POLITICAL ECONOMY RESEARCH INSTITUTE

Rising Inequality as a Root Cause of the Present Crisis

Engelbert Stockhammer

April 2012
Gordon Hall 418 North Pleasant Street Amherst, MA 01002 Phone: 413.545.6355 Fax: 413.577.0261 peri@econs.umass.edu www.peri.umass.edu

WORKINGPAPER SERIES
Number 282

RisingInequalityasaRootCauseofthePresentCrisis EngelbertStockhammer,KingstonUniversity e.stockhammer@kingston.ac.uk Abstract Thepaperarguesthattheeconomicimbalancesthatcausedthepresentcrisisshouldbethoughtof astheoutcomeoftheinteractionoftheeffectsoffinancialderegulationwiththemacroeconomic effectsofrisinginequality.Inthissenserisinginequalityshouldberegardedasarootcauseofthe presentcrisis.Weidentifyfourchannelsbywhichithascontributedtothecrisis.First,rising inequalitycreatesadownwardpressureonaggregatedemandsinceitispoorerincomegroupsthat havehighmarginalpropensitiestoconsume.Second,internationalfinancialderegulationhas allowedcountriestorunlargercurrentaccountdeficitsandforlongertimeperiods.Thus,inreaction topotentiallystagnantdemandtwogrowthmodelshaveemerged:adebtledmodelandanexport ledmodel.Third,(inthedebtledgrowthmodels)higherinequalityhasledtohigherhouseholddebt asworkingclassfamilieshavetriedtokeepupwithsocialconsumptionnormsdespitestagnatingor fallingrealwages.Fourth,risinginequalityhasincreasedthepropensitytospeculateasricher householdstendholdriskierfinancialassetsthanothergroups.Theriseofhedgefundsandof subprimederivativesinparticularhasbeenlinkedtoriseofthesuperrich. Keywords:crisis,distribution,inequality,effectivedemand,growthregimes,postKeynesian economics JELcodes:E12,E25,E60 Acknowledgements.AnearlierversionofthispaperhasbeenpresentedattheworkshopGetting OutoftheCrisis:theroleofdistribution,2eColloqueinternational,CEPN,Paris13,June2011.The authorisgratefultotheparticipantsandtoPaulAuerbachforcomments.

1.Introduction Therecessionthatbeganin2008hasbeentheworsteconomiccrisissincethe1930s.Thediscussion ofitscausesusuallyfocusesondefectsinthefinancialsystem:incentivesofbankmanagers; financialinstrumentsthatlackedtransparency;anexaggeratedtrustintheabilityofsophisticated statisticalmodelstoinsureagainstrisks;theshiftfromtheoriginateandholdtotheoriginateand distributemoduleofbankingmadepossiblebymortgagebackedsecurities;increasinginternational imbalances.Thelistcouldbecontinuedandtheliteratureonthisislongandgrowing.Whatitshares incommonisthatithighlightsmalfunctionswithinthefinancialsector.Whiletherecanbenodoubt thatfinancialfactorsarecriticalinthemakingofthecrisis,thepresentdebaterunsthedangerof neglectingothersocioeconomicaspects.Theriseofinequalityhasbeenoneofthemostprofound changesinmodernsocietiessincetheearly1980s.Severalauthorshaverecentlyhighlightedthat inequalitymayhaveplayedarole,butoftenwithoutclarifyingthemechanisms.Thispaperwill exploretherolethatrisinginequalityhasplayedincreatingthepreconditionsofthecrisis. Sincetheearly1980sanincreaseininequalityhasoccurredinallOECDcountries.Atfirstsight,this seemstohavetakenondifferentformsindifferentcountries.IntheAngloSaxoncountrieswe observeasharpincreaseinpersonalincomeinequality.Topincomeshaveexperiencedaspectacular growth(PikettyundSaez2003,2007;OECD2008).Since1980thetopincomepercentilehas increaseditsshareinnationalincomebymorethan10percentagepoints.IncontinentalEuropean countriesweseeastrongdeclineinthefunctionaldistributionofincome.Since1980the(adjusted) wagesharehasfallenbyaround10percentagepoint(ofnationalincome).Giventheextentof redistributionthathastakenplace,onemightexpectthattherearemacroeconomiceffects.While severalauthorshavenoticedthattheremightbealinkbetweenrisinginequalityandthecrisis (Stiglitz2010,Wade2009,Rajan2010),thereisasofyetlittlesystematicanalysis.Thisarticlegivesa conceptualframework,basedonpostKeynesiantheory,forthedifferentchannelsthroughwhich risinginequalitymayhavecontributedtothecrisisand,secondly,presentssomepreliminary evidencetosubstantiatethesechannels. Ourhypothesisisthatthecrisisshouldbeunderstoodastheinteractionofthederegulationofthe financialsector(orfinancialisation,moregenerally)withtheeffectofrisinginequality.Inanutshell ourstoryisthefollowing:sincetheearly1980stheriseofNeoliberalismhasbroughtabout importanteconomicandsocietalchanges,includingthederegulationoffinancialsectorandvarious legislativemeasuresthathaveweakenedorganisedlabourandthewelfarestate.Froma macroeconomicpointofviewtwogrowthmodelshaveemerged:adebtledgrowthmodelandan exportledgrowthmodel.TheUSAandtheUKareprimeexamplesoftheformer,Germanyand 2

Chinaforthelatter.Bothgrowthmodelscanberegardedasareactiontothelackofdomestic demandduetorisinginequality.Potentiallystagnatingdomesticdemandiscompensatedfor,inthe firstcase,bydebtfinancedconsumptionandresidentialinvestmentboomsand,inthesecondcase, byexportdemand.Severalmacroeconomicimbalanceshaveemerged:growingtradeimbalances acrosscountries;risinghouseholddebtlevels,namelyinthedebtledeconomies;ariseinthesizeof thefinancialsectorrelativetoothers;andariseofassetandpropertyprices.Theseimbalancesare attherootofthecrisis.Theyhavebeenfacilitatedbyfinancialderegulation,butmostofthemare intrinsicallylinkedtotheriseofinequality. ThepapertakesaviewthatisinformedbyKaleckianmacroeconomicsandbyFrenchRegulation Theory.Weidentifyfourchannelsthroughwhichrisinginequalityhascontributedtothecrisis. Firstly,risinginequalitycreatesadownwardpressureonaggregatedemand,sinceitispoorer incomegroupsthathavehighmarginalpropensitiestoconsume.Second,internationalfinancial deregulationhasallowedcountriestorunlargecurrentaccountdeficitsandforextendedtime periods.Thus,inreactiontopotentiallystagnantdomesticdemandtwogrowthmodelshave emerged:adebtledmodelandanexportledmodel.Third,(inthedebtledgrowthmodels)higher inequalityhasledtohigherhouseholddebtasworkingclassfamilieshavetriedtokeepupwith socialconsumptionnormsdespitestagnatingorfallingrealwages.Fourth,risinginequalityhas increasedthepropensitytospeculateasricherhouseholdstendholdriskierfinancialassetsthan othergroups.Theriseofhedgefundsandofsubprimederivativesinparticularhasbeenlinkedto riseofthesuperrich. Thepaperwillclarifythesechannelsandpresentsome(preliminary)evidencetosubstantiatethese channels.Ouranalysisleadstothefollowingresearchquestions:isthereevidenceforthe emergenceofdebtledversusexportledgrowthmodels?Isthereevidencefortheeffectofchanges inincomedistributiononconsumptiondemandandaggregatedemand?Istherealinkbetween risinginequalityandrisingdebtlevels?Hasincreasedinequalitycontributedtoahigherpropensity forspeculation? Thepaperisstructuredasfollows.Section2givesanoverviewofthecrisisanditsdifferentphases. Section3makessomecommentsonthedebateontheoriginsofthecrisis.Section4documentsthe riseininequalityinthepastdecades.Section5discussesfourchannelsthroughwhichrising inequalityhascontributedtothecrisisandpresentsevidenceforthesechannels.Section6 concludes.

