Rising Inequality as a Structural Cause of the Financial and Economic Crisis

The financial crisis that began in summer 2007 has turned into the worst economic crisis since the Great Depression. Its causes are usually sought in the malfunctioning of the financial sector, while non-financial factors often receive less attention. One of the major socio-economic changes of recent decades has been a dramatic shift in income distribution. This project suggests that the present crisis should be understood as an outcome of the interaction of the process of financial deregulation with the effects of the polarization of income distribution. The project explores four channels through which rising inequality has contributed to the crisis. First, there are the effects of rising inequality on aggregate demand. Second, international imbalances are related to inequality as different countries have adopted different strategies in coping with stagnating domestic demand: one group of countries has relied on debt-led consumption growth; another group has relied on net exports growth. Third, the increase in household debt (in the USA) may be linked to increasing inequality. Fourth, the increase in inequality may have increased social propensity to speculate.