e.g., by bringing finance into the discussion) or the policies (such as technocratic changes to the tax code and raising the level of productivity). Recognizing how narrow the existing discourse has become means we need to question the entire edifice of mainstream macroeconomics, including its utopian promise of full employment and price stability.

Only then can we begin to recognize how bad things have gotten under both the successes and failures of mainstream macroeconomics and to imagine and invent a radically different set of economic institutions.

That’s the only utopian horizon currently worth pursuing.


*Throughout I refer to two groups of Keynesian and neoclassical macroeconomists. But, of course, both theories have changed over time. Today, the two opposing sides of mainstream macroeconomics are constituted by new Keynesian and new classical theories, with increased attention to the “microfoundations” of macroeconomics. The former emphasizes market imperfections (such as price stickiness and imperfect competition), while the latter dismisses the relevance of market imperfections (and emphasizes, instead, flexible prices and rational expectations). And then, of course, there’s the ever-shifting middle ground, which is the basis of a macroeconomics according to which new Keynesian and new classical are both valid, at different points in the business cycle. Like the earlier neoclassical synthesis, the middle ground of “new consensus macroeconomics” is the approach presented to most students of economics.



Special mention

CroweJ20180306_low  207653


Robert McElvaine, premier historian of the first Great Depression (whose books we have used to teach A Tale of Two Depressions), argues that Republicans today are repeating the same mistakes as the Republicans who were in charge during the 1920s, whose trickledown policies led to the spectacular crash of 1929.

As a historian of the Great Depression, I can say: I’ve seen this show before.

In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression. Republican Sen. George Norris of Nebraska said that Mellon himself would reap from the tax bill “a larger personal reduction [in taxes] than the aggregate of practically all the taxpayers in the state of Nebraska.” The same is true now of Donald Trump, the Koch Brothers, Sheldon Adelson and other fabulously rich people.

During the 1920s, Republicans almost literally worshiped business. “The business of America,” Coolidge proclaimed, “is business.” Coolidge also remarked that, “The man who builds a factory builds a temple,” and “the man who works there worships there.” That faith in the Market as God has been the Republican religion ever since. A few months after he became president in 1981, Ronald Reagan praised Coolidge for cutting “taxes four times” and said “we had probably the greatest growth in prosperity that we’ve ever known.” Reagan said nothing about what happened to “Coolidge Prosperity” a few months after he left office.

In fact,

The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007 (when trickle-down economics, tax cuts for the hyper-rich, and deregulation again resulted in another economic collapse).

In 1929, the share of income captured by the top .01 percent (the über-rich, whose income share is indicated in the blue line in the chart above) reached 4 percent, and their share of wealth (the red line) even higher: 10 percent. Much the same kind of inequality existed in 2008, when the top .01 percent shares of income and wealth were 4.1 percent and 8.6 percent, respectively—on the eve of the Second Great Depression.

The only real difference is, while the top .01 percent shares of income and wealth fell during the depression of the 1930s (and continued to fall during the postwar period), they’ve been rising since 2008. In 2014 (the last year for which data are available), the top .01 percent share of income had increased to 4.4 percent and their share of wealth to 9.7 percent.

And now Coolidge’s Republican descendants are attempting to ram through a set of tax cuts that will allow those in the top .01 percent to keep more of their extraordinary income and to accumulate even more wealth.

All the while claiming that the benefits will trickle down to the rest of us.

In his position as a historian of the first Great Depression, who has also lived through the Second Great Depression, McElvaine certainly understands what’s going on:

Republican policies in the ’20s instead pushed to concentrate more of the income at the top. Nine decades later, Republicans are rushing to do it again — and they are sprinting toward an economic cliff. Another round of Government of the People, by the Republicans, for the super-rich will be catastrophic. The American people must call a halt before it’s too late.



Mainstream economics lies in tatters. Certainly, the crash of 2007-08 and the Second Great Depression called into question mainstream macroeconomics, which has failed to provide a convincing explanation of either the causes or consequences of the most severe crisis of capitalism since the Great Depression of the 1930s.

But mainstream microeconomics, too, increasingly appears to be a fantasy—especially when it comes to issues of corporate power.


