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Inequality, the Financial Crisis and Stagnation: Competing Stories and Why They Matter

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  • Thomas I. Palley

Abstract

This paper examines several mainstream explanations of the financial crisis and stagnation and the role they attribute to income inequality. Those explanations are contrasted with a structural Keynesian explanation. The role of income inequality differs substantially, giving rise to different policy recommendations. That highlights the critical importance of economic theory. Theory shapes the way we understand the world, thereby shaping how we respond to it. The theoretical narrative we adopt therefore implicitly shapes policy. That observation applies forcefully to the issue of income inequality, the financial crisis and stagnation, making it critical we get the story right.

Suggested Citation

  • Thomas I. Palley, 2015. "Inequality, the Financial Crisis and Stagnation: Competing Stories and Why They Matter," IMK Working Paper 151-2015, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:151-2015
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_151_2015.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. Thomas I. Palley, 2013. "Gattopardo economics: the crisis and the mainstream response of change that keeps things the same," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 10(2), pages 193-206.
    4. Krueger, Dirk & Perri, Fabrizio, 2002. "Does Income Inequality Lead to Consumption Inequality?," CEPR Discussion Papers 3583, C.E.P.R. Discussion Papers.
    5. Dirk Kreuger & Fabrizio Perri, 2002. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," Working Papers 02-15, New York University, Leonard N. Stern School of Business, Department of Economics.
    6. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-393, December.
    7. Stockhammer, Engelbert, 2011. "Wage-led growth: An introduction," Economics Discussion Papers 2011-1, School of Economics, Kingston University London.
    8. C. Dominguez-Pery, 2011. "Introduction," Post-Print halshs-00740570, HAL.
    9. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
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    Cited by:

    1. Eckhard Hein & Petra Dünhaupt & Ayoze Alfageme & Marta Kulesza, 2017. "Financialisation and distribution in three main Eurozone countries from a Kaleckian perspective: the US, the UK and Sweden compared – before and after the crisis," Working Papers 9/17, Sapienza University of Rome, DISS.
    2. Hein, Eckhard, 2017. "Financialisation and tendencies towards stagnation: The role of macroeconomic regime changes in the course of and after the financial and economic crisis 2007-9," IPE Working Papers 90/2017, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    3. Eckhard Hein, 2017. "Stagnation policy in the Eurozone and economic policy alternatives: A Steindlian/neo-Kaleckian perspective," Working Papers 10/17, Sapienza University of Rome, DISS.
    4. Eckhard Hein & Petra Dünhaupt & Ayoze Alfageme & Marta Kulesza, 2017. "Financialisation and distribution in three main Eurozone countries from a Kaleckian perspective: France, Germany and Spain compared – before and after the crisis," Working Papers 8/17, Sapienza University of Rome, DISS.
    5. Eckhard Hein, 2017. "Stagnation policy in the Eurozone and economic policy alternatives," FMM Working Paper 05-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

    More about this item

    Keywords

    Income inequality; financial crisis; stagnation; economic theory.;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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