Do Crises Increase Inequality?

This morning, I stumbled on a conversation between Amanda Fischer, policy director at the Washington Center for Equitable Growth, and Mehrsa Baradaran. I’ve seen Baradaran present at a history conference, and I’ve been impressed by her historical work on black banks and the racial wealth gap.

In this conversation, Baradaran and Fischer discussed “why crises help the wealthy and harm everyone else,” the gist of which is captured in this pithy line that Baradaran mentioned: “When Wall Street gets a cold, Harlem gets pneumonia.” And this rings true. Certainly, that was the impression that I had after reading Katherine Boo’s Behind the Beautiful Forevers, which showed how the 2008 financial crisis reverberated in the Annawadi slum that she describes in such rich ethnographic detail.

As Barahdaran says of that same crisis:

really only the top 20 percent or 30 percent of society recovered. A ton of Black families lost their homes. They never got those back. Black communities lost 53 percent of their wealth during the financial crisis. I studied the same effects during the Great Depression, which hit Black communities much more acutely, took them much longer to recover then the White community, and part of that is because the New Deal made explicitly racist recovery decisions. But also, part of that is because it’s just harder to recover from blow after blow when you don’t have those buffers.

And yet, I also felt a nagging skepticism, given what I’ve read about inequality. Don’t our major leveling periods follow major crises? Wasn’t the Age of Compression in the postwar period created by the destruction of depression and war, by the tax and fiscal policies that followed? Doesn’t inflation, the expansion of the money supply, hurt creditors and help borrowers? And didn’t the share of income at the top percent decrease following the financial crisis?

It is possible, I suppose, that all of those things were true and yet the setbacks of these crises were more profound for groups at the bottom of the economic ladder than those at the top. But I still find it hard to believe that the answer to the question of crises and inequality is so obvious, given the leveling possibilities of the past.

So, some quick research. Publishing in the Harvard Business Review, I see that Moritz Kuhn, Moritz Schularick, and Ulrike Steins (all at the University of Bonn) suggest that the 2008 financial crisis increased inequality, largely because of the varying performance of the major assets held by the middle and upper classes (they draw on data from the Historical Survey of Consumer Finances):

Our research demonstrates that wealthier and less-wealthy people own different types of assets: the middle class has a higher share of its wealth in housing, whereas the rich own more stock. An important consequence of this finding is that housing booms lead to wealth gains for leveraged middle-class households and tend to decrease wealth inequality. Stock market booms primarily boost the wealth at the top of the wealth distribution where portfolios are dominated by listed and unlisted business equity, thereby, increasing wealth inequality. The existence of these different portfolios means that wealth inequality is essentially a race between the housing market and the stock market. Over extended periods in postwar American history, that race has been the predominant driver of shifts in the U.S. distribution of wealth.

While a report from the World Bank (broken apart here by the Financial Times) suggests that inequality mostly plateaued following the crisis. But as interesting is that inequality between countries continued to decline, and that growth fell more precipitously in developed than in emerging economies.

More to chew on here when I have the time.

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