IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Rising Inequality and the Financial Crises of 1929 and 2008

  • Jon D. Wisman
  • Barton Baker

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 lies a deeper determining force that has received less notice: the dramatic increase in inequality in the U.S. over the preceding 35 years. Heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction. The first is that inequality 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 fueling speculation. The second dynamic 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, households took on evergreater debt, and workers 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.

If 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.

File URL: http://www.american.edu/cas/economics/pdf/upload/2011-1.pdf
File Function: First version, 2011
Download Restriction: no

Paper provided by American University, Department of Economics in its series Working Papers with number 2011-01 JEL classification: E21; E44; G01.

as
in new window

Length:
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:amu:wpaper:2011-01
Contact details of provider: Web page: http://www.american.edu/cas/economics/

References listed on IDEAS
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.:

as in new window
  1. James Crotty & Jonathan Goldstein, 1992. "The Investment Decision of the Post-Keynesian Firm: A Suggested Microfoundation for Minsky's Investment Instability Thesis," Economics Working Paper Archive wp_79, Levy Economics Institute.
  2. Jon D. Wisman & James F. Smith, 2009. "Legitimating Inequality: Fooling Most of the People All of the Time," Working Papers 2009-25 JEL classificatio, American University, Department of Economics.
  3. Samuel Bowles & Yongjin Park, 2005. "Emulation, Inequality, and Work Hours: Was Thorsten Veblen Right?," Economic Journal, Royal Economic Society, vol. 115(507), pages F397-F412, November.
  4. James Crotty, 2008. "Structural Causes of the Global Financial Crisis: A Critical Assessment of the ‘New Financial Architecture’," Working Papers wp180, Political Economy Research Institute, University of Massachusetts at Amherst.
  5. White, Eugene N, 1990. "The Stock Market Boom and Crash of 1929 Revisited," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 67-83, Spring.
  6. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  7. Mill, John Stuart, 1848. "Principles of Political Economy (I): Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number mill1848-1.
  8. Fiona Tregenna, 2009. "The fat years: the structure and profitability of the US banking sector in the pre-crisis period," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 609-632, July.
  9. Alesina, Alberto F & Rodrik, Dani, 1991. "Distributive Politics and Economic Growth," CEPR Discussion Papers 565, C.E.P.R. Discussion Papers.
  10. Mill, John Stuart, 2008. "Principles of Political Economy and Chapters on Socialism," OUP Catalogue, Oxford University Press, number 9780199553914 edited by Riley, Jonathan, March.
  11. Gary A. Dymski, 2010. "Why the subprime crisis is different: a Minskyian approach," Cambridge Journal of Economics, Oxford University Press, vol. 34(2), pages 239-255, March.
  12. Massimo Guidolin & Elizabeth A. La Jeunesse, 2007. "The decline in the U.S. personal saving rate: is it real and is it a puzzle?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 491-514.
  13. Glaeser, Edward L. & Saks, Raven E., 2006. "Corruption in America," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1053-1072, August.
  14. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family finances in the U.S.: recent evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-24.
  15. Cynthia Harter, 2009. "Review of "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism"," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(1), pages 155-157.
  16. John E. Tropman, 1982. "Shifting involvements: Private Interest and Public Action, by Albert O. Hirschman. Princeton, NJ: Princeton University Press, 1982, 136 pp. Price: $14.50 cloth, $5.95 paper," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 2(1), pages 146-146.
  17. Mill, John Stuart, 1848. "Principles of Political Economy (III): Exchange," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number mill1848-3.
  18. Mill, John Stuart, 1848. "Principles of Political Economy (II): Distribution," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number mill1848-2.
  19. Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
  20. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
  21. Bhashkar Mazumder, 2005. "Fortunate Sons: New Estimates of Intergenerational Mobility in the United States Using Social Security Earnings Data," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 235-255, May.
  22. José Gabriel Palma, 2009. "The revenge of the market on the rentiers," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 829-869, July.
  23. Mill, John Stuart, 1848. "Principles of Political Economy (IV): Influence of the Progress of Society," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 4, number mill1848-4.
  24. Marcellus Andrews, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller," Challenge, M.E. Sharpe, Inc., vol. 52(5), pages 126-131, September.
  25. Arthur B. Kennickell & Martha Starr-McCluer & Brian J. Surette, 2000. "Recent changes in U. S. family finances: results from the 1998 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-29.
  26. Clarence D. Long, 1960. "Introduction to "Wages and Earnings in the United States, 1860-1890"," NBER Chapters, in: Wages and Earnings in the United States, 1860-1890, pages 1-12 National Bureau of Economic Research, Inc.
  27. Mill, John Stuart, 1848. "Principles of Political Economy (V): On the Influence of Government," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 5, number mill1848-5.
  28. Christopher Brown, 2008. "Inequality, Consumer Credit and the Saving Puzzle," Books, Edward Elgar, number 12877.
  29. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
  30. Jeffrey G. Williamson & Peter H. Lindert, 1980. "Long-Term Trends in American Wealth Inequality," NBER Chapters, in: Modeling the Distribution and Intergenerational Transmission of Wealth, pages 9-94 National Bureau of Economic Research, Inc.
  31. Attanasio, Orazio P. & Paiella, Monica, 2001. "Households savings in the U.S.A," Research in Economics, Elsevier, vol. 55(1), pages 109-132, March.
  32. 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.
  33. Jon D. Wisman, 2008. "Household Saving, Class Identitiy, and Conspicuous Consumption," Working Papers 2008-19, American University, Department of Economics.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:amu:wpaper:2011-01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Meal)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.