2.Thecrisis20072011 Inmid2006housepricesintheUSAstartedtodecline.Withhindsight,thatprobablymarksthe beginningofthecrisis,buttheUSgrowthmodelhadgivenrisetoimbalancesalongseveral dimensions.Rapidlyrisinghouseprices,andthemortgagelendingthatcamewithit,hadbeenthe basisofaboomdrivenbycreditfinancedconsumptionandconstructioninvestmentintheUSA.The boomcamewithlargecurrentaccountsurplusesand,duetofinancialinnovation,thefinancial sectorincreaseditsassetsandliabilitiesonamassivescale.Thissectiongivesabriefoverviewofthe unfoldingofthecrisisitself. Thecrisisbrokeoutinspring2007inaseeminglyobscurenicheoftheUSfinancialsystem:the subprimemarket,whichisthemarketforderivativesonlowqualitymortgagecredit;thustheinitial nameofthecrisisasthesubprimecrisis.Thisisarathersmallsegmentoftheoverallmortgage market,thoughitaccountedforasubstantialportionofthecreditgrowthintheyearsbeforethe crisis.Assubprimecreditis,bydefinition,oflowquality,itwasthenaturalfieldforasecuritization oftheseloansthatwassupposedtoreducerisk(e.g.IMF2006).Whatwasgoingonherewasthe extremeformofwhathappenedonamuchbroaderscaleintheentiremortgageindustry.InAugust 2007thecrisisspiltoverintotheinterbankmarket,wherebankslendtoeachother,usuallyvery shortterm.Theinterbankmarketisattheverycentreofthemodernfinancialsystem.Interestrates rosetomorethanonepercentagepointabovethoseongovernmentbonds.Thisincreaseintherisk premiumoflendingreflectedthatbanksdidnottrusteachother.Andrightlyso,asitturnedout. Centralbanksreactedquicklyandpumpedbillions(ofdollarsandEuros)intothemarkettomaintain liquidity. However,whiletheinterbankmarketstabilized,thecrisisevolved.Inspring2008BearStearns,one oftheleadinginvestmentbanks,wasbankruptandcouldonlybesoldwiththeFEDguaranteeing some20bnUS$worthofassets.Afirst(small)fiscalstimuluspacketwasimplementedintheUSA. AtthisstagetheimpactofthecrisisontherealeconomyoutsidetheUSAwaslimited.In August/September2008thecrisisturnedintoafullscalefinancialcrisisanditdidsowithabang: LehmanBrothers,oneofWallStreetsleadinginvestmentbanks,wentbankrupt.Theendofthe world(oratleastofbigfinance)asweknewitseemedtohavearrived.Interestratessoared (interestratespreadsrosetoseveralpercentagepoints)andliquidityfroze. Againgovernmentsreacted.Theprinciplesofneoliberalfreemarketeconomicsweresuspendedfor afewweeks.Centralbanksprovidedmoreliquidity,butthatprovedinsufficienttostabilizemarkets. Governmentshadtointervenedirectly:intheU.S.,AIG,aninsurancefirmthathadinsuredhuge volumesofcreditderivates,wastakenoverbythestate,aswereFannieMaeandFreddieMac,the 4

twostatesponsoredmortgagerefinancinggiants.WithinafewweeksEuropeancountriesfollowed suitwiththerecapitalizationoffinancialinstitutionsandmassiveguaranteesforinterbankcredits becomingmainstreameconomicpolicy.Recapitalizationmeantthatgovernmentseffectively nationalized(fullyorpartly)financialinstitutionsbutgovernmentsabstainedfrominterferingwith themanagementofbanksdespiteobviousmanagementfailures.InlateOctober2008anEUsummit issuedastatementthatnosystemicallyimportantfinancialinstitutionswouldbeallowedtofaila capitalismwithoutbankruptcies(ofbigbanks)wasdeclared! Byfall2008thefinancialcrisishadturnedintoafullblowneconomiccrisis.Worldtradecontracted bymorethan20%andGDPinmostdevelopedcountriesshrankataspeednotseensincethe1930s (inmostcountriesbyaround5%).Anditnotonlyhitthosecountriesthathadexperiencedproperty bubbles,butalsocountrieslikeGermanyandJapanwherepropertypriceshadbeenpracticallyflat; itspreadaswelltoemergingcountries.EasternEuropeancountrieswereparticularlybadhit,with theBalticcountriessufferingGDPdeclinesofaround20%.TheIMFhadtobecalledintosave Hungary,PakistanandtheBalticstates.Butthemostconspicuoussymbolofthedownturnwas certainlythefallofGM:oncetheworldslargestfirmandemployer,itnowhadtorescuedbytheUS government. Whilecompletemeltdownseemedimminentinfall2008,inthecourseofspring2009itbecame clearthatthehistoricallyunprecedentedscaleofgovernmentinterventionhadprevented outrightcollapse.Acascadeofbankbreakdownscouldonlybepreventedbyrescuepackagesthat amountedto80%ofGDPintheUSAandtheUK(UNCTAD2009,Table1.8)andbytheFED expandingitsbalancesheetbyatrillionUS$,mostlybyacquiringassetsthatitwouldnothave touchedinnormaltimes.Riskpremiaremainedelevated,banksweremakingphenomenallosses, unemploymentstartedrising,butnormalityofasortreturned.Thepressuretoreformthesystem hadreceded.Earlierdeclarationsofafundamentalrestructuringofthefinancialsystem(e.g.theG20 meetingofNov.2008)hadbeenforgottenandthedebateonreformturnedintospecialistsdebate abouttechnicalities,withallbutprivatebankersandcentralbankersbeingexcludedfromdecision makingcircles.Thearroganceofthefinancialelite,however,isbestcapturedbythefactthat,in spiteoftheobviousdisasterinfinance,bankersbonusesreturnedtoprecrisislevels. Butthenormalitythatwasabouttorestoreitselfwasnotquitethenormalityexistingbeforethe crisis.Afterall,thecrisiswasbynomeansover,thoughforthebankersitseemedso.Forlargeparts ofthepopulation,ithadonlyjusthadbegun.Productionfellandunemploymentrose.IntheUSA foreclosureswererising.Peoplelosttheirjobsandtheirhomes.Andtherewasanotherdevastating effectofthecrisis:budgetdeficitswereincreasing,surpassing10%ofGDPinmanycases,withpublic 5

