Causes, Costs, and Alternatives

Economists consider the link between rising inequality and economic instability

Two primary causes of depressions1. Concentration of WealthExploitation

2. Blockages in the circulation of money

“Rolling” of money

Spreads crisis

Political capture• Wealthy lobby for

Tax relief

Pro-globalization, anti-labor policies

Deregulation of financial industry

Stagnant or declining average wages• Borrowing to maintain consumption

Greater risk preference for rich

Dependent Variable: PCTGDPFALL

Method: Least Squares

Date: 08/04/13 Time: 23:55

Sample: 1 139

Included observations: 139

Variable Coefficient Std. Error t-Statistic Prob.

C -0.155758 0.088834 -1.753358 0.0819

TOPSHARE -0.006128 0.001435 -4.269316 0.0000

CURRENCYCRISIS 0.004792 0.014668 0.326711 0.7444

DEBTCRISIS 0.018260 0.031538 0.578981 0.5636

STOCKMKTCRASH 0.011438 0.013044 0.876893 0.3822

BANKCRISIS -0.007440 0.014561 -0.510936 0.6103

INFLCRISIS -0.053885 0.018865 -2.856326 0.0050

LIFEEXPECT2000 0.002331 0.001339 1.741151 0.0840

YRSSCHOOL2000 -0.002049 0.003330 -0.615096 0.5396

R-squared 0.244224 Mean dependent var -0.067373

Adjusted R-squared 0.197714 S.D. dependent var 0.078209

S.E. of regression 0.070052 Akaike info criterion -2.416597

Sum squared resid 0.637949 Schwarz criterion -2.226595

Log likelihood 176.9535 F-statistic 5.251069

Durbin-Watson stat 1.786557 Prob(F-statistic) 0.000011

Poor neighborhoods targeted for predatory

mortgage lending• Fraudulent loans (Ninja loans)

• Excessive fees

• Frequent refinacing

• Fraudulent foreclosures

Encouraged by biggest banks and gov’t

No criminal convictions yet

www.ritholtz.com/blog/2011/12/measuring-the-financial-sector-2/

From Simon Johnson, MIT

Encourages risk• Perverse incentives

Distorts consumption towards luxury goods

Predatory towards the poor

Robs resources from the rest of the

economy• Talent goes to financial sector

920 suicides

648 Homicides

20,240 fatal heart attacks or strokes

494 deaths from liver cirrhosis

4227 admissions to mental hospitals

3340 admissions to state prisons

*Brenner, 1976

CBO February 5, 2013

Source: Reifschneider, Wascher, and Wilcox, Figure 1.1. From Federal Reserve

Co-op-based economy inherently stable• Locally-based, resistant to international contagion.

• Co-op workers reduce incomes rather than lay-off in downturns

• Co-ops limit income inequality

Investment is community-determinedAutomation brings leisure, not

unemploymentGovernment policy of 100% employment

Unemployment Spain:

• 26%

Basque Region:

• 15%