About the author
What’s New on AEI
View related content: Pethokoukis
Before concluding that the Fed can afford to be patient before raising interest rates in the new paper “The Equilibrium Real Funds Rate: Past, Present and Future,” economists James Hamilton (University of California at San Diego), Ethan Harris (Bank of America Merrill Lynch), Jan Hatzius (Goldman Sachs), and Kenneth West (University of Wisconsin) express deep skepticism about the Larry Summers “secular stagnation” argument. That version of the SecStag argument, by the way, posits that the US is turning into perpetually anemic Japan. It is a theory of stagnation driven by weak demand — due to rising inequality, cheaper investment goods, higher global savings — such that 0% interest rates are inadequate to stimulate growth. What’s more, central banks trying to close the gap between the real interest rate and the “full employment” real interest rate have become a dangerous bubble machines. Summers:
But with a high propensity to save, a low propensity to invest and low inflation, this has been impossible. Nominal interest rates cannot fall below zero, as they would have to for real interest rates to be low enough to enable saving and investment to be equated with the economy producing at its full potential. Furthermore, even if potential output can be attained, it would require interest rates so low that they risk financial instability. Given the factors operating to reduce natural interest rates – rising inequality, lower capital costs, slowing population growth, foreign reserve accumulation, and greater costs of financial intermediation – it seems unlikely that the American economy is capable of demanding 10 per cent more output than it does now, at interest rates consistent with financial stability. So demand-side secular stagnation remains an important economic problem.
I have snarkily called this demand-driven version of SecStag the left’s Unified Theory of What’s Wrong With the US Economy since policy solutions would include more government spending and more redistribution to boost demand. But HHH&W offer a counter argument focusing on the relative resilience of the US economy, the apparent effectiveness of monetary policy, the negative effect of US austerity, and shaken confidence from various fiscal fights. In short, Summers was too quick on the draw given these headwinds:
Last, but not least, we are skeptical about the secular stagnation argument. We see two problems as it relates to the current recovery. First, it does not distinguish between a medium-term post-crisis problem and permanent stagnation. Clearly this is not a normal business cycle where a big collapse is followed by a big recovery. As Reinhart and Rogoff and many others note, when there is a systemic crisis both the recession and the recovery are different than in a normal business cycle. Summarizing 100 such episodes, they find that GDP typically falls by 10.3% and it typical takes 8.4 years to recover to pre-crisis levels. Their “severity index”—adding the absolute value of these numbers together—averages 19.6 for all 100 cases.
Is history repeating itself? Most of these cycles predate the modern era of automatic stabilizers and countercyclical fiscal and monetary policy. They also ignore the special status of the US as the center of capital markets. And they don’t attempt to gauge the relative strength of the policy response to each crisis. Nonetheless, these historic averages are good starting point for analyzing the current period. Indeed, as the last line of the [below table] shows, the US has done much worse than following a normal recession, but measured in comparison to previous such cycles, the US has done quite well, with a smaller recession, a quicker recovery and a much smaller “severity index.”
These systemic crises unleash extended periods of deleveraging and balance sheet repair. How long this impairs aggregate demand presumably depends on the speed of the healing process. This also suggests that the effectiveness of monetary policy should be judged by balance sheet repair as well as the speed of growth in the economy. Judging from a variety of metrics, easy policy seems to have accelerated the healing process:
— Banks are in better shape, with more capital, a lot less bad debt and with the ability to withstand serious stress tests.
— The housing market has worked off most of its bad loans and both price action and turnover rates are back to normal.
— There has a been a full recovery of the ratio of household net worth to income, the debt-to-income ratio has tumbled, and debt service has dropped to the lowest of its 34 year history.
— High-yield companies have been able to refinance and avoid defaults despite a feeble recovery.
In our view, these metrics suggest the balance sheet repair is well advanced.
A second problem with the secular stagnation argument is that it ignores the role of fiscal policy in driving aggregate demand. This economic recovery has seen major fiscal tightening, starting at the state and local level and then shifting to the federal level. Despite the weak economic recovery, the 5.5 pp improvement in deficit to GDP ratio from 2011 to 2014 was by far the fastest consolidation in modern US history (Exhibit 4.22). A number of recent studies suggest that fiscal policy is particularly potent when interest rates are stuck at the zero lower bound.1
Adding to the headwinds, this consolidation has been accompanied with a series of confidence shaking budget battles, including a “fiscal cliff” and repeated threats of default or shutdown. The result is a series of spikes in the “policy uncertainty index” developed by Baker, Bloom and Davis (2013) (Exhibit 4.23). It is a bit odd to have a Keynesian theory of inadequate demand such as “secular stagnation” that does not include a discussion of the role of contractionary fiscal policy in creating that shortfall.
