Is American capitalism running out of steam? Comparative insights from the Great Depression and the Great Recession

Maria N Ivanova

From 2007 to 2009, the United States (US) experienced a major financial and economic crisis, a ‘Great Recession’, whose depth, severity, and global impact evoked numerous comparisons with the deepest structural crisis of the twentieth century – the Great Depression of the 1930s. There are significant similarities between the circumstances and dynamics surrounding both crises. And yet, those similarities should not distract from even more important differences.

The boom and the bubble: then and now
The Great Depression and the Great Recession were triggered by asset-price bubbles – a stock market bubble in the late 1920s and a housing bubble in the 2000s – but pre-existing structural imbalances in the US economy were the reason why the burst of speculative bubbles induced a general economic collapse. One fundamental imbalance was the highly unequal growth of property income relative to labour income. The combination of relatively stagnant labour income and surging corporate profits played a leading role in the run-up to the downturns and was chiefly responsible for the slow recoveries. The boom and the bubble in both instances were driven by similar dynamics: sluggish wage growth and falling labour share of national income, deepening inequality with heavy concentration of wealth gains at the top, corresponding mounting indebtedness among lower- and middle-income households, surging corporate profits and a corporate saving glut seeking financial ventures. Thus, two causal mechanisms underlay the structural fragility of the economy then and now. On the one hand, the stagnation of labour earnings represented a key factor behind rising income inequality and a drag on consumption which was temporarily alleviated by credit expansion; hence, the rising household debt levels which eventually became unsustainable. On the other hand, rising corporate profits created an overhang of idle money, eager to lend itself to speculative ventures, which played a key role in fuelling the stock market bubble of the 1920s and the housing bubble of the 2000s.