Archive for December 23rd, 2009

Ruccio points out that Martin Wolf doesn’t understand the inequality-bubble link:

Here’s a good question for Martin Wolf, the chief economics commentator for the Financial Times:

How could a more equitable distribution of income be instrumental in solving the impact of this crisis? Especially in the UK and the USA the top 20% has close to 50% of the net incomes which is one of the reasons for the bubbles on Wall Street and on the housing market.

The amazing thing is, Wolf can’t come up a good answer:

I am not at all sure about the link between inequality and the bubble. I think that the growth of the financial sector played an important role in increasing inequality in the US and UK. It helped a very small proportion of the population to extract a large amount of rent. But I am not sure about the reverse causal relationship from higher inequality to the bubble.

No? So, Wolf can’t imagine how increasing inequality—rising productivity and stagnating wages—led both to higher profits (which could be soaked up by the financial sector through securitization) and increased borrowing (on the part of wage-and-salary-earners), thus generating a financial bubble. Not such a difficult argument to imagine and make, although seemingly beyond Wolf’s worldview.

And, of course, once you imagine a link between inequality and capitalist crises, then you have to think about solving the inequality problem in order to solve the crises. And that’s a place Wolf clearly doesn’t want to go.

This shouldn’t come as a surprise to naive me, but it does. Months back, I made the unverified claim that even Krugman had drawn the inequality-bubble link. Now, I’m having my doubts. Wolf’s argument led me to look back in Krugman’s archives. This post, in particular, challenges the “underconsumption hypothesis,” which states that highly unequal societies will suffer from underconsumption. The argument seems like something that comes straight from Marx. Krugman writes,

But how, exactly, do you reconcile this assertion with the fact that we have a negative savings rate, and that consumption is at a near-record share of national income?

I mean, by all means let’s worry about inequality. But I don’t get how this particular reason for worrying about inequality can be reconciled with the facts.

Isn’t the collapse of our mortgage/credit-based consumption justification for worry about this particular aspect of inequality? Krugman confuses me here, because people like Dean Baker, whom he often cites approvingly, have been making the inequality-bubble argument. And for someone like Krugman, who likes to go off his economic intuition, it is fairly easy to connect the dots for an unequal society temporarily staving off underconsumption with unholy credit mechanisms before finally going down in flames. As for Wolf, there seems to be little hope for him on this particular topic if he can’t read between these lines.


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