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Archive for September 2nd, 2010

Robert Vienneau has a post in which he develops a simple model that creates recessionary conditions as a result of inequality. I’m not going to block quote his equations, so first, go over there to read and think through them.

His argument, though, hinges on this concluding paragraph:

Notice that when the warranted rate exceeds the natural rate, the economy must sometime fall below the warranted rate. The natural rate sets a limit which the economy cannot long exceed. Because of the instability of the warranted rate, such an economy will experience frequent and perhaps prolonged recessionary conditions. Since increased savings intensify the discrepancies between the warranted and natural growth rates under these conditions, increased savings intensify the frequency and severity of recessions. That is, increased inequality can intensify the frequency and severity of recessions.

So here are they key questions: has the inequality leading up the current recession resulted in increased savings? Does his assumption of sector-neutral productivity hold? Was the current recession characterized by “too much” growth in the preceding period? And finally, what if we want to characterize recessions in terms of employment rather than growth, that is, in the view of labor instead of capital?

I would have a hard time characterizing this model as evidence without first having these questions addressed.

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