debtincreasingaccordingly.Financialmarketsstartedtoworrywhethergovernmentswouldbeable topaytheirdebts.Sointhecourseof2009thecrisisthustookitsnextturn:asovereigndebtcrisis. ItsmostprominentvictimwastobeGreeceandwithittheEurosystem.Intermsofeconomicpolicy therehasbeenashifttowardsausterity. Inearly2010Greecefacedpunitiveinterestratesonits(public)debtissues.Greecehadfudged publicdebtstatistics(withthehelpofleadingWallStreetbanks)andnowhaddifficultiesrefinancing itsdebt.Indeed,whathadbeenexposedwasafundamentalflawintheconstructionoftheEuro system.Withexchangeratesfrozen,thesoutherncountrieshad,despitemuchlowerinflationsince adoptingtheEuro,slowlybutsteadilylostcompetitivenesstoGermanyanditseconomicsatellites. Germanysnetexports(mostlytootherEurocountries)amountedtomorethan5%ofGDP, achievedlargelybywagesuppressionand,consequently,lowinflationrates(Lapavitsasetal2010). TheEuroareahadnoinstrumentstodealwiththeinternalimbalancesthatemerged,otherthan trustinginlabourmarketflexibilitytoadjustpricelevelsinthenationsoftheEuroareatobring aboutstability(Stockhammer2011). WhileitwasrelativelysimpletoblametheGreekcrisisonirresponsiblefiscalpolicythestructural problemsoftheEuroareawereillustratedbytheIrishcrisisshortlythereafter.Irelandhad governmentsurplusesbeforethecrisis,butstillneededahugerescuepackage(85bn,morethan halfofIrishGDP).AsinGreece,therescuepackagewasreallyonefortheEuropeanfinancialsector ratherthanforstates.Irelandhadexperiencedanenormousrealestatebubblethatburstund effectivelybankrupteditsbanks.Becauseofthebankbailouts,Irishdebtsoaredby40percentage pointsofGDPfrom2007to2010.LiterallyalloftheobligationsofthebustIrishbankingsystemwere guaranteed,whichledtoanangryarticlebyEichengreen(2010). TheEurocrisisisstillgoingonatthetimeofwriting.Whiletheeconomicsituationisdesperatein Greece,thebiggerdangerfortheEuroisposedbyItalianandSpanishdebtmarkets.Butthe underlyingproblemisaEuropeanone:Europeancountrieshavegivenuponindependentmonetary policy,buttherearenoeffectiveinstitutionsandfiscaltransfersinplacethatwouldstabilisethese countriesintimesofcrisis.Ratherthecrisisisamplifiedbyprocyclicalausteritypoliciesthatare increasinglyimposedbyBrussels(andBerlin). 3.Thedebateoncausesofthecrisis Manyinsightfulcontributionstothedebateonthecausesofthecrisisemphasizemicroeconomic factors.Theycomeindifferentversions.First,therearecontributionsthathighlightincentivesfor 6

bankmanagersthatencouragerisktaking(RoubiniandMihm2010)andtheextensiveuseof statisticalmodelsthatwereaimedatdiversifyingriskandequatedriskswithpastvolatility(basedon shorttimeseries)andunderestimatedthecorrelationofrisksintheeventofacrisis.These argumentsdiscussproblemswithintheprivatesectorand,typically,assumerationalbehaviour. Second,thereisgroupofargumentshighlightingwrongincentivescreatedbygovernment institutions.AprimeexampleistheBasleIIaccord,whichisthoughttohavecreatedincentivesfor privatebankstoshiftactivitiesoffbalancetominimizeadherencetocapitalrequirements.Rajan (2009)arguesthatsuccessiveUSgovernmentshaveencouragedlendingtothepoorthroughstate backedmortgagerefinancinginstitutions.Implicitlytheseargumentsassumerationalbehaviouron partofprivateactors.Third,thereisagrowingbehaviouralfinanceliteraturethatsuggeststhat people,evenfinancialinvestors,oftendontactrationallyandarepronetoirrationalexuberance (AkerlofandShiller2009). Asmoderneconomicsisdominatedbyamicroeconomicapproachitisperhapsnotsurprisingthat themacroeconomicdimensionislessprominent.Twofactorsstandoutinthedebate.First,thereis agrowinginterestindebtcycleanddebtdeflationmodels.Risingpropertyprices(intheUSA)area keyelement,helpingtoengenderasubstantialriseinhouseholddebt.Forwhateverreason,the privatesavingsratiohadbeenonadecliningtrendinthedecadesbeforethecrisisconsumption wasinpartbeingfinancedbyrisingdebt.Risinghousepriceswerealsocentralforthe(residential) investmentboomthatpartsoftheUSA,SpainandIrelandhadwitnessed. Asecondmacroeconomicfactorthathasreceivedwidespreadattentionhasbeentherising internationaltradeimbalancesandincreasesincapitalflows.TheUSAhadexperiencedmassive capitalinflows(andtradedeficits)priortothecrisis.Thereisnoconsensusastowhethertrade imbalancesorsavingsdecisionsdrovecapitalflowsorwhethercapitalflowshavebeendriving assetpricesandmacroeconomicperformance,butthereisawidespreadperceptionthat internationalimbalanceshadsomethingtodowiththecrisis.Thesavingsgluthypothesisof Bernanke(2005)essentiallyblamedsouthEastAsiancentralbanksfortheimbalances(asifthe inflowswereforcedupontheUSA).BorioandDisyatat(2011)arguethatcapitalflowsarenotdueto savingsdecisions,buttoportfoliodecisionsandthattheyarepronetolargeswingsduetowhatthey callanexcesselasticityofthefinancialsystem.Withoutmuchtheoreticalado,ReinhartandReinhart (2008)haveshownthatepisodesofcapitalinflows(capitalflowbonanzas)typicallyleadto speculativebubblesonfinancialmarketsandpropertymarketsand,ultimately,tofinancialcrises. Figure1summarisesthemacroeconomicmechanismsofthecrisisthathavebeenhighlightedinthe literaturegraphically.Changesinthefinancialsystem,duetothederegulation(orwrongregulation) 7

allowedforabubbleonfinancialandpropertymarkets,whichinturnallowedforthemassive increaseinhouseholddebt.Risinghouseholddebtlevelsfuelledconsumptionexpendituresand residentialinvestmentandthusledtoeconomicgrowththatalsoresultedincurrentaccount deficits.Theresultingcapitalinflows,inturn,helpedkeepinterestrateslowandfuelledthebubbles. Figure1.Standardcrisisexplanation Thereisdisagreementaboutthemicroeconomicdimensionforthesedevelopments.Theserange fromneoclassicalapproachesthathighlightgovernment(regulationfailure),behaviouraleconomics, whichhighlightsirrationalbehaviour,topostKeynesianapproachesthathighlight,inthetraditionof HymanMinsky,theintrinsicandendogenousinstabilityofthefinancialsystem,whichhasbeen amplifiedbyfinancialderegulation.Somecommentatorshaveemphasisedaparallelbetweenthe risinginequalityofthe1920sandthepresentcrisis(Livingston2009).Usuallythesearguments remainrudimentary.ThediscussionthatfollowswillpresentapostKeynesianandregulationist frameworkfortheinequalityargumentandsubstantiatesomethechannelsempirically. 4.Risinginequality Incomedistributionhasexperienceddramaticchangesinthelastdecades.Andthereareremarkable differencesacrosscountries.Since1980(adjusted)wageshareshavefallenbysometenpercentage pointsincontinentalEuropeancountries,andevenmoreinJapan(Figure2).ThedeclineintheUSA andtheUKwasmoderateandisaroundfivepercentagepoints.TheAngloSaxoncountries,onthe otherhand,experiencedamuchmoredramaticchangeinpersonalincomedistribution(Figure3).In theUSAthetop1%oftheincomedistributionhasincreaseditsshareinnationalincomefrom8% (1980)toabove21%(2005).DevelopmentsinotherEnglishspeakingcountriesaresimilar.In continentalEuropeancountriesandJapanpersonalincomehasbecomemoreunequal,buttoa muchmoremoderatedegree.Thedramaticriseinpersonalinequalityis,toasignificantextent,due tosharplyrisingmanagementremuneration(inEnglishspeakingcountries).Thesearecountedas labourcostsinthenationalaccountandthusformpartofthewageshare.Ifmanagementsalaries werecountedasdistributedprofits,i.e.adjustingtheUSwageshareforthewagepaymentsoftop incomepercentile,itlooksmuchmorelikeEuropeanwageshares.Overall,increasinginequalityhas thusresultedinstagnatingincomesfortheworkingclasses(intheUSArealmedianwageshave grownbyatotalof2.8%inthequartercenturyfrom1980to2005;OECD2008),whereasprofit

