Inequality, the Great Recession, and Slow Recovery. Barry Z. Cynamon and Steven M. Fazzari. November 20, 2013

“Rising inequality reduced income growth for the bottom 95% of the income distribution beginning around 1980, but that group’s consumption growth did not fall proportionally. Instead, lower saving put the bottom 95% on an unsustainable financial path that eventually triggered the Great Recession. An original decomposition of consumption and saving across income groups shows that the consumption-income ratio of the bottom 95% fell sharply in the recession,  consistent with tighter borrowing constraints. The top 5% ratio rose, consistent with consumption smoothing. In the recession’s aftermath, the inability of the bottom 95% to generate adequate demand helps explain the slow recovery.”