In some ways the received wisdom on the economy has come full circle: the optimistic “Great Moderation” has been replaced with its near-opposite, “Secular Stagnation.” The truth seems to be somewhere in between. Some of the moderation was earned at the expense of asset bubbles. Some of the stagnation is cyclical. If our narrative is correct, the weak economic recovery of the past five years is not evidence of secular stagnation, but is evidence of severe medium-term headwinds. The real test is happening as we speak: with significant healing from the 2008-9 crisis, will the recent pick-up in growth continue, creating a full recovery in the economy? And will the economy withstand higher interest rates? Judging from the previous three business cycles (and recent growth data!), we think the answer to both questions is “yes.”
Our narrative approach suggests the equilibrium rate may have fallen, but not by as much as some suggest. The last several business cycles have underscored the danger of calling a new era of lower rates in the middle of an economic recovery. We would expect the equilibrium rate to be higher than the 1% average rate during the financial repression of the 1950s and 1960s before inflation surged. On the other hand, lower trend growth in the economy may have lowered the equilibrium rate below the 2% or so average for real rates over the 1960-2007 period. Based on our narrative analysis, a reasonable range for the equilibrium rate today is between 1 and 2%.
To achieve growth of even 2 per cent over the next decade, active support for demand will be necessary but not sufficient. Structural reform is essential to increase the productivity of both workers and capital, and to increase growth in the number of people able and willing to work productively. Infrastructure investment, immigration reform, policies to promote family-friendly work, support for exploitation of energy resources, and business tax reform become ever more important policy imperatives.
View related content: Pethokoukis
This week, the Federal Communications Commission voted to regulate the Internet. What’s next? We’ve gathered the latest thoughts from AEI experts on the FCC decision and what it means for the future.
Daniel Lyons: “What’s next on the road to net neutrality?”
Like a high-stakes game of legislative chess, the House and Senate may move to block the FCC, only to find themselves blocked in turn by a presidential veto that they likely lack the votes to override. But bureaucracy and politics are not the only obstacles to implementation. Publication in the Federal Register also serves as the starting gun for judicial review. Numerous parties affected by the order will file petitions asking the court to overturn the FCC’s decision. If petitions are filed in multiple courts, a lottery will determine which circuit will hear the challenge—though some litigants may seek to transfer the case to the DC Circuit, which has a reputation for engaging in more critical review of agency action and has twice invalidated the FCC’s previous attempts to regulate Internet providers. …..
Obviously it is far too early to predict how this timeline will unfold. But one thing we know for certain. Legally, nothing will change on February 26, and probably not for at least several months afterward. The only event guaranteed to happen after the Commission’s vote is an expensive, multi-front battle in Congress and in the courts to overturn the agency’s action. The agency will expend significant resources and political capital to defend a decision that may be stayed pending appeal. And in the end, the agency risks being told—for the third time in five years—that its efforts to regulate broadband providers goes beyond the scope of its statutory authority.
Given this delay, the costs of litigation, and the risk of another failure in court, one wonders why the agency has not simply accepted the olive branch likely to be extended by Congress. The Thune-Upton bill would create binding net neutrality rules against broadband providers—rules that go beyond those that the FCC attempted unsuccessfully to craft itself in 2010. These rules prohibit broadband providers from blocking websites, throttling network traffic, or engaging in paid prioritization. But President Obama insists he will veto the bill, and the FCC will not wait for Congress to act. …. If the president and the FCC believe we must implement net neutrality as quickly as possible, they should work with Congress rather than undertaking the longer and riskier path of freelancing at the edge of the agency’s statutory authority.
Contrary to the optimistic views of those who have been pushing for the adoption of these [Open Internet] rules for the past decade, these rules face a bleak future in court. This is because they clearly exceed the intended scope of the Commission’s statutory authority. While clever lawyers surely can argue that the words of the Communications Act have enough ambiguity to cover the Internet, the purpose and design of the Commission’s rules clearly amount to a substantial expansion of the Commission’s authority. The courts look at such overt expansions of authority with substantial skepticism.
