The 2007–09 financial and subprime mortgage crises sent middle-class Americans’ net worth back to 1992 levels, effectively wiping out two decades of accumulated wealth. Many still haven’t recovered. Suparna Chakraborty, associate professor of economics and a former Federal Reserve Bank of Boston fellow, explains why the middle class continues to lose ground compared to the rich.
1.How does the current economic recovery compare to the past?
The recovery has been very slow. Slower than any past recoveries, except perhaps after the Great Depression. U.S. economic (GDP) growth has averaged about 2 percent per year. During prior recoveries, U.S. growth averaged 2.5 percent — significantly higher in economic terms.
The good news is that in looking at the data there's no indication of a looming wide-spread tech or housing bubble, as some have speculated.
2. Stocks are up almost 200 percent in seven years. Yet the benefits of that wealth haven't reached middle- and low-income families for the most part. Why?
The purchasing power of the typical American family is 3.1 percent lower than it was five years ago. Economists don't have an iron-clad answer for why. It might be due in part to slow growth in manufacturing, which affects the middle class most because they typically benefit from job creation, not necessarily from a hot stock market.
3. Corporate capital investment is near an all-time low. Why aren't companies investing to grow out of the recession?
They're being conservative. The government's generous bailout package, coupled with a slowly rebounding economy, means corporations are coming out of their "red days" with large cash reserves. The general economic outlook, however, is still not robust enough for corporations to gamble on big investments.
4. Is the growing wealth disparity in America a symptom of a deeper problem?
Yes. As Warren Buffett is fond of pointing out, our biased tax laws are to blame. The rich win because most of their income comes from investing, which is taxed at a 15–20 percent rate. The middle class, on the other hand, loses because most of their income comes from wages, which are taxed at a 25–39 percent rate, depending on income. It's a bias that leads to incongruent outcomes, such as Buffet's secretary being taxed at a higher rate than her boss — one of the world's richest men.
5. You teach Corruption, Ethics, and Crisis — The American Economy Today. What do students learn in this and similar courses about economics?
They learn that ethical economics need not be a detriment to growth. And that real, long-term growth cannot be achieved by cutting ethical corners. Students meet and hear from guest speakers like Professor Anil K. Kashyap of the University of Chicago Booth School of Business, and Jeremy Wilson, Cisco Systems' award-winning ethics officer, about the importance of ethical thinking in economics.