Inequality and deficits on the current account...

from Merijn Knibbe

Is it possible to construct a plausible economic story which tells us that a fast increase in debts led to or enabled, in this century, economic bubbles as well as higher inequality, deficits on the current account and an erosion of the tax base, a situation which, when the bubbles deflated, led to large government deficits? Vicente navarro tries to do this. And he might have a point (graph 1). In western and southern Europe, the countries with relatively high inequality are also the countries with high deficits on the current account (as well as, not shown in this graph, high government deficits!). Not all of them knew debt inflated bubbles (Italy). But even then, the economic costs of maintaining high inequality and upward redistribution of income seem to be high and to lead to an unstable economic situation.

Technical note: the current account is shown as a ‘pertwocent’ of GDP, to make the graph more balanced. The data have to be divided by 2 to change them in percent. The gini-index is a measure of income inequality. A value of “0″ means that everybody earns exactly the same amount of money, a value of “100″ means that one person earns everything and the rest nothing. A value of “20″ means a very egalitarian society, a value of “40″ or more is characteristic of South-American countries. all data: Eurostat.

The same relationship is not visible for the “transition countries”.

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