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Wage Stagnation, Rising Inequality and the Financial Crisis of 2008

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  • Jon D. Wisman

Abstract

The most widely embraced explanations of the financial crisis of 2008 have centered upon inadequate regulation stemming from laissez-faire ideology, combined with low interest rates. Although these widely-acknowledged causal factors are true, beneath them lie deeper determining forces that have received less notice: wage stagnation and a dramatic increase in inequality in the U.S. over the preceding 35 years. Wage stagnation and heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction. The first is that they constrained consumption, reducing profitable investment potential in the real economy, and thereby encouraging an every wealthier elite to flood financial markets with credit, helping keep interest rates low, encouraging the creation of new credit instruments and greater indebtedness, and fueling speculation. The second dynamic is that consumption externalities were generated, forcing individuals to struggle harder to find ways to maintain the welfare of their families and maintain their relative social status. The consequence was that over the preceding three decades household saving rates plummeted, households took on ever- greater debt, and worked longer 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. Reducing the size of government, cutting taxes on the rich and reducing welfare for the poor, deregulating the economy, and failing to regulate newly evolving credit instruments flowed out of this ideology.

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Bibliographic Info

Paper provided by American University, Department of Economics in its series Working Papers with number 2012-01.

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Date of creation: 2012
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Handle: RePEc:amu:wpaper:2012-01

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

Related research

Keywords: social mobility; deskilling; loss of community; conspicuous consumption; social status;

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References

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Citations

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Cited by:
  1. 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.
  2. Jon D. Wisman & Aaron Pacitti, 2013. "Ending the Crisis With Guaranteed Employment and Retraining," Working Papers 2013-12, American University, Department of Economics.
  3. Robert A. Blecker, 2013. "Economic Stagnation in the United States: Underlying Causes and Global Consequences," Working Papers 2013-16, American University, Department of Economics.
  4. 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.
  5. Mark Setterfield & Yun Kim, 2013. "Debt Servicing, Aggregate Consumption, and Growth," Working Papers 1316, Trinity College, Department of Economics.

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