The Rich and the Great Recession

Abstract

Most papers explaining the macro causes of the U.S. Great Recession focus on the behavior of the middle class: how its saving rate declined in the pre-crisis years, then surged following the crisis. This paper argues that the saving rate of the rich followed a similar pattern, the result of wealth effects associated with a boom-bust in asset prices. Indeed, the swings in saving by the rich must actually have played the most important role in the consumption boom-bust, since since the top 10 percent account for almost half of income and two-thirds of wealth. In other words, the rich played a critical role in the Great Recession.

Keywords: Income inequality, United States, Income distribution, Private savings, Household consumption, Economic recession, Econometric models, wealth inequality, business cycles, assets, reserve, debt, disposable income, prices, marginal propensity to consume, valuation, consumption function, real income, trends, elasticity, wages, variables, real estate, household debt, macroeconomics, econometrics, monetary policy, growth rate, gdp, national income, mortgages, financial crisis, central bank, trough, income groups, political economy, debts, consumption increases, lags, measurement, distribution of wealth, households, advanced economies, homeowners, loan, loan delinquency

JEL Classification: E12, E21, E32, E52, N12