Washington’s Blog provides links to “numerous prominent economists in government and academia [who] have all said that large inequalities can cause – or at least contribute to – financial crises.”*
Then they add three other factors. One is that rising inequality leads to political corruption.
when the wealthy have enough money to drown out other voices who might otherwise be heeded by legislators and regulators, they can:
- Skew the tax code and other laws so that they can get even wealthier
- Encourage a debt bubble (Bill Black has repeatedly explained that the fraudsters blow huge bubbles, knowing that the government will bail them out when the bust leads to defaults)
- Create new Ponzi schemes for speculation
The second is that government policy has made existing inequalities even worse.
Government policy has accelerated the growing inequality. It has encouraged American companies to move their facilities, resources and paychecks abroad. And some of the biggest companies in America have a negative tax rate … that is, not only do they pay no taxes, but they actually get tax refunds.
As mentioned above, a rising stock market mainly benefits the wealthy. And yet the Federal Reserve has more or less admitted that it is putting tremendous effort and resources into boosting the stock market.
Quantitative easing doesn’t help Main Street or the average American. It only helps big banks, giant corporations, and big investors. . .And by causing food and gas prices skyrocket, it takes a bigger bite out of the little guy’s paycheck, and thus makes the poor even poorer.
The third factor is that inequality “dampens the confidence of most consumers.”
The bottom line is that rising inequality, which caused the crisis in the first place, is getting worse (in part, as a result of government policies), which has the effect of prolonging the crisis.
* As it turns out, yours truly appears on the list.