incomeshaveincreasedsharply,evenastheformthatthisincreasehastakendiffersacross countries. Figure2 Figure3 Thesedramaticchangesinincomedistributionstillawaitsatisfactoryexplanation.Severalstudies havetriedtoquantitativelyidentifyingitscauses.Remarkably,recentlyseveralmainstreamstudies haveaddressedtheissueofchangesinfunctionalincomedistribution.IMF(2007a)andEuropean Commission(2007)identifytechnologicalchangeasthemaindeterminantofchangesinthewage shareinOECDcountries;globalisationisconsideredasecondaryfactor.Stockhammer(2012)argues thattheseresultsarenotrobustandfindsthatfinancialisation,globalisationandwelfarestate retrenchmentallhavecontributedtofallingwagessharesandthattechnologicalchangeonlyhad moderateeffects.FinancialisationhadalsobeenhighlightedbyILO(2008),thoughwithout econometricevidence.Rodrik(1998),Harrison(2002)undJayadev(2007)showedforasampleof developinganddevelopedeconomiesthatglobalisationhashadnegativeeffectsonthewageshare. Onaran(2009)showsforafouremergingeconomiesthatfinancialcrisishavelonglastingeffectson incomedistribution. 5.Risinginequalityandthecausesofthecrisis:fourchannels Thereisanobviousparallelbetweenthepresentcrisisandthatofthe1930s:bothwereprecededby sharpincreasesininequality.Thishasledsomeauthorstospeculateaboutapossibleconnection betweenthetwophenomena(Livingston2009),butthereareyetfewstudiesthatdetailthecausal relation.Thissectiondiscussesfourchannelsthroughwhichrisinginequalityhascontributedtothe imbalancesthatcausedthecrisis.Thesechannelsoperateininteractionwithfinancialfactors.Our explanationhassomesimilaritieswithHornandvanTreeck(2011),whoidentifyinequality, internationalimbalancesandunderregulatedfinancialmarketsasthecausesofthecrisis. Channel1:Risinginequalityhasledtostagnatingdomesticdemand,namelyconsumptiondemand.

Section4presentedevidenceforthedramaticchangesinincomedistributionthatoccurredinthe past30years.Whatarethemacroeconomiceffectsofthisredistribution?Moreprecisely,whatare itseffectsonaggregatedemand?First,otherthingsequal,onewouldexpectafallingwageshareto haveanegativeeffectonconsumptiondemand:wageearners,andespeciallythepoor,willhavea higherconsumptionpropensitythanrecipientsofprofitincomes.Second,afallingwageshare,i.e.a risingprofitshare,oughttohavepositiveeffectoninvestmentexpenditures(atleastforagiven levelofdemand).Third,afallingwageshareinanyonecountyoughttohaveapositiveeffectonnet exportsascompetitivenessincreases.Thislasteffect,however,isnotrelevantinourcontext,as wageshareshavefalleninallcountries.Thetotalorneteffectofachangeinwageshareon aggregatedemandistheoreticallyambiguousanddependsontherelativesizeofthepartialeffects. BhaduriandMarglin(1990)proposedapostKaleckianmacromodelthatencompassesthesethree effects.Itallowsforaggregatedemandtobeeitherwageledorprofitled.Awageleddemand regimeisonewhereanincreaseinthewageshareleadstohigheraggregatedemand,whichwill occuriftheconsumptioneffectinlargerthantheinvestmentandnetexporteffect.Aprofitled demandregimeisone,whereanincreasethewagesharehasanegativeeffectonaggregate demand.TheKaleckianhypothesisisthat(atleastasfarasthedomesticcomponentsare concerned)demandiswageled. ThismodelhasinspiredaseriesofempiricalstudiesincludingBowlesandBoyer(1995), StockhammerandOnaran(2004),NaastepadandStorm(2006/07),HeinandVogel(2008), StockhammerandStehrer(2011),OnaranandGalanis(2012).ForexampleStockhammeretal. (2009)findaconsumptiondifferentialofaround0.4fortheEuroarea.Thusthedeclineinthewage sharebyaroundtenpercentagepointswouldhaveledtoareductionofconsumptionbyfour percentagepointsofGDP. Theeffectsofchangesinpersonalincomedistributiononconsumptiondemandaremore straightforward,asstandardconsumptiontheorypredictsthatthepoorwillhavehighermarginal consumptionpropensitythantherich.Toillustrate,Stein(2009)reportsthat,forGermany,in2007 thetopquartilehadanaveragesavingrateof15.8%,thesecondquartileof9%,thethirdof8%and thebottomquartile4.1%.Indeedsavingdifferentialsacrossincomegroupshaveincreased,withthe differencebetweenthetopandthebottomquartileincreasingfrom5.5%in1995to11.7%.[OECD?] Theincreaseinthesavingdifferentialis,accordingtoStein,duetoincreasinginequalityinthis period.Brenke(2011)arguesthatrisinginequalityhasbeenanimportantcontributingfactorto Germanysweakconsumptiondemand.

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Channel1arguesthatrisinginequalityhas,otherthingsequal,anegativeeffectonconsumption expendituresandthusonaggregatedemand.Otherthings,however,werenotequalduring neoliberalism. Channel2:Thederegulationofinternationalcapitalflowshasrelaxedtheexternalbalanceconstraint andallowedcountriestorunlargercurrentaccountdeficits.Thishasallowedforthedevelopmentof twodistinctgrowthmodels:adebtledgrowthmodelthatcamewithaconsumptionboomand currentaccountdeficits,andanexportledgrowthmodel. Figure4plotsthestandarddeviationofcurrentaccountpositionsofOECDcountries.Thisisan measureofinternationalimbalances.Thefigureillustratesthatinternationalimbalancesdidnot occurrecently,butarepartofalongertermtrend:theliberalisationofcapitalflowsafterBretton Woodsdidnotleadtostableexchangerates,butrathertoincreasinginternationalimbalances becauseexchangeratesareincreasinglydeterminedbycapitalflowsratherthantradebalances.As capitalflowshavefinancial,oftenspeculative,motivesandaretypicallyprocyclical,the deregulationofinternationalcapitalflowshasloosenedexternaltradeconstraints.Ithasallowed countriestorunlargercurrentaccountdeficitsforlongerperiods(comparedtotheBrettonWoods period).ReinhartandReinhart(2008)showthatepisodesofstrongcapitalinflows(capitalflow bonanzas)usuallycomewithspeculativebubblesonfinancialandpropertymarketsandtypically endinrecessions. Figure4[stddeviationcurrentaccount] Financialglobalisationhasthusironicallyincreasedtheroomfordifferentdevelopmentsacross countries.Currentaccountimbalancescanbemaintainedforlongeressentiallyaslongasmarkets trustthesituation.Thisisthebackgroundtotheemergenceoftwodifferentgrowthmodels. Theimbalancesattheeveofthecrisisarewellknown.In2007Germanyhadacurrentaccount surplusof7.5%ofGDP;theUSAhadadeficitof5.07%(OECD.stats,accessedFeb2012).Figure4 suggestthattheseimbalancesarepartofalongtermtrend.Ourhypothesisisthattheseimbalances aretheexpressionandresultsofdifferentgrowthmodelsthatdevelopedindifferentcountries. Morespecifically,wearguethatcountriescanbeusefullygroupedindebtledgrowthmodelsand

