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Inequality and crises: coincidence or causation?
Paul Krugman
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Top 1% share
Source: Piketty and Saez
Pre-2008: When I would talk to lay audiences aboutinequality, I would mention that we were reachinglevels not seen since 1929 – and that would inevitablylead to questions about whether we would soonhave another Depression. No, I’d say – there reallyisn’t a clear reason why high inequality should leadto macroeconomic crisis.
And then ….
Sources: Eichengreen and O’Rourke, World Trade Monitor
So a return of inequality to 1920s levels was followedby a financial crisis similar to the onset of theGreat Depression. Why? Three possibilities:
1. Coincidence
2. Common causation – e.g., neoliberal ideology
3. Actual causation: inequality somehow createsmacroeconomic vulnerability
Sharp rightward shift in politics in US and to lesserextent UK circa 1980. Reflected in polarization, andalso in policies – including financial deregulation.
Also, strong correlation between political shifts andinequality.
Source: Poole and Rosenthal
Source: Campbell and Hercowitz
So political shifts may have led both to rising inequalityand to a more vulnerable financial system
But might there be a direct causal link from inequalityto macro crisis?
Hobson’s choice: underconsumption theory
Robert Reich: “The problem wasn't that consumers lived beyond their means. It was that their means didn't keep up with what the growing economy was capable of producing at or near full-employment. A larger and larger share of total income went to people at the top.
“So in the longer term, it's hard to see where the buying power will come from unless America's vast middle class has more take-home pay.”
But underconsumption has both conceptual problemsand empirical troubles.
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1950
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1974
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1983
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2007
Consumption share of GDP
Modern ideas: overconsumption (and over-indebtedness), not underconsumption
Frank: “The wealthy are spending more now simplybecause they have more money. But their spendinghas led others to spend more as well, includingmiddle-income families. If the real incomes ofmiddle-class families have grown only slightly, howhave they financed this additional consumption?In part by working longer hours, but mainly bysaving less and borrowing more.”
Also see Warren-Tyagi on bankruptcies.
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Inequality and household debt
debt1
debt2
top1share
Sources: Piketty-Saez, Historical Statistics, Federal Reserve
Politics
InequalityFinancial fragility
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