Rising Inequality as a Root Cause of the Present Crisis
AbstractThe paper argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense rising inequality should be regarded as a root cause of the present crisis. We identify four channels by which it has contributed to the crisis. First, rising inequality creates a downward pressure on aggregate demand since it is poorer income groups that have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand two growth models have emerged: a debt-led model and an export-led model. Third, (in the debt-led growth models) higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend hold riskier financial assets than other groups. The rise of hedge funds and of subprime derivatives in particular has been linked to rise of the superrich.�
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp282.
Date of creation: 2012
Date of revision:
crisis; distribution; inequality; effective demand; growth regimes; post-Keynesian economics;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
- E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-25 (All new papers)
- NEP-MAC-2012-06-25 (Macroeconomics)
- NEP-PKE-2012-06-25 (Post Keynesian Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eckhard Hein & Lena Vogel, 2008. "Distribution and growth reconsidered: empirical results for six OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 479-511, May.
- Gustav Horn & Simon Sturn & Till Treeck, 2010. "Die Debatte um die deutsche Exportorientierung," Wirtschaftsdienst, Springer, vol. 90(1), pages 22-28, January.
- Hein, Eckhard & Mundt, Matthias, 2012. "Financialisation and the requirements and potentials for wage-led recovery : a review focussing on the G20," ILO Working Papers 470932, International Labour Organization.
- Eckhard Hein & Lena Vogel, 2007. "Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA," IMK Working Paper 03-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
- Reinhart, Carmen & Reinhart, Vincent, 2008.
"Capital Flow Bonanzas: An Encompassing View of the Past and Present,"
CEPR Discussion Papers
6996, C.E.P.R. Discussion Papers.
- Carmen Reinhart & Vincent Reinhart, 2009. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Chapters, in: NBER International Seminar on Macroeconomics 2008, pages 9-62 National Bureau of Economic Research, Inc.
- Carmen M. Reinhart & Vincent R. Reinhart, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Working Papers 14321, National Bureau of Economic Research, Inc.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Obama, Abe, Roosevelt: ecco perchÃ© aumentare i salari combatte la recessione
by keynesblog in Keynes Blog on 2014-02-14 14:49:01
- G. Bellettini & F. Delbono, 2013.
"Persistence of high income inequality and banking crises: 1980-2010,"
wp885, Dipartimento Scienze Economiche, Universita' di Bologna.
- Giorgio Bellettini & Flavio Delbono, 2013. "Persistence of High Income Inequality and Banking Crises: 1980-2010," CESifo Working Paper Series 4293, CESifo Group Munich.
- Russo, Alberto & Riccetti, Luca & Gallegati, Mauro, 2013. "Increasing Inequality and Financial Fragility in an An Agent Based Macroeconomic Model," MPRA Paper 51528, University Library of Munich, Germany.
- Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
- Danilo Šuković, 2014. "Did Economic Inequality Cause the Economic Crisis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(3), pages 369-387, June.
- Thomas Goda, 2013. "Changes in income inequality from a global perspective: an overview," Working Papers PKWP1303, Post Keynesian Economics Study Group (PKSG).
- Mario Holzner, 2013. "Inequality and the Crisis: A Causal Inference Analysis," wiiw Balkan Observatory Working Papers 110, The Vienna Institute for International Economic Studies, wiiw.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Judy Fogg).
If references are entirely missing, you can add them using this form.