Advocates of the Commission’s efforts are confident the rules will be upheld, pointing to cases like Brand-X and Fox, cases that show how courts, in the event of an unclear law, generously defer to the agencies’ determination of what the statutory language means. Commission supporters particularly draw comfort from Justice Scalia’s dissent in Brand-X, which they interpret as saying that the Communications Act in fact requires the Commission to regulate Internet access as a so-called “telecommunications service.” The Communications Act gives the FCC broad power to regulate telecommunications services, and if Internet access is such a service, the thinking goes, clearly this means that the FCC has broad authority to regulate Internet access. ….
The Communications Act gave the FCC power to regulate the phone network. …. The phone network was a useful and important tool; the Internet is the backbone of our modern economy. …. The FCC cannot use that authority to bootstrap its efforts to regulate the Internet. … The Commission may have wide latitude to say what ambiguous words in the Communications Act mean, but those words can’t mean whatever the Commission wants them to mean. The FCC needs to stay within the boundaries established by Congress. …. The Commission’s approach is a massive expansion of the Commission’s power into an area of vast economic and political significance. It is anything but mere “statutory interpretation” – and for this reason it is quite likely to face a rough road as it heads to court.
Richard Bennett: “Inside Obama’s net fix”
The Internet is working well, so it’s not obvious that the FCC needs to help it. American companies own 10 of the world’s 15 largest websites (Google, Amazon, and Facebook to name an obvious few); the United States has greater access to advanced cable and fiber networks than any large country except Japan; it was the first to deploy advanced 4G/LTE mobile networks; it has more smartphones than anywhere else in the world; and it exports more digital goods per capita than any other nation. ….
The FCC says it’s not passing new rules in hopes of improving the Internet but to preserve it as it is with “light touch regulations.” The agency is taking action because courts have voided all but a sliver of its three previous sets of rules. And President Obama raised the stakes by publicly urging the FCC to impose the “strongest possible rules” on the Internet to fill the regulatory vacuum.
The new net neutrality rules were reportedly formulated by a “shadow FCC” operating within the White House that actively thwarted the will of FCC Chairman Tom Wheeler, the former investor and lobbyist who heads the agency. This has sparked congressional investigations into whether the White House improperly interfered with the FCC, which is officially independent. It has also prompted Congress to hold hearings about a pair of identical “Internet openness” bills in the two chambers that endorse net neutrality but clarify and reduce the FCC’s power and control over the Internet.
Rarely has a wonky feature of telecom policy generated such drama. The FCC rules will certainly be challenged in court, and Congress will just as certainly press forward with its efforts to shield the FCC from White House control. Internet policy will become a prominent issue in the 2016 presidential election, nearly 50 years after the Internet was born. ….
[T]he US has arrived at a turning point in the development of the web. The present direction of Internet regulation threatens the ability of networks to advance. …. The Internet as we know it today is a distillation of ideas developed around the world by both public and private sector researchers supported by investments from both public and private sources. Most of the magic comes from the profit-driven private sector. As amazing as the Internet is today, it still falls short of its potential. It’s a certainty that the rules imposed on Wheeler will slow the Internet’s rate of progress and lock in current applications. Congress can take steps to undo the damage about to be inflicted — and it should.
If you’d like to learn more, join us on March 2 for the AEI event “The path ahead for US Internet policy: A conversation with Representative Greg Walden.” Rep Walden, chairman of the House Subcommittee on Communications and Technology, will discuss the implications of the FCC’s net neutrality vote.
View related content: Pethokoukis
If you are worried that someday California will fall into ocean, then you might also be worried about the future fate of Silicon Valley, America’s entrepreneurial capital. But here is some good news, via Ian Hathaway:
To recap, the data tell a pretty clear story that seems to confirm the “growth-focused startups are spreading throughout the country geographically” narrative — venture capital first fundings are reaching more regions throughout the United States, and those that previously received at least some venture capital appear to be getting more early-stage companies funded.
While the substantial majority of first funding venture capital continues to go to a small number of metropolitan areas — even truer when measured by the amount of capital invested — the bottom of the pyramid is broadening and a number of cities are getting in on the action.
These cities will not rival Silicon Valley or even New York or Boston any time soon. Still, this is a welcomed development in my view. The presence of businesses in a region that achieve very high growth can broadly boost income and employment opportunities, not just for those directly involved, but for all participants in the local economy.