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exportledgrowthmodels.1Importantly,weinterpretthesemodelsasareactiontothesame underlyingproblem:stagnatingdomesticdemandduetorisinginequality.Table1classifiessome importantcountries.Debtledandfinanceledgrowthmodelsexistincoreaswellasinperipheral countries.Whileonaglobalscalethedebtledeconomieswereatthecore,withintheEuroarea,the rolesarereversedandtheexportledeconomiesareatthecentreanddebtledgrowthtookplacein theperiphery. Table1 ThehistoricalpathsthatledthecountriestotheirpositionsinTable1arecomplexandwemakeno claimofbeingabletoexplainthemhere.Financialinstitutionsaswellasindustrialrelationsand industrialpolicyplayarole.TheUSAandtheUKhavelongbeenleadingexamplesofmarketbased financialsystemsandtheyledthewayinneoliberalfinancialderegulationofthe1970sand80s.In particularintheUSAhomeownershiphasaspecialeconomicandideologicalconnotation.Forthe countriesoftheEuropeanperipheryfinancialliberalisationwasverymuchanoutcomeofEuropean integration,onewhichimposedtheliberalisationofcapitalflowsandprovidedtheframeworkfor capitalinflows.Thereisalsoanaspectofhistoricalcontinuityonthesideoftheexportledmodel, complementedbyanewdynamicduetochangingcircumstances.Germanyhaslonghadanexport orientedgrowthstrategy.TheentireeraofEuropeanintegrationismarkedbyGermansurplusesand subsequentrevaluations.However,Germandemandcompositiononlytiltsdecisivelytowardsan exportledgrowthmodelafterunificationandtheintroductionoftheEuro(Hornetal.2010).In Japantheexportledgrowthmodelisarguablyareactiontoitsdebtledgrowthmodelgoinginto reverseafter1992.IntheemergingeconomiesofSouthEastAsia,exportledgrowthisinparta reactiontothehumiliatingexperienceofthecrisis1097/98,and,certainlyinthecaseofChina,the resultofstrategyofundervaluationinordertoaccumulatereserves. Giventhecontrastingcurrentaccountpositions,itishardlysurprisingthatcountrieshavedifferent compositionsoffinaldemand.Figure5illustratesthestarkdifferenceinconsumptionsharesacross

No particular weight is given to names. What we label debt-led has been called

financialized, finance-led models. Our export-led model has also been called neomercantilist. Hein and Mundt (2012) offer a more detailed analysis of debt-led and export-led growth models. The conceptual distinction is found in Becker (2002).
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countries.Whereasdebtledeconomieshavetypicallyexperiencedasubstantialincreaseinthe consumptionshare,exportledeconomieshaveexperiencedadeclineintheconsumptionshare. Figure5 Increasesintheconsumptionsharehavetypicallybeenaccompaniedbyincreasesinhousehold debt.Table2showstheinhouseholddebtinpercentofGDPaswellasitschangefrom2000to 2008.Wefocusonthechangeinhouseholddebtratherthanonitslevel,because,arguably increasesindebt(ratherthanalevelofdebt)canfeedconsumptionexpenditures.Forthestability ofthegrowthregime,ofcoursethechangeaswellasthelevelofdebtmaybeimportant.While householddebtdeclinedinGermanyfrom2000to2008by11percentagepointsofGDP(andit increasedinAustriabyamoderate7%points),householddebtroseby26percentagepointsinthe USAandby28percentagepointsintheUK.InperipheralEuropetheincreaseswereevensharper (thoughlevelsinMediterraneanEuropewereusuallylow).InIrelanditroseby61,inSpainby33 percentagepoints.2 Table2[HHdebt] Overall,ourcrudeclassificationindebtledandexportledgrowthmodelsseemsconsistentwiththe data:countrieswithcurrentaccountdeficitsarealsothosewithhigherincreasesinhouseholddebt. TheUSAandtheUKontheonesideandGermanyandJapanontheotherareprimeexampleof thesegrowthmodels.TheclassificationalsoishelpfulinunderstandingdevelopmentsinGreece, Portugal,Ireland,andSpain.TheIrishcase,admittedly,issomewhatmorecomplicatedasIreland had,atthesametimecurrentaccountdeficitsandnetexportsurpluses,thedifferencebeing explainedbyrepatriatedprofits.TheIrishexternalpositiondeterioratedinthedecadepriortothe crisis.Severalcountrieswould,however,notfitneatlyintoourdichotomy,forexamplethenew memberstatesincentralandeasternEurope,butalsotheNetherlandsandDenmark,whichseemto havehad,atthesametime,sharpincreasesinhouseholddebtandexportsurpluses.Notablythese aresmallcountries.
2

We were unable to find comparable data for Japan. Girouard et al (2006, Figure 1) report

falling household debt levels from 1995 to 2004.

13

 Channel3.Risinginequalitycontributedtohouseholddebt(inthedebtledmodels). Thedistributionofhouseholddebtisanunderresearchedtopic.Primarydataareoftennotreadily availableand,wheretheyare,theyusuallynotreportedinaformthatwouldencourage distributionalanalysis.FortheUSA,dataareavailableandwillbediscussedbelow. Intheliteraturethereareoppositeviewsonthedistributionaldimensionofrisinghouseholddebtin theUSA.OntheonehandBarbaandPivettiarguethatrisinghouseholdindebtednessshouldbe seenprincipallyasaresponsetostagnantrealwagesandretrenchmentsinthewelfarestate,i.e.as thecounterpartofenduringchangesinincomedistribution(BarbaandPivetti2009,114);rising inequalityhasthuscontributedtohouseholddebtinthatthepoorweredrivenintodebtby decliningwagesandsocialservices.Ontheotherhand,ithasbeenarguedthatrisinghousehold debt,andmorepreciselyfallingsavingrates,isduetothebehaviouroftherich.MakiandPalumbo claimthatalloftheconsumptionboomreallycanbeattributedtotherichestgroupsof households(MakiundPalumbo(2001,22).Thisargumenthasbeencitedwidely,includingby Marxistauthors(Brenner2003,Glyn2006).Whilerisinghouseholddebtisrelatedtorisinginequality inthisstory,itisnotthepoorwhoareaccumulatingdebt,butitisthetopendofthedistribution. ThestudybyMakiandPalumbowasoneofthefirstonthistopic.Theyanalysewealtheffectsinthe consumptionbehaviourofUShouseholdsbasedondataoftheSurveyofConsumerFinances(SCF) from1992to2000.TheSCFalsoformedthebasisforlaterstudiesthatyieldeddifferentresults. Somecommentsareinplace.First,theirstudyfocusesonsavingratesratherthanondebtlevels. Whileitistemptingtoassumethatthegroupsthatreducedtheirsavingratesarealsotheones whosedebtlevelsincreased,thisneednotbethecase.Second,theirstudyfocusesonthe1990s,i.e. theperiodintherunuptothedotcombubble.Inthisperiod,arguablygainsinwealthwere concentratedinfinancialassetsthataremorehighlyconcentratedthanthegainsinhousingwealth thattookplaceinthe2000s.Third,laterstudiesareunabletoreplicatethefindingsofMakiand Palumbo.Bibow(2010)findsthatthedeclineinthesavingcanbeattributedtohomeowners. WhileBarbaandPivetti(2009)donotpresentempiricalanalysis,Wolff(2010)offersextensive analysisofprimarydata.Hearguesthattheincreaseinhouseholddebtisduemostlytothe attemptsofmiddleclasshouseholdstomaintaintheirconsumptionpositioninthefaceoffallingor stagnatingrealwages.Maintainingsocialstatuswasonlypossiblethroughincreasingdebt. Kennickell(2009)givesanextensiveoverviewoftheresultsofvariouscohortsofSCFdatafrom1989 to2007.Wewillusethisstudytoillustratethedifferentpoints.Table3summarisestheshareof 14

