We got some good news Monday night: The government sold off all of its shares in AIG, the huge insurer with a hedge fund on top that went bust at the height of the 2008 financial crisis, requiring a $182 billion taxpayer bailout. With the stock sale this week, we learned that the Treasury Department came away with a profit on behalf of taxpayers of about $23 billion.
All told, the government has gotten back about 90% of the $418 billion it gave out through the much-maligned TARP program. You won’t win friends defending the TARP, but the fact is that if “worked” is taken to mean reflating the collapsing financial system—and an operative financial system is essential to a functioning economy—at a cost far below expectations, then TARP worked.
And it’s not just the financial sector. Not only has corporate profitability recovered from the hit it took in the Great Recession, it’s soaring to new highs, the most recent data show. A few quarters ago, corporate profits as a share of national income hit their highest level in over half a century.
But just because profits are soaring doesn’t mean everything’s fine.
That same data shows that the compensation share of national income, on the other hand, is at a 50-year low. Inequality is on the rise: The share of national income going to the top 1% is again increasing, after slowing during the Great Recession thanks to the turmoil on Wall Street and the temporary decline in high-end asset values. Meanwhile, the hourly wages of middle-wage workers are growing more slowly than ever in the history of that data series, which begins in the mid-1960s.
So: Did we bail out the banks and abandon the working class? And if so, what does that say about our policy bias?
On the first question, I’d answer “no.” We passed the largest stimulus in the nation’s history, we tried—haltingly, for sure—to help many of those hurt by the housing bust, we bailed out not only the white-shoe banker but the blue-collar auto-worker too (using TARP funds in both cases), and we implemented many a round of unemployment insurance, tax cuts targeted at paychecks, and safety-net programs targeting the poor (which have also been very effective).
But on the second question, there is clearly a bias, and it infects a lot of our economic policy.
We went into full bailout mode to help the banks because we correctly believed that the flow of credit is as essential to the life of the economy as the flow of blood is to the life of a person. But while we helped the working class in the ways mentioned above, we didn’t bring the same urgency or firepower. Unlike with the banks, we never took a “whatever-it-takes-to-get-them-back-on-track” policy stance. That’s because there’s no central, guiding belief that increasing living standards of the broad middle class is essential for creating economic growth. (Europe is playing out the same drama right now, by the way: full support to the banks … far less to the people).
That’s one reason we’re stuck in the slow-growth slog we’re in. It’s not that the financial sector isn’t important. It’s by no means a bad thing that corporate profits have more than fully recovered. What’s deeply problematic is that their recovery has not fed our recovery.
That is in no small part because we can’t really have a robust recovery that leaves most households behind. The banks don’t create the demand we need to fuel growth or to raise investors’ “animal spirits” such that they’ll come off the sidelines. The banks create the capital supply chain—they’re the veins of the economic body, but they’re not the heart.
In an economy where most growth flows right to the top, it’s very hard to get that heart beating again. Some sectors will do well, stock sales may bring a high price such that even the U.S. government can turn a profit. But it won’t feel like a real recovery, because it won’t be a real recovery.
To fix that, we need to recognize that the prosperity of the poor and the broad middle class is just as important as any other economic entity—if not more so. When ordinary folks start turning a profit, then we’ll know we’re getting somewhere.
Jared Bernstein was chair of President Joe Biden's Council of Economic Advisers.