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Wage stagnation, rising inequality and the financial crisis of 2008

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  • Jon D. Wisman

Abstract

Explanations of the financial crisis of 2008 have centred upon inadequate regulation stemming from laissez-faire ideology and low interest rates. Although true, the deeper determining forces of wage stagnation and dramatically increasing inequality in the USA over the preceding 35 years have received less notice. Wage stagnation and heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction. First, consumption was constrained, reducing profitable investment potential in the real economy and encouraging an ever-wealthier elite to flood financial markets with credit, helping keep interest rates low, stimulating the creation of new credit instruments, greater indebtedness and speculation. The second dynamic is that consumption externalities were generated, forcing households to struggle harder to maintain the welfare of their families and their relative social status, resulting in plummeting household saving, ever-greater indebtedness and longer work hours. The third dynamic is that as the rich took larger shares of income and wealth, they gained more command over ideology and hence politics, resulting in tax cuts for the rich, reduced welfare for the poor and deregulation. Copyright , Oxford University Press.

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Article provided by Oxford University Press in its journal Cambridge Journal Of Economics.

Volume (Year): 37 (2013)
Issue (Month): 4 ()
Pages: 921-945

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Handle: RePEc:oup:cambje:v:37:y:2013:i:4:p:921-945

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Cited by:
  1. Mark Setterfield & Yun Kim, 2013. "Debt Servicing, Aggregate Consumption, and Growth," Working Papers 1316, Trinity College, Department of Economics.
  2. Mark Setterfield, 2013. "Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities," Working Papers 1320, Trinity College, Department of Economics.
  3. Jon D. Wisman & Aaron Pacitti, 2013. "Ending the Crisis With Guaranteed Employment and Retraining," Working Papers 2013-12, American University, Department of Economics.
  4. Jon D. Wisman, 2013. "Labor Busted, Rising Inequality and the Financial Crisis of 1929: An Unlearned Lesson," Working Papers 2013-07, American University, Department of Economics.
  5. Robert A. Blecker, 2013. "Economic Stagnation in the United States: Underlying Causes and Global Consequences," Working Papers 2013-16, American University, Department of Economics.

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