Inequality and the Roots of the Great Recession

by John Iceland

What does income inequality have to do with the Great Recession? After all, wasn’t the recession mainly caused by hanky-panky in the financial sector (or, to put it more formally, the loosening of bank lending rules and rise of mortgage securitization with too little regulatory oversight), which led to a housing bubble that eventually burst?

As I describe in Portrait of America, income inequality was a critical factor contributing to the recession. For those of you who were thinking of buying a house in the 2000s, who doesn’t remember the importance of more bathrooms, granite kitchen tops, and large open-concept living space—popularized by and reflected in television shows featuring discerning home buyers? The average size of houses, for example, grew 15 percent to 2,277 square feet in just 10 years between 1997 and 2007. Among the aspiring middle class, home-buying, and even home-flipping, seemed like a good way to build wealth. Very little money down was required, and you could refinance with your growing home equity (driven by ever-rising home prices) if monthly payments got too big. Everyone was doing it.

The fact is that subjective well-being has a relative component. When you are not doing as well as your neighbors, you feel less well off. If everybody is buying their dream home, and they all can seem to afford it, shouldn’t you too? This issue does not simply boil down to envy. It is more about fitting in and being able to participate in one’s community. Everyone aspires to be in the middle class. The rising income and wealth of those in the upper portion of the income distribution raised the bar for everyone, even as incomes in the middle stagnated. Thus, while inequality was not the sole factor behind the Great Recession, it was a vital—and often underappreciated—one.

 

John Iceland is Head of the Department of Sociology and Professor of Sociology and Demography at Penn State University. His most recent book, A Portrait of America,  is the first book in the new series Sociology in the 21st Century. Conceived and written for courses, the books in this series will address major sociological issues in the United States today such as race, immigration, gender, the family, education, and social inequality.