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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.

Suggested Citation

  • Jon D. Wisman, 2013. "Wage stagnation, rising inequality and the financial crisis of 2008," Cambridge Journal of Economics, Oxford University Press, vol. 37(4), pages 921-945.
  • Handle: RePEc:oup:cambje:v:37:y:2013:i:4:p:921-945
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    File URL: http://hdl.handle.net/10.1093/cje/bes085
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    Cited by:

    1. Setterfield, Mark & Kim, Yun K., 2016. "Debt servicing, aggregate consumption, and growth," Structural Change and Economic Dynamics, Elsevier, vol. 36(C), pages 22-33.
    2. Mark Setterfield & Yun K. Kim & Jeremy Rees, 2016. "Inequality, Debt Servicing and the Sustainability of Steady State Growth," Review of Political Economy, Taylor & Francis Journals, vol. 28(1), pages 45-63, January.
    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. repec:ecr:col016:40117 is not listed on IDEAS
    5. Fernando Rugitsky, 2015. "Financialization, Housing Bubble, and the Great Recession: an interpretation based on a circuit of capital model," Working Papers, Department of Economics 2015_24, University of São Paulo (FEA-USP).
    6. Mark Setterfield & Yun K. Kim, 2016. "Household Borrowing and the Possibility of ``Consumption-Driven, Profit-Led Growth’’," Working Papers 2016_01, University of Massachusetts Boston, Economics Department.
    7. Mark Setterfield, 2014. "Using Interest Rates as the Instrument of Monetary Policy: Beware Real effects, Positive Feedbacks, and Discontinuities," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(70), pages 7-22, June.
    8. Mark Setterfield & Yun K. Kim, "undated". "Household Borrowing and the Possibility of “Consumption- Driven, Profit-Led Growthâ€," Working Papers Series 39, Institute for New Economic Thinking.
    9. 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.
    10. Robert A. Blecker, 2013. "Economic Stagnation in the United States: Underlying Causes and Global Consequences," Working Papers 2013-16, American University, Department of Economics.
    11. Mark Setterfield, 2014. "Rising Income Inequality, Increased Household Indebtedness, and Post Keynesian Macrodynamics," Working Papers 1403, New School for Social Research, Department of Economics.
    12. -, 2016. "Horizons 2030: Equality at the centre of sustainable development. Summary," Documentos de posición del período de sesiones de la Comisión 40117, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    13. Mark Setterfield, 2017. "Long-run variation in capacity utilization in the presence of a fixed normal rate," Working Papers 1704, New School for Social Research, Department of Economics.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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