March 25, 2011 4:47PM

The Economy Tanked but, Hey, Wealth Inequality Declined

I just read through a new report from the Federal Reserve, “Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009,” on how the Great Recession of 2007–2009 impacted the balance sheets of American households. The short and unsurprising answer is: very negatively. The average net worth of U.S. households fell by nearly 20 percent between 2007 and 2009.

A less intuitive finding was that the more wealthy households took a bigger hit, not just in dollars but in percentage of wealth. As the survey put it, there were “progressively larger decreases at the higher percentiles” of net wealth.

The survey also found progressively larger declines in income during the recession. The higher a household’s income in 2007, the steeper the decline on average by 2009. As the survey put it:

On the whole, events of the 2007–09 period tended to have an equalizing effect on income, although most of the changes in income were relatively modest. All the measures of income change presented here suggest that income increased for families with income below the 2007 median and income fell for families with income near or above the 2007 median.

The reason for the decline in inequality during the downturn isn’t all that mysterious, I suppose. Households with higher net worth tend to have more invested in stocks and real estate, which both took a big hit. And, as the report explained, their income is more dependent on capital gains, and farm, business, and self-employment income, which all fluctuate more with the business cycle.

Still, it is kind of jarring to see that even during a recession, income rose for families in the lower half of the income spectrum and fell for those in the top half. The curse of “rising inequality” and the rich getting richer at the supposed expense of the poor was temporarily suspended from 2007 to 2009, but at the cost of the deepest downturn since the Great Depression.

If forced to choose between a deep recession and rising inequality, I would gladly accept the latter.