Neoclassical microeconomics is based on a set of models that assume perfect competition. What that means, as my students learned the other day, is that, while in the short run firms may capture super-profits (because price is greater than average total cost, at P1 in the chart above), in the “long run,” with free entry and exit, all those extra-normal profits are competed away (since price is driven down to P2, equal to minimum average total cost). That’s why the long run is such an important concept in neoclassical economic theory. The idea is that, starting with perfect competition, neoclassical economists always end up with. . .perfect competition.*

Except, of course, in the real world, where exactly the opposite has been occurring for the past few decades. Thus, as the authors of the new report from the United Nations Conference on Trade and Development have explained, there is a growing concern that

increasing market concentration in leading sectors of the global economy and the growing market and lobbying powers of dominant corporations are creating a new form of global rentier capitalism to the detriment of balanced and inclusive growth for the many.

And they’re not just talking about financial rentier incomes, which has been the focus of attention since the global meltdown provoked by Wall Street nine years ago. Their argument is that a defining feature of “hyperglobalization” is the proliferation of rent-seeking strategies, from technological innovations to mergers and acquisitions, within the non-financial corporate sector. The result is the growth of corporate rents or “surplus profits.”**


As Figure 6.1 shows, the share of surplus profits in total profits grew significantly for all firms both before and after the global financial crisis—from 4 percent during the 1995-2000 period to 19 percent in 2001-2008 and even higher, to 23 percent, in 2009-2015. The top 100 firms (ranked by market capitalization) also saw the growth of their surplus profits, from 16 percent to 30 percent and then, most recently, to 40 percent.***

The analysis suggests both that surplus profits for all firms have grown over time and that there is an ongoing process of bipolarization, with a growing gap between a few high-performing firms and a growing number of low-performing firms.


That conclusion is confirmed by their analysis of market concentration, which is presented in Figure 6.2 in terms of the market capitalization of the top 100 nonfinancial firms between 1995 and 2015. The red line shows the actual share of the top 100 firms relative to their hypothetical equal share, assuming that total market capitalization was distributed equally over all firms. The blue line shows the observed share of the top 100 firms relative to the observed share of the bottom 2,000 firms in the sample.

Both measures indicate that the market power of the top companies increased substantially over the 1995-2015 period. For example, the combined share of market capitalization of the top 100 firms was 23 times higher than the share these firms would have held had market capitalization been distributed equally across all firms. By 2015, this gap had increased nearly fourfold, to 84 times. This overall upward surge in concentration, measured by market capitalization since 1995, experienced brief interruptions in 2002−03 after the bursting of the dotcom bubble, and in 2009−2010 in the aftermath of the global financial crisis, and it stabilized at high levels thereafter.****

So, what is causing this growth in market concentration? One reason is because of the nature of the underlying technologies, which involve costs of production that do not rise proportionally to the quantities produced. Instead, after initial high sunk costs (e.g., in the form of expenditures on research and development), the variable costs of producing additional units of output are negligible.***** And then, of course, growing firms can use intellectual property rights and lobbying powers to protect themselves against actual or potential competitors.


Giant firms can also use their super-profits to merge with and to acquire other firms, a process that has accelerated because—as both a consequence and cause—of the weakening of antitrust legislation and enforcement.

What we’re seeing, then, is a “vicious cycle of underregulation and regulatory capture, on the one hand, and further rampant growth of corporate market power on the other.”

The models of mainstream economics turn out to be a shield, hiding and protecting this strengthening of corporate rule.

What the rest of us, including the folks at UNCTAD, have been witnessing in the real world is the emergence and consolidation of global rentier capitalism.


*There’s another reason why the long run is so important for neoclassical economists. All incomes are presumed to be returns to “factors of production” (e.g., land, labor, and capital), equal to their “marginal products.” But short-run super-profits are a theoretical embarrassment. They represent a return not to any factor of production but to something else: serendipity or Fortuna. Oops! That’s another reason it’s important, within a neoclassical world, for short-run super-profits to be competed away in the long run—to eliminate the existence of returns to the decidedly non-productive factor of luck.

**UNCTAD defines surplus profits as the difference between the estimate of total typical profits and the total of actually observed profits of all firms in the sample in that year. Thus, they end up with a lower estimate of surplus or super-profits than if they’d used a strictly neoclassical definition, which would compare actual profits to a zero-rent (or long-run equilibrium) benchmark.

***The authors note that

these results need to be interpreted with caution. More important than the absolute size of surplus profits for firms in the database in any given sub-period, is their increase over time, in particular the surplus profits of the top 100 firms.

****The authors of the study focus particular attention on the so-called high-tech sector, in which they show “a growing predominance of ‘winner takes most’ superstar firms.”

