The New Inequality

The conventional wisdom now holds that policymakers' response to the 2008 financial crisis enabled the world to escape a repeat of the Great Depression. But measured inequality has surged since the crisis, owing largely to the very measures that are so often lauded for preventing another catastrophe.

PRINCETON – From the start, policy responses to the 2008 financial crisis were colored by memories and interpretations of the Great Depression. The conventional wisdom now holds that the world avoided a repeat of the interwar catastrophe, largely because policymakers made better decisions this time around. But, while there is plenty of room for self-congratulation, two features of the post-crisis recovery cast a shadow over the celebrations.

First, despite unprecedented monetary expansion and massive fiscal stimulus, recovery has been strikingly weak and fragile. In the eurozone, the debt crisis triggered a sharp turn to fiscal contraction – and, with it, a return to recession. But, even in the United States, where there was plenty of initial stimulus, the long-term growth rate seems likely to remain well below pre-crisis levels for the foreseeable future.

The faltering upswing recalls the 1930’s, when many prominent economists, including John Maynard Keynes and his leading American exponent, Alvin Hansen, decided that the world was entering a phase of secular stagnation. In their view, the Industrial Revolution’s vigor and dynamism had been exhausted, with nothing to replace it to sustain economic growth.

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