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Rising inequality as a cause of the present crisis

Rising inequality as a cause of the present crisis The article 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. I identify four channels by which it has contributed to the crisis. First, rising inequality creates a downwards pressure on aggregate demand since poorer income groups 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 to 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 super-rich. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Cambridge Journal of Economics Oxford University Press

Rising inequality as a cause of the present crisis

Stockhammer, Engelbert
Cambridge Journal of Economics , Volume 39 (3) – May 26, 2015
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References (96)

Publisher
Oxford University Press
Copyright
© The Author 2013. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.
ISSN
0309-166X
eISSN
1464-3545
DOI
10.1093/cje/bet052
Publisher site
See Article on Publisher Site

Abstract

The article 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. I identify four channels by which it has contributed to the crisis. First, rising inequality creates a downwards pressure on aggregate demand since poorer income groups 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 to 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 super-rich.

Journal

Cambridge Journal of Economics – Oxford University Press

Published: May 26, 2015

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