Monday, March 26, 2012

Did increasing disparities in wealth lead to the economic crisis?

I quote from The Economist:
IN THE search for the villain behind the global financial crisis, some have pointed to inequality as a culprit. In his 2010 book “Fault Lines”, Raghuram Rajan of the University of Chicago argued that inequality was a cause of the crisis, and that the American government served as a willing accomplice. From the early 1980s the wages of working Americans with little or no university education fell ever farther behind those with university qualifications, he pointed out. Under pressure to respond to the problem of stagnating incomes, successive presidents and Congresses opened a flood of mortgage credit.
The article goes on to summarize ideas put forth in several papers:

I suspect that these all should be regarded as exploratory or expository models, seeking to clarify the role of the increasing inequality in causing the crisis rather than as a detailed, scientific explanation of those causes. Still, my intuition agrees with that of the authors that there is something in the hypothesis.

I also suspect that the authors are right when they suggest that the differences in European and American cultures affect the ways the increasing inequality work out are different in the two regions. In the United States I can see that our political institutions have allowed the very rich to influence the political system so as to allow the rich to get rich faster. In our consumer society, I can see that conspicuous consumption trickles down. I suspect that the rich influenced politicians to make credit easier to obtain, and lower income consumers faced by aspirations to consume rising faster than their income, went into more and more debt. And thus the American crisis.

I suspect that the way in which disparities in wealth, income and power hindered economic growth and development in Latin American may be quite different.

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