Written by Dirk Ehnts
Nearly four years ago I wrote a commentary about the repetition of income inequality patterns and stock market behavior over the past several years and the 1920s. Here is what I wrote then:
The graph from the 2008 NY Times shows that US income inequality has probably risen to levels only known in the run-up of the Great Depression. During the 20s, a huge stock market buble built up in the US. Its burst then started a deflationary downward spiral, leading to mass unemployment. In the 90s, we have seen a huge stock market bubble again, but it’s burst was compensated by a rise of another bubble: the real estate bubble. Now that these bubbles have burst, and already aggregate demand is falling, one would wonder whether we go the way of the 20s: falling asset prices cause a decrease in wealth and a decrease in credit. This causes firms to reduce output, which will reduce demand: debt-deflation results. We are not there (yet?), but maybe it is worth pondering whether historically high income inequality leads to stock market bubbles.
We were actually right on the verge of a debt-deflation crisis, even though I was not sure we were there yet in October 2008. After going through the Great Financial Crisis it is still not clear that we have moved past the debt-deflation crisis as some may think.
The Tax Justice Network has published a new paper some two weeks ago. Its conclusion starts like this:
This paper reveals for the first time that economic inequality is worse – significantly worse – than any known study of inequality has ever indicated. This is true probably for every country in the world, and for the world as a whole.
In the 30 years to 2010, the income of the top 1% in the US doubled while the top 0.01% quadrupled. In this period, incomes of the bottom 90% in the US fell by nearly 5%. Yet wealth data does not reflect the huge increases of income enjoyed by America’s richest earners. There is a “total disconnect”.
I think that this is very important information. Who earns what and who owns what should be information available to those who discuss these issues – which is the broader public. Only when the extent of inequality is known can economists try to understand what role it played in the ongoing financial crisis. I posted some short comments on this connection in October 2008 on this blog, and have rewritten The Fable of the Bees (Wikipedia) into a modern story (also discussed here). However, the paper was not published since – among other things – one of the co-authors couldn’t see how it would be relevant for today’s problems. So, for those interested in the effects of changes in the distribution of income/wealth on the macro-economy I refer to a paper written by my colleague Eckhart Hein last year entitled Distribution, ‘Financialisation’ and the Financial and Economic Crisis – Implications for Post-crisis Economic Policies(link).
About the Author
Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.