Question: If the USA has the largest unequal distribution of wealth of any industrial nation, what will this do for the recovery?
Paul Solman: Intriguing question. There are those who argue that the crisis was itself caused by the unequal distribution of wealth, especially in the U.S. The argument runs as follows:
Over the past three decades or so, income (and wealth) stagnated for the vast majority of Americans (90 percent or more). Thus most Americans were unable to spend any more in the ’80s, ’90s and current decade than they had been in the ’60s and ’70s. How then would the economy grow, since it is largely led by consumption?
The answer: Those TAKING all the new wealth being generated by the US economy — the top few percent — increasingly LOANED that money to the rest. Not directly, of course, but through the banks and capital markets. What are mortgage-backed securities? Pools of mortgages used to purchase homes by people who often couldn’t afford them, financed by those who have extra money to invest.
By this line of reasoning, the greater the inequality in America, the greater the desperation of both the vast majority to keep up their spending — and thus resort to more and more debt. AND the greater the desperation — if you could call it that — of those getting the wealth to earn a return on it — by lending to their fellow Americans to buy, buy, buy, and keep the economy going.
University of Chicago economist Raghurman Rajan gives the argument a somewhat different spin in his new book, “Fault Lines.” He writes of “rising income inequality in the US and the POLITICAL PRESSURE it has created for easy credit.” (Emphasis ours.)