Tuesday, May 26, 2020

Growth and distribution after the 2007–2008 US financial crisis: who shouldered the burden of the crisis?

Mathieu Dufour and Özgür Orhangazi

Keywords: financial crisis; Great Recession; 2008 crisis

Published in print:Apr 2016


Category:Research Article



Pages:151–174

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The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe, the majority of which took place in low- and middle-income countries. Studies of the impacts of these crises have identified three broad sets of consequences. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase. Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of large masses. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well. Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows may increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets. The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle- income countries, we study the consequences of the 2007–2008 US financial crisis and complement the budding literature on the ‘Great Recession.’ In particular, we examine the impacts of the crisis on labor and capital, with a focus on distributional effects of the crisis such as changes in income shares of labor and capital, and the evolution of inequality and poverty. We also analyse the role of government policies through a study of government taxation and spending policies, and examine capital flow patterns.



Full Text

1 INTRODUCTION

The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe (Eichengreen 2001; Reinhart and Rogoff 2011). Apart from the large amount of literature that examines the causes of these crises, another line of research has concerned itself with the consequences of financial crises. Three broad findings emerge from the latter, which focuses on low- and middle-income country experiences, as this is where most of the major financial crises have taken place in the last couple of decades. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase (Diwan 2000; 2001; Jayadev 2005; Onaran 2007). Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of the rest of society. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well (Crotty and Lee 2001; Harvey 2003; Duménil and Lévy 2006; Dufour and Orhangazi 2007; 2009). Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows often increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets (Wade and Veneroso 1998; Dufour and Orhangazi 2007; 2009).

The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle-income countries as an entry point to look at the experience of the US economy in the aftermath of the 2007–2008 financial crisis provides a fresh perspective on that crisis and allows for an original contribution to the gradually emerging literature on the consequences of the US financial crisis and the ‘Great Recession’ (for example, Oleinik 2013; Wolff 2013). In this paper, we empirically investigate the outcome using broad indicators such as changes in inequality and poverty, and then compare the fortunes of labor and capital after the crisis. We find that unemployment has substantially increased and labor incomes have fallen, but the income share of capital and profitability continued to increase after the crisis. While the US did not need an external bailout, such as those the IMF provided during earlier financial crises in less-developed countries, the US government and the Federal Reserve (FED) provided unprecedented amounts of support to the economy. Since they were not constrained by an external structural adjustment program and since the FED has the power to issue an international reserve currency, the outcomes of the crisis in this regard differed from other experiences. However, capital inflows peaked during the crisis, suggesting that it opened business opportunities for international capital in similar ways as previous crises did.

The rest of the paper is organized as follows. In Section 2 we look at the emergence of the 2007–2008 US financial crisis and the path of some important macroeconomic indicators before and after the crisis. In Section 3 we turn our attention to the distributional effects of the US financial crisis and then compare this with the impacts of the crisis on capital. We compare the changes in income shares of labor and capital before shifting our attention to changes in inequality and poverty. Section 4 focuses on the role of government policies through an analysis of government taxation and spending policies. After discussing the change in capital flows in Section 5, we conclude in Section 6 with a discussion of our overall findings and further research areas.

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