Matthew Yglesias gives a short look at the question of whether income inequality may be a causal element in financial collapses. He summarizes the case for and against as such:The barest outline of a case that there is such a link is that you have two giant increases in inequality, one that ended with the Great Depression and one that ended with the current recession. The barest outline of a case against the existence of such a link is that it's hard to understand what the causal mechanism here. This reminded me of a recent Radiolab (I believe it was Radiolab, anyway) about a computer program built to analyze data and identify correlations. It worked so well that it identified equations to explain phenomena that scientists still couldn't understand even with the formula provided, which apparently makes it tricky to publish.
It is quite possible for us to confirm that something occurs without us understanding why or how it does (e.g. gravity).
But what I found interesting was an explanation that inequality appears to be correlated to debt, which in turn may trigger economic collapse.
But this only looks at half the problem. Inequality presumable causes some people to have lower relative salaries than they would in a more equal world. In fact, that's probably the very working definition of inequality in this case. That leads them to borrow. But they need to find people to borrow from. And something else that happens with inequality is that some people have relatively more money than they would otherwise have. And they have to find places to put that money.
Is it any surprise that the rise of inequality also saw an explosion in financial "innovations" that ostensibly better avoided risk while making riskier investments.
In other words, inequality triggers riskier lending and riskier borrowing because of both a larger supply of capital and amped up demand. The demand is also exacerbated, I'd guess, by the sense of comparison by people nearby (which also helps explain the "buy a flatscreen TV but not have health insurance" phenomenon), which is well-recorded in microeconomics, I believe.
This is why equality is a good thing. Not full equality of outcomes, not flat salary schedules, not full-blown Marxism, but some protections -- progressive income tax, unionization, etc. -- that keep inequality in check. It also keeps the whole damn thing from spinning out of control.
That seems to make a fair amount of sense to me and is a hypothesis worth evaluating. Although, as Yglesias notes, testing macroeconomic hypotheses is hard. |
