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Increasing Inequality, Status Insecurity, Ideology, and the Financial Crisis of 2008

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  • Jon D. Wisman
  • Barton Baker

Abstract

The current financial crisis has been blamed on inadequate regulation stemming from laissez-faire ideology, combined with low interest rates. But beneath these widely-acknowledged causal factors lies a deeper underlying determining cause that has received less notice: the dramatic increase in inequality in the U.S. over the preceding 35 years. This rise in inequality generated three phenomena that heightened conditions in which this crisis could occur. The first is that greater inequality meant that individuals were forced to struggle harder to find ways to consume more to maintain their relative social status. The consequence was that over the preceding three decades household saving rates plummeted, workers worked longer hours, and households took on ever-greater debt. The second phenomenon is that, flush with ever greater income and wealth, the elite were able to flood financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments. The third phenomenon is that, as the rich took larger shares of income and wealth, they gained relatively more command over everything, including ideology. Reducing the size of government, deregulating the economy, and failing to regulate newly evolving credit instruments flowed out of this ideology.

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File URL: http://www.american.edu/cas/economics/pdf/upload/Working-Paper-14-Wisman.pdf
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Bibliographic Info

Paper provided by American University, Department of Economics in its series Working Papers with number 2009-14 JEL classification: E21, E44, G01.

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Date of creation: Aug 2009
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Handle: RePEc:amu:wpaper:2009-14

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Web page: http://www.american.edu/cas/economics/

Related research

Keywords: deregulation; real estate boom; credit; conspicuous consumption; social respectability;

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  1. Alesina, Alberto & Rodrik, Dani, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 465-90, May.
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  5. Ana M. Aizcorbe & Arthur B. Kennickell & Kevin B. Moore, 2003. "Recent changes in U.S. family finances: evidence from the 1998 and 2001 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-32.
  6. Samuel Bowles & Yongjin Park, 2004. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," UMASS Amherst Economics Working Papers 2004-14, University of Massachusetts Amherst, Department of Economics.
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  8. Attanasio, Orazio P. & Paiella, Monica, 2001. "Households savings in the U.S.A," Research in Economics, Elsevier, vol. 55(1), pages 109-132, March.
  9. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
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  11. Jon D. Wisman, 2008. "Household Saving, Class Identitiy, and Conspicuous Consumption," Working Papers 2008-19, American University, Department of Economics.
  12. Robert Frank, 2000. "Does Growing Inequality Harm the Middle Class?," Eastern Economic Journal, Eastern Economic Association, vol. 26(3), pages 253-264, Summer.
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