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Rising Inequality and the Financial Crises of 1929 and 2008

  • Jon D. Wisman
  • Barton Baker

Inequality increased dramatically in the decades leading up to the financial crises of both 1929 and 2008. Yet students of both crises have largely ignored any role that rising inequality might have played in rendering the financial sector more vulnerable to systemic dysfunction. This study draws upon the work of Thorstein Veblen, Michal Kalecki, and Karl Marx to clarify the manner in which growing inequality prior to both crises made U.S. financial markets more prone to systemic dysfunction. Greater inequality generated three dynamics that heightened conditions in which these financial crises might 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, thereby reducing their savings and increasing their indebtedness. The second is that holding ever greater income and wealth, the elite flooded financial markets with credit, helping keep interest rates low and encouraging the creation of new credit instruments. 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, tax cuts for the rich, deregulating the economy, and failing to regulate newly evolving credit instruments flowed out of this ideology.

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Paper provided by American University, Department of Economics in its series Working Papers with number 2010-10 JEL classification:.

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Date of creation: Jul 2010
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Handle: RePEc:amu:wpaper:2010-10
Contact details of provider: Web page: http://www.american.edu/cas/economics/

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