By Heather Boushey and Somin Park

The failure to make a serious dent in high levels of economic inequality in recent years will make responding effectively to the next inevitable recession more difficult, both economically and politically.

Rising income and wealth inequality, combined with financial deregulation and the expanding financialization of the U.S. economy, led to the credit boom and crash that substantially deepened the resulting economic crisis in 2008. Fiscal stimulus during the Great Recession prevented the economy from collapsing completely but was still insufficient and phased out too soon. What’s more, instead of taking lessons from our experiences a decade ago and strengthening our recession-fighting tools, recent policies passed by Congress have focused on cutting taxes, reduced the perceived space we have to increase spending in a downturn and exacerbated income and wealth disparities in the United States.

First, let’s zoom out. Recessions aren’t just one-offs. They are part of the economic cycle. Aggregate demand in the economy expands and contracts over time and recessions occur during prolonged contractions, which are more likely when economic inequality distorts consumption and savings. Inequality also affects the time it takes to recover from recessions because it subverts our institutions and makes our political system ineffective. Lifting the economy out of a downturn requires decisive government action to boost spending and aggregate demand, which often runs counter to the primary interests of those with economic and political power. As entrenched interests continually hamstring the government’s capacity to respond to a recession, policymakers should act now to prepare for the next one by addressing inequality in the United States.

Inequality makes recessions more likely

The U.S. economy is amid what will be the longest recovery in history if it lasts past June 2019. While no one can predict the next recession, it will happen. And, evidence from around the world indicates that our high inequality makes that even more likely.

Economists are examining how higher inequality is associated with slower income gains among those lower down the income and wealth ladder.1 The question has been most prominently explored by Jonathan Ostry and a group of his colleagues at the International Monetary Fund. In a book released early in 2019, Ostry and fellow IMF economists Prakash Loungani and Andrew Berg showed that inequality was associated with more frequent economic downturns.2 Growth may happen, but if inequality is high then the economic gains are more likely to be destroyed by the recession—or depression—that follows, with the economic pain all-too-often compounded for those at the lower end of the income spectrum.

A few folks have asked me about my friend Michael Strain’s recent Bloomberg piece where he argues against wage stagnation (it’s “more wrong than right”). It’s an old argument but one worth having, and Michael makes some important points and misses some big ones too (5, to be precise).

Larry Mishel and I counter a much shorter-term version of Michael’s case here but similar issues pertain. Certainly, the evidence he presents doesn’t change the basic wage story that I and many others carry around in our heads.

I think Michael’s most germane point is that nobody defines “stagnation.” If you think stagnation means real wages for low-wage workers have never gone up in the past four decades, you’re wrong. The figure below, from a recent piece I published (one I’ll get back to re a key point Michael misses), shows real wages for low and moderate wage workers stagnated through the 1970s, 80s, and 2000s.

But, in periods of very tight labor markets—the latter 1990s and now—they grew at a decent clip. This is key insight #1about real wage growth for too many workers. It’s not that they’ve never grown. It’s that their growth periods in recent decades have been few and far between. And it’s largely dependent of achieving persistent full employment, a condition that’s also been too rare in recent years (see this exciting new paper on precisely this point!).

Key insight #2 is that, sure, switching to a slower-growing deflator leads to faster wage growth and there are good arguments for various choices (see Mishel/Bivens’ cautions re Michael’s choice of using the PCE for wages). But it doesn’t wipe out long periods of stagnation. Here’s the real 20th percentile wage (2018 $’s) using both the CPI-RS (used in the figure above) and the PCE. Just like the above figure: periods of growth, but longer periods of stagnation.

The U.S. needs $2 trillion to bring its crumbling roads, creaky railroads, aging airports, 100-year-old water pipes and crowded subways up to snuff. It needs $2.5 trillion more to get ahead of the game and build projects to handle people, business and growth in the 21^st century, studies calculate.

But whether it will get the cash, much of it from the federal government, and spend it, is largely up to one man: GOP President Donald Trump.

 If he says “yes” to raising money for construction, legislation to rebuild the U.S. infrastructure measure goes through Capitol Hill lickety-split, with Democratic, Republican, labor and business support, the speakers at a May 13 conference declared.

If he doesn’t, it doesn’t go through at all.

That was the conclusion, both implicitly and explicitly, of many speakers at the half-day confab to kick off the 7^th annual National Infrastructure Week. The week will see more than 100 events elsewhere nationwide and lobbying by unions, businesses and state and county officials on Capitol Hill. A 52-group coalition, including the AFL-CIO and building trades unions, is sponsoring it.

“We need a major infusion by the federal government to do a massive infrastructure rebuild and build out,” which would also produce tens of thousands of well-paying construction jobs, said Sean McGarvey, the president of North America’s Building Trades Unions, and one of three union speakers at the D.C. confab.

And those jobs, which, once young people complete apprenticeships – without heavy college debt and with just a high school diploma along with the specialized training building trades provide – would pay each of them $60,000-$80,000 and provide a road into the middle class, added McGarvey.

“If we can do a massive infrastructure bill with the president, we’ll lift hundreds of thousands of people into the middle class,” he stated.

“Infrastructure is an amazing virtuous circle where you’re creating middle-class jobs and making things” – roads, bridges, airports, subways – “people need. So why are we not actually getting it done?”  Teachers President Randi Weingarten asked rhetorically during her panel discussion.