Center Faculty Director Michael Barr, along with Daniel Schaffa, PhD Candidate in Economics at the University of Michigan, with support from the Washington Center for Equitable Growth, have released a working paper which analyzes the effect of the financial crisis in Detroit.
Summary of Research
The Financial Crisis and ensuing Great Recession caused enormous hardship for households. Using original datasets, Barr and Schaffa examine the effects of the recession on a population many might think had nothing left to lose: low- and moderate-income households in the Detroit metropolitan area. They found that the Great Recession in fact imposed significant costs on these households, reducing employment and assets and increasing hardships in a wide variety of ways. Detroit was hit especially hard by the Recession, experiencing significant population loss from 2000-2010, among other symptoms.
The paper uses two surveys to analyze the changes in these households. The data collected comes from the DAHFS (April 2005- January 2006) and MRRS (October 2009- March 2010).
During the Great Recession that followed the Financial Crisis, wealth was lost, incomes fell, and households experienced significant distress. The analysis shows that rather than having nothing left to lose, already disadvantaged groups suffered disproportionately in many cases.
- Blacks faced above average decreases in employment and non-retirement assetholding rates and above average increases in gas or electric shutoffs and disconnected phone lines.
- Women experienced above average decreases in home ownership and nonretirement asset-holding rates and above average increases in payday loan usage, gas or electric shutoffs, and disconnected phone lines.
- Those with only a high school degree faced above average increases in using one payday loan to pay another off, gas or electric shutoffs, and disconnected phone lines.
- Those without a high school degree experienced above average decreases in employment, bank account usage, and credit card usage.
Among the other data presented, Barr and Schaffa found the following:
Employment was down 10%, to only 51% of households employed. Median duration of unemployment increased by 4.3 months to 9.5 months. The elderly, those with some college education, and women saw the sharpest drop in “employment in the past year,” while hours worked per week fell throughout the sample.
Median household income decreased by $5,000 to $19,000, and median home values dropped by $44,006, while mortgage payments rose $164 a month. Other hardship measures support these findings.
In 2010, 8.2% of all homes were underwater in the U.S. In Barr and Schaffa’s studies, 66% of Detroit area homes were underwater. This represents a dramatic 62% increase (from only 4%) in homes so designated.
Barr and Schaffa’s data is correlated by other studies showing that households below the 75thpercentile faced the largest decrease in net worth in the Great Recession. Other studies confirm that minorities had the greatest proportionate wealth loss.
This evidence suggests that these groups would reap disproportionate benefit from policies designed to safeguard them during recessions. Barr and Schaffa’s findings suggest the need for “more robust safety net policies and financial services that can help cushion the blows from sharp reductions in incomes and assets.”
While specific policies are beyond the scope of this paper, Barr and Schaffa called for measures that address sharp employment or income decreases, financial services accessibility, and interrupted utility provision. Some strategies that Barr has suggested in in the past include: increasing emergency savings, reducing the costs of financial transactions, providing better social and private insurance, and efforts to reduce uncertainty and volatility in income and expense flows.
Click here to read the full paper.
Lindsay Anderson ’17 is a 3L at University of Michigan Law School and a teaching assistant at the Ross School of Business.