debtheldbydifferentincomegroups.Kennickellgroupsthemintothebottom50%,the5090th percentile,the9095thpercentile,the9599thpercentileandthetoppercentile.Lookingatthe distributionofdebtovertime,theoverallimpressionisoneofstability.(AstheSCFisbasedona smallsample,notallfluctuationsnecessarilyreflectchangesintheunderlyingpopulation.)The bottom90%ofthedistributionhad74.9%ofallhouseholddebtin1989and73.3%in2007. Table3[debtbyincomegroup.] Debthastobeservicedoutofcurrentincome.Andthedistributionofcurrentincomehadchanged intherelevantperiod.Table4thussummarisesthedebttoincomeratiobyincomegroup.This givesaverydifferentpicture.Thereisacleartrend:relativetoincome,debthasincreasedmore sharplyinlowerincomegroups.Thedebttoincomeratioforthebottom50%increasedfrom61% (1989)to137%(2007);forthenext40percentilesitincreasedfrom81%to148%;whilethedebtto incomeratiosalsoincreasedforthetop10%oftheincomedistribution,thedynamicwasamuch weakerone. Table4[debttoincomebyincomegroup.] Thuswhilethedistributionofdebthasremainedratherstable,debtrelativetoincomehasincreased moreforlowerincomegroups.Inthissensethehypothesisthatlowerincomegroupshavebeen drivenintodebtbyfallingwages(andsocialservices)isconsistentwiththedata. Channel4.Risinginequalityhasincreasedthepropensitytospeculate. Thereisawidespreadperceptionthatincreasinginequality,andinparticularthegrowthofsmall groupofsuperrichindividualshascontributedtothetotalpropensitytospeculate.Theintuition behindthisperceptionisthat,withincreasingincome,theconsumptionpossibilitiesgetexhausted andspeculativeuseofwealthincreases.ForexampleHuffschmied(2002),arguesthatincreasing inequalityhasresultedinexcessliquiditythathashadaninflationaryeffectonthepricesof financialassets.Thetermexcessliquidityissomewhatconfusinginthiscontext,buttheintuitionis

15

clearenough:becauseofthegrowthofthesuperrichthereisanincreasedvolumeofwealththatis lookingforriskyinvestment. However,therearefewempiricalstudiesonthistopic.Thisisduetoconceptualaswellasempirical difficulties.Conceptuallyitisdifficulttooperationalisetheconceptofspeculation.Weusetheterm pragmatically,inthesenseofriskyinvestmentstrategies.Empiricallytheproblemisthatdata availabilityonwealthdistributionisextremelypoor. SCFdataconfirmsthatrichhouseholdholdriskierassets.In2007thetop10%oftheincomeheld 60.5%oftheholdingsofchecking,savings,moneymarketandcallaccountsand50.3%ofthe holdingsofcertificatesofdeposits,but90.4%ofdirectholdingsofstocksand87.9%ofbonds,51.9% ofmutualfundsandhedgefunds(Kennickell2009,FigureA3a).Thislendsitselftotheconclusion thatashiftinwealthdistributioninfavouroftherichwouldalsoresultinashifttowardsriskier portfoliosoffinancialassets.Thingsaremorecomplicatedasregardswithregardtononfinancial wealth:principalresidencesarethelargestformofnonfinancialwealthandthebottom90%hold (in2007)61.5%ofthatwealthandtheyhaveturnedouttobequiteariskyasset. PhotisLysandrou(2011)shedslightonaparticularmechanismbywhichrising(wealth)inequality hascontributedtothecrisis.Lysandrouarguesthat,firstly,thecrisisbrokeoutinthemarketfor derivativesonsubprimeloans.Second,thismarketsegmentdevelopedsosubstantiallybecause hedgefundsdemandedthesehighriskand(atthetimeitseemed)highreturnassets.Theseassets arenotofftheshelf,butwerecreatedbyinvestmentbankstofitthedemandsofhedgefunds. Third,hedgefundsarebyandlargeaninvestmentvehicleforthesuperrich(atalaterstage institutionalinvestorsincreasinglyinvestedinhedgefunds):thechiefdrivingforcebehindthe creationofthestructuredcreditproductsthattriggeredthecrisiswasaglobalexcessdemandfor investablesecuritiesandthatkeytothebuildupofthisexcessdemandwasthehugeaccumulation ofprivatewealth(Lysandrou2011,3). HedgefundsheldabouthalfofallCDOs(Lysandrou2011,Fig9).Theassetsmanagedbyhedgefunds growfourfoldbetween2000and2007,whichexplainedtheirstrongdemandforexoticfinancial instruments.Becauseoftheirhighminimuminvestmentrequirementshedgefundsareprimarilyfor superrichindividuals(highnetwealthindividuals)and,morerecently,institutionalinvestors,which wanttoholdsomehighriskassets.Whereashedgefundswereessentiallycateringrichindividualsin 2000,by2007almosthalfoftheirassetscamefrominstitutionalinvestors.Lysandrouidentifiesthe superrichaswhatiscalledHighNetWealthIndividuals(HNWI),whoownnetwealthofmorethana millionUS$.HNWIownaboutonefifthofallfinancialassets,butmorethanhalfofalternative

16

investmentassets,whichincludeCDOsandotherderivatives(Lysandrou2011,Tab1).Lysandrou concludes:Amajorpolicyimplicationthatfollowsfromtheaboveanalysisisthattheworlds wealthhastobemoreequitablydistributedifglobalfinancialcrisesaretobeavoided(Lysandrou 2011,22). 6.Conclusion Thispaperhasinvestigatedthequestionwhetherrisinginequalityhascontributedtotheimbalances thateruptedinthepresentcrisis,inotherwords,whetherrisinginequalityisacauseofthecrisis. Wehavediscussedfourchannelsthroughwhichinequalitymayhavecontributed.Thisisnottobe understoodasanalternativetofinancialfactors,butasacomplementaryexplanationthathighlights theinteractionoffinancialandsocialfactors.First,increasinginequalityleadspotentiallytoa stagnationofdemand,sincelowerincomegroupshavehigherconsumptionpropensity.Second, countriesdevelopedtwoalternativestrategiestodealwiththisshortfallofdemand.IntheEnglish speakingcountries(andinMediterraneancountries),adebtledgrowthmodelemerged,incontrast withtheexportledgrowthmodelincountriessuchasGermany,JapanorChina.Thesetwogrowth modelsbecamefeasiblebecausefinancialliberalisationofinternationalcapitalflowsallowedfor unprecedentedinternationalimbalances.Third,indebtledcountriesrisinginequalitycontributed tothegrowthofdebtasthepoorhaveincreasedtheirdebtlevelsrelativetoincomefasterthanthe rich.FortheUSAthiscanbeclearlyseenindebttoincomeratiosfordifferentincomegroups. Financializationhasmeantdebtgrowthinsteadofwagegrowth.Thisgrowthmodelthatisnot sustainable.Fourth,increasinginequalityhasincreasedthepropensitytospeculate,i.e.ithasledto ashifttomoreriskyfinancialassets.Oneparticularaspectofthesedevelopmentsisthatsubprime derivatives,thesegmentwherethefinancialcrisisbrokeoutin2008,weredevelopedtocatertothe demandsofhedgefundsthatmanagetheassetsofthesuperrich.Increasinginequalityhasthus playedaroleintheoriginoftheimbalancesthateruptedinthecrisisaswellasinthedemandfor theveryassetsinwhichthecrisisbrokeout.Ourconclusionthatincreasinginequality,ininteraction withfinancialderegulation,shouldbeseenasrootcausesofthecrisis.Figure6summarisesour argumentgraphically. Figure6.Risinginequalityandthecausesofcrisis

