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Rising Inequality and the Financial Crises of 1929 and 2008

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  • Jon D. Wisman
  • Barton Baker

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 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.

Suggested Citation

  • Jon D. Wisman & Barton Baker, 2011. "Rising Inequality and the Financial Crises of 1929 and 2008," Working Papers 2011-01 JEL classificatio, American University, Department of Economics.
  • Handle: RePEc:amu:wpaper:2011-01
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    References listed on IDEAS

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    Cited by:

    1. Jakob Kapeller & Bernhard Schütz, 2015. "Conspicuous Consumption, Inequality and Debt: The Nature of Consumption-driven Profit-led Regimes," Metroeconomica, Wiley Blackwell, vol. 66(1), pages 51-70, February.
    2. Jon Wisman, 2013. "Government Is Whose Problem?," Journal of Economic Issues, Taylor & Francis Journals, vol. 47(4), pages 911-938.
    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. Ebru Kongar & Mark Price, 2017. "Gender, Socioeconomic Status, and Time Use of Married and Cohabiting Parents during the Great Recession," Economics Working Paper Archive wp_888, Levy Economics Institute.

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    Keywords

    Underconsumption; deregulation; speculation; real estate boom; credit; conspicuous consumption; social respectability;

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