View related content: Pethokoukis
Former CBO boss Donald Marron offers a modestly positive take on dynamic scoring:
Some advocates hope that dynamic scoring will usher in a new era of tax cuts and entitlement reforms. Some opponents fear that they are right.
Reality will be more muted. Dynamic scores of tax cuts, for example, will include the pro-growth incentive effects that advocates emphasize, leading to more work and private investment. But they will also account for offsetting effects, such as higher deficits crowding out investment or people working less because their incomes rise. As previous CBO analyses have shown, the net of those effects often reveals less growth than advocates hope. Indeed, don’t be surprised if dynamic scoring sometimes shows tax cuts are more expensive than conventionally estimated; that can easily happen if pro-growth incentives aren’t large enough to offset anti-growth effects.
Detractors also worry that dynamic scoring is an invitation for JCT or CBO to cherry pick model assumptions to favor the majority’s policy goals. Doing so runs against the DNA of both organizations. Even if it didn’t, the discipline of twice-yearly budget baselines discourages cherry picking. Neither agency wants to publish rosy dynamic scenarios that are inconsistent with how they construct their budget baselines. You don’t want to forecast higher GDP when scoring a tax bill enacted in October, and have that GDP disappear in the January baseline.
I am cautiously optimistic about dynamic scoring. Done well, it can help Congress and the public better understand the fiscal effects of major policies. There are still some process issues to resolve, most notably how investments might be handled, but we should welcome the potential for better information.
View related content: Pethokoukis
The economy in the U.S. expanded at a slower pace in the fourth quarter than previously reported, restrained by a smaller gain in stockpiles and widening trade gap, even as consumers continued to provide support. Gross domestic product, the value of all goods and services produced, rose at a 2.2 percent annualized rate, down from an initial estimate of 2.6 percent, Commerce Department figures showed Friday in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 2 percent pace.
Another way of looking at what happened in the fourth quarter is final sales domestic purchasers. This metric is GDP minus the effects of foreign trade and inventories. Final sales to domestic purchasers grew at a 3.2% annual rate in the fourth quarter, and had grown at a 4.1% rate in the third quarter. We expect this metric will continue to growth 3.5% throughout 2015. We see real GDP growing at 3.1% in 2015, up from 2.4% in 2014.
View related content: Pethokoukis
Recall the exit polls from the 2012 presidential election. Mitt Romney had a slight edge over President Obama on the economy and the budget. By eight points, voters said they preferred a smaller government with fewer services. Among those who wanted someone with a vision for the future, Romney won by nine points. Voters who said unemployment was America’s biggest problem sided with Romney.
Just knowing the above data might lead one to conclude Romney must be sitting in the Oval Office right now. But not after viewing this data: Only 47% of voters had a favorable view of Romney vs. 53% for Obama. By 53-43%, voters thought Obama was more “in touch” with people like them than Romney. By a whopping 81-18%, people looking for empathy in a candidate mostly backed Obama. Finally, voters saying rising prices were the biggest problem went for Obama. (Indeed, rising prices pretty much tied with unemployment as the most important economic issue for voters.) These are people for whom affording a middle-class life — including education and healthcare — was a struggle. This is the middle-class stagnation data point.
Now here are some results from a new Pew survey:
The latest national survey by the Pew Research Center, conducted Feb. 18-22, 2015 among 1,504 adults, finds that both parties are viewed by majorities as having strong principles. Somewhat more say this about the GOP (63%) than the Democratic Party (57%). About six-in-ten say the Democratic Party “cares about the middle class” (60%) and “is tolerant and open to all groups of people” (59%). By comparison, 43% say the GOP cares about the middle class, and 35% say it is tolerant and open to all. … The gap is much narrower when it comes to opinions about whether each party “has good policy ideas.” About half (52%) say the Democratic Party has good policy ideas while nearly as many (48%) say the same about the GOP. … And the Republican Party fares much better on issues than image. Despite the majority view that the GOP lacks empathy for the middle class, about as many Americans say the Republican Party (44%) as the Democratic Party (41%) can do better in dealing with the economy. On immigration the public also is divided: 45% say the Democrats can do better, while 43% prefer the GOP. The only issue on which Democrats have an edge is on health care (47% to 40%). … The GOP is also now seen by more as the party better able to handle taxes (47% vs. 36%); in January 2014, neither party had an advantage on this issue (41% each). … The two parties continue to run about even in views of which party is better able to handle the overall economy (44% say the Republican Party, 41% the Democratic Party) …
So, again, the GOP is competitive on key issues. But it is also seen as far less open and caring that the Democrats. To me, this looks like the 2016 presidential race may be on a similar trajectory as 2012. People are hesitant to vote for leaders they consider capable if they view those leaders as lacking understanding and empathy of their everyday, real-world concerns. That’s the admission ticket. The political and policy solution for Republicans isn’t to mimic the Dem agenda or their rhetoric. Instead, they should promote the smart, effective conservative reforms — on education, healthcare, taxes — that would strengthen the middle, while also promoting economic growth and upward mobility. This interview with economist and GOP economic adviser Glenn Hubbard gives some hint the party is starting to figure it out:
Few conservative economists have been as influential over the last decade as Glenn Hubbard. He was an architect of President George W. Bush’s tax cuts and of Mitt Romney’s 2012 economic plan. He has preached the importance of permanent, fundamental policy changes — such as reducing tax rates and simplifying the tax code — for improving America’s long-run economic growth prospects. Hubbard still believes in those type of reforms, but he has taken to arguing that Republicans need more to their economic message. As the 2016 campaign begins, Hubbard believes Republicans have to worry more about encouraging people to work — given that we have an economy with a shrinking number of workers — and about economy opportunity, which has been stagnant over the last half-century.