17

Thisargumenthasdirectimplicationsforeconomicpolicy.Abroadconsensusexiststhatfinancial reformisnecessarytoavertsimilarcrisesinthefuture(eveniflittlehasyetchangedinthe regulationoffinancialmarkets).Theanalysisherehighlightsthatincomedistributionwillhavetobe acentralconsiderationinpoliciesdealingwithdomesticandinternationalmacroeconomic stabilisation.Theavoidanceofcrisessimilartotherecentoneandthegenerationofstablegrowth regimeswillinvolvesimultaneousconsiderationofincomeandwealthdistribution,financial regulationandaggregatedemand.Itisthisfirstelementthedistributionofincomeandwealth thathasnotconventionallybeenincorporatedinmacroeconomicanalysis.Putmorebluntly, creatingamoreequalsocietyisnotaneconomicluxurythatcanbetakencareofafterthereal issues,suchasfinancialregulation,havebeensortedout.Rather,afarmoreequitabledistribution ofincomeandwealththanpresentlyexistswouldbeanessentialaspectofastablegrowthregime: wagegrowthisapreconditionofanincreaseinconsumptionthatdoesnotrelyonthegrowthof debt.Andfinancialassetsarelesslikelytobeusedforspeculationifwealthismorebroadly distributed. Amoreequitabledistributionofincomeandwealthwillinvolvechangesintaxaswellasinwage policy.Reformedtaxpolicieswillincludeincreasesinupperincometaxrates,risesinwealthtaxes andtheclosureoftaxloopholesandoftaxhavens(Shaxson2011).Intheareaofwagepolicyfar reachingchangesarenecessary.Presentpolicyprescriptionsaimatcuttingwagesinarecession.But higherwagegrowthisanecessaryaspectofabalancedeconomy.Itcanonlybeachievedby strengtheningoflabourunionandcollectivebargainingstructures. 7.References
Atkinson, A, Piketty, T, Saez, E, 2011. Top Incomes in the Long Run of History. Journal of Economic Literature 49(1): 371 Barba, A, Pivetti, M, 2009. Rising household debt: Its causes and macroeconomic implicationsa long-period analysis. Cambridge Journal of Economics 33, 113-37 Becker, J. (2002): Akkumulation, Regulation Territorium. Zur kritischen Rekonstruktion der franzsischen Regulationstheorie. Marburg: Metropolis Verlag Beigewum, Attac sterreich 2010. Mythen der Krise: Einsprche gegen falsche Lehren aus dem groen Crash. Hamburg: VSA Verlag Bernanke, Ben, 2005. The Global Saving Glut and the U.S. Current Account Deficit. Speech by Ben Bernanke at the Sandridge Lecture, Virginia Association of Economists, Richmond, Virginia http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/ Bibow, J. (2010): Financialization of the U.S. household sector: The subprime mortgage crisis in U.S. and global perspective, IMK Studies 3/2010 Borio, C, Disyatat, P. 2011. Global imbalances and the financial crisis: Link or no link? BIS Working Paper 346 Brenke, Karl, 2011. Einkommensumverteilung schwcht privaten Verbrauch. Wochenberichte des DIW Berlin Nr 8/2011, 2-12

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Brenner, R. (2003): The boom and the bubble. London: Verso Cynamon, B., Fazzari, S. (2009): Household debt in the consumer age: source of growth risk of collapse. Capitalism and Society, 3 (2), Art 3 http://www.bepress.com/cas/vol3/iss2/art3/ Eggert, W, Krieger, T, 2009. Home Ownership als Substitut fr Sozialpolitik. Zum Entstehen der Finanzkrise in den USA. Wirtschaftsdienst 6/2009, 390-96 Eichengreen, Barry, 2010. Irelands reparations burden. [original appeared as Jmmerliches Versagen, Handelsblatt, 1 Dec 2010] http://www.irisheconomy.ie/index.php/2010/12/01/barryeichengreen-on-the-irish-bailout/ (accessed 21 Jan 2011) Ertrk, Ismail, Julie Froud, Sukhdev Johal, Adam Leaver, and Karel Williams (eds.) 2008. Financialization At Work. Key Texts and Commentary. London: Routledge European Commission 2007. The labour income share in the European Union. Chapter 5 of: Employment in Europe, pp. 237-72 Fitoussi, J.-P./Stiglitz, J. E. (2009): The Ways Out of the Crisis and the Building of a More Cohesive World, OFCE Document de travail, 17 Girouard, N, Kennedy M, Andr, C, (2006) Has the rise in debt made households more vulnerable? OECD Economics Working Paper 535 (ECO/WKP(2006)63) Glyn, A. (2006). Capitalism unleashed: Finance, Globalization and Welfare. Oxford University Press. Harrison, A, 2002. Has globalization eroded labors share? Some cross-country evidence, Mimeo, UC Berkeley. Harvey, D. (2005): A Short History of Neoliberalism. Oxford: Oxford University Press Hein, E. Mundt, M. 2012. Financialisation and the requirements and potentials for wage-led recovery a review focussing on the G20. Paper written for the project New perspectives on wages and economic growth: the potentials of wage-led growth. Hein, E., Vogel, L. (2008): Distribution and growth reconsidered empirical results for Austria, France, Germany, the Netherlands, the UK and the USA. Cambridge Journal of Economics, 32 (3), 479-511 Horn, G, Sturn, S, van Treeck, T, 2010. Die Debatte um die deutsche Exportorientierung. Wirtschaftsdienst 1/2010, 22-28 Horn, G, van Treeck, T, 2011. Ungleichheit und aussenwirtschaftliche Ungleichgewichte. Eine Keynesiansiche Erklrung. In: Tagungsband zur Tagung der Keynes-Gesellschaft 2010, im Erscheinen Horn, Gustav A. / Drge, Katharina / Sturn, Simon / van Treeck, Till / Zwiener, Rudolf (2009) Von der Finanzkrise zur Wirtschaftskrise (III). Die Rolle der Ungleichheit. IMK Report, Nr. 41, September 2009. http://www.boeckler.de/show_product_imk.html?productfile=HBS-004487.xml Huffschmied, Jrg, 2002. Politische konomie der Finanzmrkte. Aktualisierte und erweiterte Auflage. Hamburg: VSA Verlag ILO, 2008. World of Work Report 2008. Income inequalities in the age of financial globalization. Geneva: ILO IMF (2006) The Influence of Credit Derivative and Structured Credit Markets on Financial Stability. Chapter 2 of: Global Financial Stability Report 2006 April IMF, 2007a. The globalization of labor. Chapter 5 of World Economic Outlook April 2007. Washington: IMF IMF, 2007b. Globalization and inequality. Chapter 4 of World Economic Outlook, Oct 2007 Jayadev, A, 2007. Capital account openness and the labour share of income. Cambridge Journal of Economics 31, 423-443 Kennickell, Arthur, 2009. Ponds and streams: Wealth and income in the U.S., 1989 to 2007. Federal Reserve Board Finance and Economics Discussion Series 2009-13 Livingston, James, 2009. Their Great Depression and ours. Challenge 52, 3, 34-51 Lysandrou, Photis, 2009. Global Inequality and the Global Financial Crisis: The New Transmission Mechanism. Paper presented at the conference The World Economy in Crisis The Return of Keynesianism?, Berlin Oct 2009 Lysandrou, Photis, 2011. Global inequality, wealth concentration and the subprime crisis: a Marxian commodity theory analysis. Development and Change 42, 1, 183-208 Maki, D, Palumbo, M, 2001 Disentangling the Wealth Effect: A Cohort Analysis of Household Saving in the 1990s, Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series, 2001-21.

