Thread: Rising Inequality In The US Was A Major Cause Of Crisis

Monday, January 24, 2011

Robert Shiller Argues That Rising Inequality In The US Was A Major Cause Of The Recent Crisis, And Little Is Being Done To Address It

I have previously argued at some length that rising inequality is one of the main causes of the economic crisis. http://www.washingtonsblog.com/2010/12/ ... -both.html

Famed Yale economist Robert Shiller agrees.

As the Browser reports: http://thebrowser.com/interviews/robert ... capitalism

Yale economist Robert Shiller argues that rising inequality in the US was a major cause of the recent crisis, and little is being done to address it.
Shiller gave The Browser a reading list of books which explain the economic crisis, including former IMF chief economist Raghuram G. Rajan's book Fault Lines, which gives several causes for the current crisis, explaining:

The first of them is political, and the politics that lead to rising inequality. That’s been a trend in recent years in most nations of the world. Inequality has been getting worse, particularly in the US, but also in Europe and Asia and many other places. One thing that this has done is it has encouraged governments, who are aware of the resentment caused by the rising inequality, to try to take some kind of steps to make it more politically acceptable. He gives other examples as well, but historically, that has often taken the form of stimulating credit: instead of fixing the problems of the poor, lending money to them. He has a chapter entitled ‘Let them eat credit’.

The US in particular has stimulated the housing market, it has subsidised lending to people, which drove up home prices in an unsustainable way. And there wasn’t that much concern about, or understanding of, the sustainability of this. That’s his first fault line

Shiller notes:

I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ not through wishful thinking. We have to understand how we get inequality and what we can do about it.
Shiller then discusses Winner-Take-All Politics: How Washington Made the Rich Richer and Turned its Back on the Middle Class, by Paul Pierson and Jacob Hacker:

This is a new book – it just came out. It’s about rising inequality and it traces back to fundamental causes. I like books that get back to ultimate causes and that think like social scientists about these causes. The question is, ‘Why is inequality getting worse in so many different countries?’ This book particularly focuses on the US. The traditional answer is – well, there are a number of traditional answers, but the most prominent among them is this idea that in a modern economy there is a skill bias in technical change. Our computers and communications have led to a winner-take-all society, where only the really smart can make money. Everyone else is technologically obsolete, with all these computers that are replacing people. It is, I think, a very important theory.

But Hacker and Pierson point out that it doesn’t really fit the recent data. In the US, we’ve seen a rapid concentration of wealth at the extreme high end. The top tenth of a per cent of the top hundredth of a per cent of the population is getting wealthy very fast. They point out that this is not true in Europe, and yet the economies are very similar and growing at similar rates. If the technology is the same, why would there be a difference at the extreme high end? And they argue that the answer is really political. There have been political changes in the US that allow the extreme high end to garner more wealth. Ultimately, it represents a failure of our society to take account of the fact that the extreme high end can lobby and can organise for its own interests, and we’ve let it happen.
The interviewer asks:

So you feel inequality is central to what has gone on and that we really need to address that?

Shiller responds:

Yes – and there is very little concrete talk about addressing it. It’s a very difficult problem. You might think that in a system of majority voting, the middle class and the poor would dominate and would prevent this kind of inequality from developing. But it hasn’t been that way – it’s been even less so that way lately, especially in the US. And once again, we have to attribute that to some change in our zeitgeist, in our way of thinking about what people view as important. That’s an underlying theme in all of these works, going back to Adam Smith. I don’t think he uses the word inequality very much – but it is about poverty and the alleviation of poverty. In Adam Smith, of course, the wealthy tend to be the kings and lords…

http://www.washingtonsblog.com/2011/01/ ... ising.html

Students and experts on industrial development have always known that an economy based on a housing market is doomed to fail.

Successful capitalist economies are based on production and income, not on how many people have a home they can't afford or any other personal decision they make about their consumption. Using tax codes and other public policies to pump money into the housing market is doomed to failure and bankruptcy from the outset, because the housing market only grows with population by decreasing the amount of land resources available for production, which is a self-fulfilled recipe for economic collapse.

The result is millions of Americans without jobs or sufficient income due to the lack of production who can't afford a home, who were manipulated into buying a home that's too far from their work, too distant from the core business districts of our cities, forcing ridiculous commutes and wasteful fuel and transportation expense, displaced them from their source of true happiness by restricting their leisure time, took the joy out of going to work, created day care businesses they can't afford and screwed the pooch of a normal natural life.

Waking children up at 4 am to get ready to go to day care so their parents can get on the highway by 5 am to drive 2 hours to work is INSANE, all because they bought a home they thought they could afford out in the suburbs 40 miles and 2 hours in traffic from their job. Then they come home to a neighborhood where they don't know anyone, with postage stamp yards no children play in, with nothing to do and nowhere to go to enjoy the life they thought they wanted. The weekends arrive and it's now the yard, fix this, fix that, clean and hope the strangers they call their neighbors don't criticize them for not having done this or done that, only to learn that the vinyl siding doesn't keep the cold air out and the uncurtained windows don't keep the heat out, and now their utility bills and taxes to pay for all the roads and infrastructure required for them to live in the wilderness of the suburbs are almost as much as their mortgage, only then to learn that because our economy was no longer supporting domestic production of goods and services or using Americans to produce what little we do manufacture and provide to ourselves and producers fed up with taxes and unhappy employees went elsewhere and ... OOPS ... there went their job.