Rising inequality as a cause of the present crisis

Stockhammer, Engelbert (2015) Rising inequality as a cause of the present crisis. Cambridge Journal of Economics, 39(3), pp. 935-958. ISSN (print) 0309-166X

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The article argues that the economic imbalances that caused the present crisis should be thought of as the outcome of the interaction of the effects of financial deregulation with the macroeconomic effects of rising inequality. In this sense rising inequality should be regarded as a root cause of the present crisis. I identify four channels by which it has contributed to the crisis. First, rising inequality creates a downwards pressure on aggregate demand since poorer income groups have high marginal propensities to consume. Second, international financial deregulation has allowed countries to run larger current account deficits and for longer time periods. Thus, in reaction to potentially stagnant demand, two growth models have emerged: a debt-led model and an export-led model. Third, (in the debt-led growth models) higher inequality has led to higher household debt as working-class families have tried to keep up with social consumption norms despite stagnating or falling real wages. Fourth, rising inequality has increased the propensity to speculate as richer households tend to hold riskier financial assets than other groups. The rise of hedge funds and of subprime derivatives in particular has been linked to rise of the super-rich.

Item Type: Article
Uncontrolled Keywords: crisis, distribution, inequality, effective demand, growth regimes, post-Keynesian economics
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences (until 2017) > School of Economics, History and Politics (from November 2012)
Depositing User: Engelbert Stockhammer
Date Deposited: 26 Jan 2015 10:22
Last Modified: 03 Nov 2015 13:45
DOI: https://doi.org/10.1093/cje/bet052
URI: http://eprints.kingston.ac.uk/id/eprint/29873

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