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Naastepad, R, Storm, S (2006/07), OECD demand regimes (1960-2000), Journal of Post-Keynesian Economics 29 (2): 213-248 OECD 2008. Growing unequal? Income distribution and poverty in OECD countries. Paris: OECD Onaran, . (2009): Wage share, globalization, and crisis: The case of manufacturing industry in Korea, Mexico, and Turkey, International Review of Applied Economics, 23(2), 113-134 Onaran, ., Galanis, G. 2012. Wage-led and profit-led demand: a global mapping. Paper written for the project New perspectives on wages and economic growth: the potentials of wage-led growth. Piketty, T, Saez, E, 2003. Income inequality in the United States, 1913-1998. Quarterly Journal of Economics, 118 (1): 1-39 Piketty, T, Saez, E, 2007. Income inequality in the United States, 1913-1998. In: A.B. Atkinson and T. Piketty (eds.): Top Incomes in a Global Perspective, Oxford University Press Rajan, Raghuram, 2010. Fault Lines. How Hidden Fractures Still Threaten the World Economy. Princeton: Princeton University Press Reinhart, C, Reinhart, V, 2008. Capital Flow Bonanzas: An Encompassing View of the Past and Present. NBER Working Paper No. W14321 Rodrik, D, 1998. Capital mobility and labor. Manuscript. http://ksghome.harvard.edu/~drodrik/capitalm.pdf Roubini, N, Mihm, S, 2010. Crisis Economics: A Crash Course in the Future. New York: Penguin Shaxson, Nicholas, 2011. Treasure Island. Tax havens and the Men Who Stole the World. London: Ransom House Stein, Ulrike, 2009. Zur Entwicklung der Sparquoten der privaten Haushalte - eine Auswertung von Haushaltsdaten des SOEP. IMK Working Paper 10-2009 Stiglitz, Joseph (2009). Freefall: Free Markets, and the Sinking of the World Economy, New York: Norton & Co Stockhammer, E (2011). Wage-led growth. An introduction. International Journal of Labour Research 3 (2): 167-188 Stockhammer, E, 2011. Peripheral Europes debt and German wages. International Journal for Public Policy 7 (1-3): 83-96 Stockhammer, E, 2012. Financialization, income distribution and the crisis. Investigacin Econmica forthcoming Stockhammer, E, Onaran, and Ederer, S. (2009) Functional income distribution and aggregate demand in the Euro area. Cambridge Journal of Economics 33 (1): 139-159 Stockhammer, E, Stehrer, R, 2011.Goodwin or Kalecki in demand? Functional income distribution and aggregate demand in the short run. Review of Radical Political Economics 43(4), 506522 Stockhammer, E. (2009): Determinants of functional income distribution in OECD countries. IMK Studies, Nr. 5/2009 . Dsseldorf 2009. Stockhammer, E. 2012. Decline in wage share: causes and prospects. Paper written for the project New perspectives on wages and economic growth: the potentials of wage-led growth. Wade, Robert, 2009. The global slump. Deeper causes and harder lessons. Challenge 52, 5, 5-24 Wolff, Edward, 2010. Recent trends in household wealth in the United States: Rising debt and the middle-class squeezeAn Update to 2007. Levy Economics Institute Working Paper 589

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 FiguresandTables Figure1.Thestandardviewofthecrisis

Financial deregulation

Rising household debt Bubbleson financialand realestate markets

Debtled growth

Currentaccount deficits capitalinflows

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Figure2.Adjustedwageshareinmajoreconomies
Adjusted wage share
80 78 76 74 72 70 68 66 64 62 60

USA UK Germany France Japan

19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

Source:AMECO3

http://ec.europa.eu/economy_finance/db_indicators/ameco/index_en.htm
22

Figure3.Incomeshareofthetop1%oftheincomedistributioninUSA,UK,France,Swedenand Japan
25 20 15 10 5 0 1886 1894 1902 1910 1918 1926 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006 France Japan Sweden UnitedKingdom UnitedStates

Note: There is a (minor) break in the UK series in 1990. Source: Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, The World Top Incomes Database, http://g-mond.parisschoolofeconomics.eu/topincomes [access 24/2/2012]

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Figure4.Standarddeviationofthecurrentaccountas%ofGDPacrossOECDcountries
Standard deviation of current account as % of GDP across OECD countries
0.12

0.1

0.08

0.06

0.04

0.02

0
19 60 19 66 19 68 19 74 19 82 19 90 19 96 19 98 20 04 19 64 19 62 2 19 70 8 19 80 19 76 19 84 19 86 19 94 19 78 19 92 20 00 2 20 06 19 7 19 8 20 0

Source:AMECO

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Figure5.ConsumptionasashareoffinaldemandintheUSA,UK,Germany,FranceandJapan
Consumption to final demand ratio
0.6 0.63 0.62 0.55 0.61 0.6 0.5 0.59 0.45 0.58 0.57 0.4 0.56 0.55 0.35 0.54 0.3
19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08

UK Germany France Japan USA

0.53

Note. All countries except USA left scale; USA right scale

Source:AMECO

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Figure6.Risinginequalityandfinancialderegulationascausesofthecrisis

Risinginequality

Stagnantdomesticdemand

Twogrowthmodels

Financial deregulation

Rising household debt Bubbleson financialand realestate markets

Debtled growth

Exportled growth

Currentaccount deficits capitalinflows

Currentaccount surpluses Capitaloutflows

26

Table1.Debtledandexportledgrowthmodelsincoreandperiphery
Core Periphery Debtled USA,UK Greece,Ireland,Portugal,Spain Growthmodel Exportled Germany,Austria,Japan China

27

 Table2.Householddebt(in%ofGDP) Householddebt(in%ofGDP) Change2000 08 26.13 32.27 62.71 35.46 33.84 27.38 18.32 11.71 7.91 2.94 32.83

2000 2008 USA 70.21 96.35 United Kingdom 75.16 107.43 Ireland 51.55 114.26 Greece 19.83 55.29 Spain 54.22 88.06 Portugal 74.96 102.34 Italy 35.29 53.61 Germany 73.41 61.70 Austria 47.13 55.04 Switzerland 74.76 77.70 Netherlands 86.98 119.81 Note:Ireland200108 Source:Eurostat,expectUSA(FlowsofFunds)

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 Table3.Debtsharesbyincomegroup,USA19892007 Percentileofthedistributionoffamilynetworth 050 5090 9095 9599 99100 1989 23.4 51.5 9.9 9.8 5.4 1992 25.7 46.7 9.1 12.4 6.1 1995 30.4 45.9 8.6 9 6.1 28.8 45.3 8.2 12.2 5.5 1998 2001 26 48 8.6 11.5 5.9 2004 24.2 48.6 8.3 11.5 7.3 2007 26.7 46.6 7.7 13.7 5.3 Source:Kennickell(2009)

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Table4.Debttoincomebyincomegroups,USA19892007 Percentileofthedistributionoffamilynetworth 050 5090 9095 9599 99100 1989 0.61 0.81 0.71 0.5 0.25 1992 0.72 0.88 0.8 0.77 0.57 1995 0.89 0.92 0.77 0.67 0.43 1998 1 0.97 0.92 0.81 0.4 2001 0.89 0.99 0.73 0.59 0.32 2004 1.14 1.36 1.1 0.91 0.6 2007 1.37 1.48 1.07 0.95 0.37 Source:Kennickell(2009)

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Table5.Distributionoffinancialassetsacrossincomegroups,USA2007 Holdingsofchecking,savings,money market,andcallaccounts Holdingsofcertificatesofdeposit Directholdingsofpubliclytradedstocks Mutualfundsotherthanmoneymarket mutualfunds,andhedgefunds Source:Kennickel(2009),TableA3a Percentileofthedistributionoffamilynetworth 050 5090 9095 9599 99100 6.5 3.1 0.6 0.4 33 46.6 9 11.6 11.4 11.5 8 10.3 26.2 23.7 30.5 30.9 22.9 15.1 51.9 46.7

31