View related content: Pethokoukis
I have written frequently about the great Fed-ECB natural experiment. You have two large, advanced economies. One is recovering, though slowly, from a previous downturn. The other seems stuck in a Long Recession. The likely difference: monetary policy. Here is David Beckworth with more on the right lessons to draw:
Imagine the ECB had not raised its interest rate target in 2008 and 2011, but had lowered it. Also imagine the ECB began its open-ended QE program back in 2009. Would there now be a brighter future for the Eurozone? If the answer is yes, then the Eurozone economic debacle is at its core a monetary policy crisis. There are compelling reasons to believe the answer to this counterfactual question is, in fact, yes. A comparison of total money spending growth in the United States and Eurozone is one of them. Unlike the ECB, the Fed did cut its target policy interest rate quickly and implement QE programs. Though these programs were flawed, the Fed was able to promote a stable growth path for total money spending because of them. And it did so despite a tightening of U.S. fiscal policy beginning in 2010. This suggest the ECB could have done the same for the Eurozone economy. Instead, it did not and the growth of Eurozone nominal GDP growth faltered. …
Now some observers will object and say the Eurozone crisis was actually a debt crisis. It was the consequence of irresponsible government spending policies that finally came home to roost. For some countries like Greece this was true, but for others it was not the case. Spain, for example, was actually running primary surpluses for several years leading up to the crisis. It was the crisis that worsened its debt position, not the other way around. This can be seen in the figure below. It shows Spain’s debt-to-GDP ratio was falling until the crisis erupted. The flat-lining of nominal GDP growth closely matches the surge in Spain’s debt-to-GDP ration. This is no coincidence.
View related content: Pethokoukis
“The GOP is debating whether Reaganomics needs an update” is a must-read piece by Washington Post reporter Jim Tankersley. One side answers the “What would Reagan do?” question by offering a nostalgic return to the 1980s Reagan agenda. Another prefers to apply the Reagan principles — a dynamic private sector, strong families and neighborhoods, upward mobility, work — to modern economic reality with different conservative policy results. Tankersley:
Leading Republicans are clashing over a signature issue the party has treated as gospel for nearly 40 years: the idea that sharply lower taxes and smaller government are enough by themselves to drive a more prosperous middle class — and win national elections. That simple philosophy has been the foundation of every GOP platform since the days of Ronald Reagan. Now, some of the party’s presidential hopefuls — along with some top conservative economists and strategists — are sending strong signals that they believe today’s beleaguered workers need more targeted help, even if growth speeds up.
For some context, here are a few then-and-now stats:
1.) When Reagan was elected president in 1980, the top income tax rate was 70%. Today, the top income tax rate is 40%.
2.) When Reagan was elected, the top 1% paid about a fifth of federal income taxes. Today it’s about a third.
3.) When Reagan was elected, the bottom 90% paid just over half of all federal income taxes. Today it’s around 30% with 40% of households paying no federal income taxes.
5.) When Reagan was elected, 8% of national income went to the top 1%. Today, it’s nearly 20%.
6.) When Reagan was elected, inflation had averaged nearly 9% over the previous eight years. Today, inflation is less than 2% and has averaged around 2% the past 15 years.
