Home > The Economy > Inequality and capitalist crises: 2 graphs

Inequality and capitalist crises: 2 graphs

from David Ruccio

Neoclassical economists will go to almost any lengths to prove that the current crises were not caused by inequality. It’s not that their existing models offer much in the way of a convincing explanation of what caused the Second Great Depression. But, of all the possible explanations, the one they least want to invoke has to do with capitalist inequality. 

But, of course, they can’t simply ignore the possibility. Not now, when class has reared its ugly head and the problem of inequality is getting more and more attention.

So, Edward Glaeser takes up the task of dismissing inequality as an explanation. It’s not that he’s unwilling to take seriously one inequality hypothesis—the one offered by Raghuram Rajan—but that’s only because it blames the government:

Policies in the United States, such as support for Freddie and Fannie and the home mortgage interest deduction, did certainly encourage people to bet on housing markets.

But he wants nothing to do with the other forms of the inequality explanation, for example, the so-called Stiglitz hypothesis:

that “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.” This “flood of liquidity” then “contributed to the reckless leverage and risk-taking that underlay this crisis.”

Unfortunately for Glaeser, the key source of data he invokes—a recent comprehensive study by Sir Anthony Atkinson and Salvatore Morelli [pdf]—doesn’t accomplish what he thinks it does. In fact, it does the opposite, since the data they produce do in fact demonstrate key parallels between inequality and financial crisis among three key episodes: the Great Depression, and the Savings and Loan Crisis of the 1980s, and the Second Great Depression.

Now, to be clear, Atkinson and Morelli do not find that rising or high inequality precedes all financial crises, in all countries. No one makes that argument. But the link is strong for the United States, in the occurrence of the three great 20th-century crises.

The one caveat is that it was high inequality, not rising inequality, in the decade preceding the banking crisis of 2008 that might be to blame. In fact, the argument about the current crises is they were caused by rising inequality since the mid-1970s, leading to a level of inequality similar to that achieved just prior to the Great Depression. So, contra what Glaser writes in his column, neither the theories nor the data serve to discredit the inequality hypothesis.

Inequality seems as if it was a large part of the story.

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Categories: The Economy
  1. Mike Meeropol
    December 15, 2010 at 6:09 pm

    It is amazing to me how the attempt to blame Fannie Mae and Freddie Mac for the housing bubble (it’s the government’s fault, not capitalism’s!) has such currency. I just found it as the centerpiece of a textbook treatment by Robert Guell at the Principles level.

    This seems to be as difficult to squelch as Friedman’s monetarist explanation for the Great Depression (even though Temin thoroughly discredited it in his book.)

    Refutations mean nothing if the perpetrators just keep repeating the old saw.

    Sigh! (So it goes!)

  2. December 15, 2010 at 6:17 pm

    I think inequality is an aspect of the problem, but not its cause, per-se.
    A deregulated financial system leads to a free-for-all gambling environment where a large percentage of the population participates (real estate speculation, for example). The net effect is that the smart folk hoard all the profits at the expense of the sheeple who end up in major debts that need to be paid down.
    Debt deflation leads to economic downturn in the productive economy. The prevailing mentality becomes “a quick buck at the casino” rather than “productive enterprise”.

  3. Alice
    December 16, 2010 at 10:13 am

    Stiglitz view has lot to commend it “that “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.” This “flood of liquidity” then “contributed to the reckless leverage and risk-taking that underlay this crisis.”

    The more insidious aspect of reckless leverage and risk taking and having so much money (in financial market funds etc) that they really dont know what to do with, is that they not only take increasingly extreme risks, they remove real producing firms from entrepreneurs by acquisition only to run them down, asset strip them, or hope to hype them beyond their market value and offload to another prowling fund. Its almost like a black hole that destroys genuine production.

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