Almost every recession in the past has seen a relatively predictable recovery. The one that began in 2007 is being a lot more stubborn. According to recent research, the sluggish increase in demand seems to be directly related to the ever increasing growth of wealth inequality.
Decades in the Making
The slow economic recovery can be linked to mid-eighties, when income growth for the majority of the consumer base began, but thanks to the increased debt of the population, the spending continued, despite the lack of an economic basis for it.
This artificial spending bubble was sustained for two and a half decades, until the Wall Street crises finally hit. Lending to households was halted, and the trend which had kept the economy afloat was mostly gone, leading to the biggest recession in recent history.
Wealth Gap Constantly Growing
Even during the latest recession, earnings for the top 5% continued to grow, creating an ever increasing discrepancy. When the lending market suddenly dried up, so did the buying power of the majority of the consumer base. To improve growth and prevent deep recessions, the U.S. economy needs to regain and even build on the pre-recession levels of demand.
Can it be fixed?
The difference in today’s economy over the past is that there is now a vast pool of inherited wealth that has set up a certain portion of the population to continue to increase their earnings. In the meantime, most people who try to get ahead are held back by debts created as soon as they reach college. To add insult to injury, most politicians want to avoid losing valuable financial support by refusing to increase taxes on the more wealthy members of the population
There is clearly a need to find a way to significantly boost the demand throughout the economy. To achieve this, the government needs to look at ways to slow the pace at which this inequality is growing, for example, by increasing the earnings of the average person in America to close the gap. This would start to provide a longer term solution which would not prevent recessions, but should make them shorter and less severe.