*****Thus, as Piero Sraffa argued long ago, the standard neoclassical model of perfect competition, with U-shaped marginal and average cost curves (i.e., “diminishing returns”), is called into question by increasing returns, with declining marginal and average cost curves.



The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thoughtRudi Dornbusch

Last week, a wide variety of U.S. media (including the Wall Street Journal and USA Today) marked what they considered to be the ten-year anniversary of the beginning of the global economic crisis—from which we still haven’t recovered.

The event in question, which occurred on 9 August 2007, was the announcement by international banking group BNP Paribas that, because their fund managers could not calculate a reliable net asset value of three mutual funds, they were suspending redemptions.

But, as I explain to my students, “Beware the appearance of precision!” For example, the more numbers after the decimal point (2.9, 2.93, 2.926, etc.), the more real and precise the number appears to be. But such a number is only ever an estimate, a best guess, about what is going on (whether it be the growth of output or the increase in new home sales).

The same holds for dates. It would be odd to choose a particular day ten years ago that, among all the possible causes and precipitating events, put the U.S. and world economies on the road to the Second Great Depression. That would be like saying World War I was caused on 28 June 1914, when Yugoslav nationalist Gavrilo Princip assassinated Archduke Franz Ferdinand of Austria. Or that the first Great Depression began on Black Thursday, 24 October 1929.


Given the centrality of housing sales, mortgages, and mortgage-backed securities in creating the fragility of the financial sector, we could just as easily choose July 2005 (when, as in the green line in the chart above, new one-family house sales peaked), January 2006 (when, as in the blue line, new privately owned housing units starts peaked), or February 2007 (when the Case-Shiller home price index, the red line, started its slide).

fredgraph (1)

Or, alternatively, we could choose the third quarter of 2006, when the U.S. corporate profit share (before taxes and without adjustments) reached its peak, at almost 12 percent of national income. After that, it began to fall, and the decisions of capitalists dragged the entire economy to the brink of disaster.

fredgraph (2)

Or the year 2005, when the profits of the financial and insurance sector were at their highest level—at $158.3 trillion—and then began to decline. Then, of course, it was bailed out after falling into negative territory in 2008.


Or, given the centrality of inequality in creating the conditions for the crash, we can go all the way back to 1980, when the share of income going to the top 1 percent was “only” 10.7 percent—since after that it started to rise, reaching an astounding 20.6 percent in 2006.

Those are all possible dates, some of course more precise than others.

What is important is each one of those indicators gives us a sense of how the normal workings of capitalism—in housing, finance and insurance, corporate profits, and the distribution of income—created, together and over time, the conditions for the most severe set of crises since the first Great Depression. And now, as a result of the crash and the nature of the recovery, all of them have been restored.

Thus creating the conditions for the next crash to occur, ten years after the last one.


Narayana Kocherlakota, professor of economics at the University of Rochester and past president of the Federal Reserve Bank of Minneapolis, is right: in some ways, the 2007-08 was worse than the Great Depression.

It certainly has been worse for average households in the United States. Real median household income (the red line in the chart above) is still below what it was in 2007—and lower still from what it was even earlier, in 1999.

But it hasn’t been a lost decade for the members of the top 1 percent. Their share of income (the blue line in the chart above), which was already an obscene 19 percent in 2007, is today even higher, at 19.6 percent.*

Still, Kocherlakota’s warning is appropriate:

financial crises and the responses to them can have highly persistent adverse effects on economic potential. The risk of such large costs means that policy makers must have better safeguards in place, and be willing to respond vigorously through monetary and fiscal stimulus when crises nonetheless happen.

So what’s happening along these lines? The Trump administration’s nominee to be vice chair of supervision and regulation at the Federal Reserve wants to make the big banks’ stress tests less stringent — and that’ll make a financial crisis more, not less, likely. . .

In short, I see little evidence that policymakers have learned the lessons of the last decade. I hope that situation will change before another crisis occurs.


*Both of the data series represented in the chart above end in 2014. That’s because the series on the share of income captured by the top 1 percent ends in that year. Median household income in 2015, the last year for which those data are available, was still below what it was in 2007.

We don’t have comparable data series for the first Great Depression.


What we do know is that the share of income of the bottom 90 percent, which was 52.4 percent in 1928, hovered at roughly the same level throughout the 1930s, ending the decade at 52.5 percent, and then rose dramatically beginning in 1940. Meanwhile, the share of income captured by the top 1 percent, which stood at 21.2 percent in 1928, never managed to rise to that level during the 1930s and, by 1948, it had fallen to 15.6 percent.