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Rising Inequality as a Root Cause of the Present Crisis

  • Engelbert Stockhammer

The paper argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense rising inequality should be regarded as a root cause of the present crisis. We identify four channels by which it has contributed to the crisis. First, rising inequality creates a downward pressure on aggregate demand since it is poorer income groups that have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand two growth models have emerged: a debt-led model and an export-led model. Third, (in the debt-led growth models) higher inequality has led to higher household debt as working class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend hold riskier financial assets than other groups. The rise of hedge funds and of subprime derivatives in particular has been linked to rise of the superrich.�

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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp282.

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Date of creation: 2012
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Handle: RePEc:uma:periwp:wp282
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  1. Harrison, Ann, 2005. "Has Globalization Eroded Labor’s Share? Some Cross-Country Evidence," MPRA Paper 39649, University Library of Munich, Germany.
  2. Carmen M. Reinhart & Vincent R. Reinhart, 2008. "Capital Flow Bonanzas: An Encompassing View of the Past and Present," NBER Working Papers 14321, National Bureau of Economic Research, Inc.
  3. Eckhard Hein & Lena Vogel, 2007. "Distribution and growth reconsidered - empirical results for Austria, France, Germany, the Netherlands, the UK and the USA," IMK Working Paper 03-2007, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  4. Gustav Horn & Simon Sturn & Till Treeck, 2010. "Die Debatte um die deutsche Exportorientierung," Wirtschaftsdienst, Springer, vol. 90(1), pages 22-28, January.
  5. Hein, Eckhard & Mundt, Matthias, 2012. "Financialisation and the requirements and potentials for wage-led recovery : a review focussing on the G20," ILO Working Papers 470932, International Labour Organization.
  6. Eckhard Hein & Lena Vogel, 2008. "Distribution and growth reconsidered: empirical results for six OECD countries," Cambridge Journal of Economics, Oxford University Press, vol. 32(3), pages 479-511, May.
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