7.) When Reagan was elected, US publicly held debt was 26% of GDP. Today, it’s 74% of GDP with a whole lot of entitlement spending quickly headed our way.
8.) When Reagan was elected, more than 19 million Americans worked in manufacturing. Today, just under 12 million Americans work in manufacturing.
9.) When Reagan was elected, health care spending was 10% of GDP. Today, it’s 17% of GDP.
10.) When Reagan was elected, China’s GDP, in nominal terms, was 3% of America’s. Today, China’s GDP is over half of America’s and about the same based on purchasing power.
Let me also add (a) there is good reason to believe that faster GDP growth is not lifting all boats, (b) upward mobility is stagnant, (c) slowing labor force growth and productivity suggest it will be harder to generate fast growth in the future than in the past, (d) automation has taken a toll on middle-class income and jobs, (e) labor force participation by high school-only graduates has fallen by 10 percentage points over the past 25 years, and (f) inflation-adjusted market income for the top 1% has risen by 174% since 1979 vs. 16% for the bottom 80%.
So given all that, shouldn’t center-right policymakers, pols, and pundits at least try and think afresh about what sort of economic agenda would best promote growth, upward mobility, and economic security in the 21st century? Sometimes that would mean tax cuts (the corporate code is a cronyist mess and bad for workers), deregulation (end Too Big To Fail and barriers to startups), and less spending (entitlements.)
But not everywhere and always. For instance, let’s say you believe work is a conservative goal. What’s the best welfare program? A job. So what is the “conservative” reform, cutting the Earned Income Tax Credit — ostensibly shrinking government — or expanding it? AEI’s Michael Strain notes that the EITC “is a very effective anti-poverty tool because it supplements earnings and incentivizes employment. Expansions of the EITC have been very successful at encouraging work, particularly among single mothers during the 1990s.”
I would argue that a pro-work EITC expansion — not a money-saving reduction — is the conservative reform. And probably so would Reagan. Nor should one forget that the Reagan tax cuts were hardly some purist, supply-side experiment. Also, a 15% flat tax and return to the gold standard — what some on the right are proposing — hardly constitute a return to the Reagan agenda. Or more to the point: Is the right move for America in 2015 a return to the economic policies of 1915?
View related content: Pethokoukis
House Republicans on Wednesday peppered Janet L. Yellen, the Federal Reserve chairwoman, with pointed questions about the central bank’s stimulus campaign and its responsibilities as a financial regulator. Republicans, who control Congress but not the agencies that interpret and execute legislation, appear frustrated with the course of economic policy. They want the Fed to retreat more quickly from its stimulus campaign and to ease some of the restrictions that a Democrat-controlled Congress imposed on the financial industry after its 2008 collapse.
What’s the rush? Where’s the inflation? Where are the signs of financial instability? You know, there is risk the other way. MKM’s Mike Darda:
Another reason for the Fed to be patient / gradual is the lopsided history of ZLB exits being premature instead of late. To wit: the Fed tried to exit prematurely (and thus failed) in 1936-1937; the BoJ presided over two premature (and thus failed) ZLB exits in 2000 and 2006 and several European central banks blew it in 2011 with premature tightening, triggering double-dip recessions and deflation risk.
View related content: Pethokoukis
Life is complicated, These are the kinds of results that don’t exactly make for great talking points. Aparna Mathur:
To summarize, the recession and recovery paint a complicated picture for recent changes in inequality. While data from the CBO suggest that income inequality declined between 2007 and 2011, a more nuanced picture suggests that income inequality first declined between 2007 and 2009, but has been increasing again since then, though inequality has not yet returned to 2007 levels. Wealth inequality rose in the first few of years of the Great Recession, but has stayed relatively constant since. Consumption inequality declined over the course of the recession, but is showing a marginal uptick in recent years.
So yes, inequality did decline over some years of the recession as top incomes took a hit and transfer programs kicked in to boost incomes at the bottom. However, both of these “automatic stabilizers” are temporary artifacts of the recession. Recessions are a good reminder that even the very wealthy are not immune to economic busts. However, transfer programs are also only a temporary, albeit useful, solution to helping the poor insure against economic shocks. A more meaningful and, long-term, response to alleviating poverty and income inequality requires investments in human capital and training, encouraging workforce participation, and stemming the decline in traditional, stable family structures, which is highly correlated with poverty and adverse economic outcomes across generations.