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Recap of the 2008 Recession

The 2008 Recession began with the burst of the housing bubble. The concept of the housing bubble refers to events leading up to a fall in housing prices. From the mid-2000s, the US housing market experienced a boom. Housing prices increased and people bought houses and expected to sell them shortly after purchase to make a profit. The housing bubble bursted when housing prices fell and people defaulted on the loans they took out to pay for those houses. Investment banks loaned out more money than they had to people buying homes. One form of these loans is the subprime mortgage. Subprime mortgages are loans given to people with low credit ratings. Therefore, the likelihood they will return the loan is lower than of a person with a higher credit rating.

In addition, banks began to encourage people to buy credit default swaps (CDSs), which were a form of mortgage-backed security. CDSs equated to bets on the repayments of aggregate loans called CDOs, collateralized debt obligations. Credit rating agencies rated low-quality, high-risk CDOs as AAA, the highest rating a security can receive. What investors did not know was that these CDOs were backed by subprime mortgages. Banks practiced predatory lending in which they loaned money to people with poor credit scores or a higher likeliness to default, or fail to repay, a loan. People borrowing money to buy houses could not pay back the loans and the values of CDSs plummeted. Investors had little to no chance of making a profit on CDOs for that reason. By this point, investment banks began to collapse. They had borrowed more money than the amount of assets they owned.

By definition, a recession is a decline in economic activity. This was exactly what happened even after the federal government bailed out the banks. The collapse of several huge financial institutions impacted the consumer spending and unemployment. More homes were foreclosed than ever and consumption greatly decreased. People invested less in businesses, which led to increased unemployment. The stock market also responded poorly, causing people to lose wealth.

Note: Sony Pictures’ documentary, Inside Job (2010), offers a critical look at the key figures and complex technical causes of the 2008 Recession. The documentary is highly informative and easy to follow, but do take into account that several important contributors to the recession declined to be interviewed. They were shown in archival footage instead, but viewers still never get a chance to hear their defense.

So what is the connection between the recession and the increased poverty that followed? 

Here’s a rundown the 2008 Recession’s effects:

  • Unemployment and underemployment
  • Job loss
  • Income decline
  • Loss of health insurance
  • Decreased consumer spending

Unemployment and Underemployment

The Bureau of Labor Statistics classifies an individual as unemployed if they meet the following conditions:

  • Do not have a job
  • Have actively looked for work in the past 4 weeks (includes contacting employers, filling out applications, submitting resumes)
  • Presently available for work
  • Long term unemployment refers to being unemployed for 27 weeks or more

US unemployment was higher than other industrialized countries’ immediately after the end of the recession. National unemployment jumped almost 5% from recession’s beginning to end. The unemployment rate was no higher than 5% in the 30 months prior to the start of the recession. It rose from 5% in December 2007 to 9.5% in June 2009 and continued to rise until it reached a high of 10% in October 2009. The long term unemployment rate reached the highest it had been in the past 6 or more decades.

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Wage and salary increases slowed during the recession as well. The Employment Cost Index is used to measure the change in the cost of labor. Employers are less likely to offer raises or bonuses during recessions.

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Something interesting to note is that unemployment affected both minorities and whites similarly. 

Screen Shot 2015-05-17 at 11.08.21 AMThere was higher unemployment among men than women during the recession.

Screen Shot 2015-05-17 at 11.09.31 AMThe employment of young adults also decreased equally among both sexes. 

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Job loss

Mass layoffs occurred during the recession. A mass layoff is defined as taking action to lay off 50 or more people. Mass layoffs affected 326,392 workers in 3,059 mass layoff actions by February 2009. Between 2008 and 2009, the US lost 8.4 million jobs. This was 6.1% of the employment prior to 2008. 

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The net change in the graph below is negative, indicating that more business closed than opened. Establishment death means permanent, rather than seasonal, closing.

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Income Decline

From 2007 to 2008, the median income fell $1,860 from $52,163 to $50,303. All races and ethnicities experienced this decline. However, Hispanics were particularly affected the most because many worked in the construction industry, which suffered during the recession.

Loss of Health Insurance

Loss of employment often meant losing health insurance provided by employers. The number of people with employer-sponsored health insurance fell and as a result, the number uninsured or covered by public insurance rose.

Decreased Consumer Spending

Consumer unit refers to a household. The average yearly expenditure of a family in 2007 was $52,203 and decreased to $48,109 in 2010.

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Now really, what’s the connection? 

All this data goes to show that the recession had a widespread effect. The poverty rate grew from 12.5% to 13.2% between 2007 and 2008. This .7% change equated to another 2.6 impoverished Americans. 31.9%/96 million people in 2008 were living below 2x the poverty line, as opposed to 30.5% in 2007. (Note: 2x the poverty line is used in research because 1x the poverty line does not provide the bare minimum standards of living). Inequality between the 20th and 95th income percentile did not change, as they were both affected (EPI.org).

The 2008 Recession impacted poverty greatly primarily because of its effects on consumer spending and business investment. The stock market also fell and people lost wealth. In addition, the government’s precautions and response to economic hardship were insufficient. Paid work is one major way to get out of poverty, as Professor Leonard Rodberg mentions in his interview. Work was not a good solution due to the recession’s negative impact on the economy and jobs.

Sources

All graphs are from the Bureau of Labor Statistics.

BLS.gov

  • BLS Spotlight on Statistics- The Recession of 2007–2009
    • http://www.bls.gov/spotlight/2012/recession/pdf/recession_bls_spotlight.pdf
  • How the Government Measures Unemployment
    • http://www.bls.gov/cps/cps_htgm.htm#unemployed

Economic Policy Institute

  • New 2008 Poverty, Income Data Reveal Only Tip of the Recession Iceberg
    • http://www.epi.org/publication/income_picture_20090910/
  • Employer-Sponsored Health Erosion Continues, Will Likely Accelerate Through 2009
    • http://www.epi.org/publication/health_picture_20090910/

FiscalPolicy.org

  • NYC’s Rising Poverty and Falling Incomes Since the Great Recession
    • http://fiscalpolicy.org/nycs-rising-poverty-and-falling-incomes-since-the-great-recession

StateofWorkingAmerica.org

  • The Great Recession
    • http://stateofworkingamerica.org/great-recession/