Inequality and crisis

Posted: 23 December 2009 in Uncategorized
Tags: , ,

Here’s a good question for Martin Wolf, the chief economics commentator for the Financial Times:

How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

The amazing thing is, Wolf can’t come up with any kind of answer:

I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble.

No? So, Wolf can’t imagine how increasing inequality—rising productivity and stagnating wages—led both to higher profits (which could be soaked up by the financial sector through securitization) and increased borrowing (on the part of wage-and-salary-earners), thus generating a financial bubble? Not such a difficult argument to imagine and make, although apparently beyond Wolf’s worldview.

And, of course, once you imagine a link between inequality and capitalist crises, then you have to think about solving the inequality problem in order to begin to solve the crises. And that’s a place Wolf clearly doesn’t want to go—whether in the short run or in the long run.

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