IPE in the news:
- Chris Dillow on “Inequality and the crisis“
- Kemal Dervis on “The Inequality Trap” in a macroeconomic sense.
- Sebastian Mallaby on how “Inequality may lead to rage against the machines” – skill-biased technological change against anyone who can’t make or program a computer?
- Robert Frank arguing that “The Prestige Chase Is Raising College Costs“
- James Kwak asking “Who’s a freeloader?“, and contrasting Tea Party logic and welfare-as-insurance in the process.
This is the updated reading list for the final class of PO4730.
4.9 Inequality and the Financial Crisis
For this ﬁnal topic, we will look at the relationships between economic inequality and the ﬁnancial crisis that has unfolded since around 2007/2008. The sovereign debt crises that have emerged from the original private sector ﬁnancial problems have had large impacts on public expenditure — and so redistributive programmes. However, it has also been argued that inequality itself was an important cause of the original ﬁnancial crisis in the USA. We will examine these issues. N.B. Readings may be updated at a later date for this topic as scholarly work in this ﬁeld is still emerging.
Shorter/Popular Readings (Required)
- The Economist (2011). The beautiful and the damned. January 20th.
- The Economist (2010e). What’s income inequality got to do with it?. Democracy in America Blog. August 26th.
- The Economist (2010c). How inequality fueled the crisis. Free Exchange Blog. August 26th.
- The Economist (2010a). How egalitarian policy fueled the crisis. Democracy in America Blog. August 26th.
- The Economist (2010b). How exactly did inequality fuel the crisis?. Democracy in America Blog. August 27th.
- Rajan, Raghuram G. (2010). Fault Lines: How Hidden Fractures Still Threaten the World Economy. Princeton University Press, Princeton, NJ, Introduction and Chapter 1
- Krugman, Paul and Wells, Robin (2010a). The Slump Goes On: Why? New York Review of Books.
- Krugman, Paul and Wells, Robin (2010b). The Way Out of the Slump. New York Review of Books.
- Atkinson, A. B. and Morelli, Salvatore (2011). Economic Crises and Inequality. Paper prepared for the 2011 Human Development Report, funded by the United Nations Development Programme.
- Honohan, Patrick (2009). What Went Wrong in Ireland? Paper prepared for the World Bank.
- Bordo, Michael D. and Meissner, Christopher M. (2012). Does Inequality Lead to a Financial Crisis? NBER Working Paper 17896.
- This American Life (2009a). Episode 375: Bad Bank. WBEZ Radio.
- This American Life (2009b). Episode 382: The Watchmen. WBEZ Radio.
- This American Life (2009c). Episode 390: Return to the Giant Pool of Money. WBEZ Radio.
- This American Life (2010). Episode 418: Toxie. WBEZ Radio.
- * Mian, Atif, Suﬁ, Amir, and Trebbi, Francesco (2010). The Political Economy of the Sub-prime Mortgage Credit Expansion. NBER Working Paper No. 16107.
Cardinal Keith O’Brien has been saying some things about gay marriage. At the risk of ‘indulging madness’…
I was just working on the European Election Study data from 2009 (for wholly unrelated reasons). It turns out they asked respondents to indicate whether they agree or disagree with the statement, “Same-sex marriages should be prohibited by law”. Some very quick code with Stata yielded the following figure.
This is very rough – e.g. I don’t account for survey weighting as it’s just made by one line of code. I suppose the question may seem a little biased, but it seems like the populations of about half the EU member states, on average, didn’t share Keith O’Brien’s policy conclusion in 2009.
This is not my field, so that is all.
There’s quite a lot written these days about the structural failings of the Euro. The failure to back a common currency with a common treasury (of some sort). The failure to Europeanise banking sector insurance and regulation. The failure to block political desires from trumping economic sense when it came to admission of ‘Mediterranean’ Eurozone members.
Setting those aside, I’ve not really read too much along the lines of the ECB inflation target being ‘structurally’ too low. But that makes sense, no?
If we operate in a system in which ‘external’ (aka currency) devaluation is impossible, then we must rely on ‘internal’ devaluation. It turns out that’s really hard. Prices and especially wages are rather sticky in the downward direction. The result is that rebalancing comes in the form of unemployment, and so reduced economic output. That’s bad. It’s particularly bad if a country has debts to service from that economic output.
Welcome to the Eurozone periphery.
If the fundamental problem is that prices and wages need to be revalued across Eurozone countries, then a higher ECB inflation target would seem to make a lot of sense. David McWilliams says that Ireland needs to devalue by 30% compared to Germany. Let’s assume that downward stickiness puts a 0% lower bound on inflation, which Ireland hits because things are pretty rough here, while German inflation is on ECB target. With the 2% (or less!) target set by the ECB, it’ll take about 15 years for the rebalancing of prices to work through. With, say, a 5% ECB target, it’d take about 6 years. Dating the start of the Irish crisis at summer 2008, by now, we’d be over half way to a full rebalancing under the higher inflation target.
I’m really not sure why a higher inflation target isn’t on the agenda, even. Is it because it’s so politically impossible for Germany? Maybe. Other things that were previously politically impossible for Germany are now on the agenda or even implemented, though. Sovereign bailouts. Private sector losses on sovereign debt (before 2013). Eurobonds (if you’re a German Social Democrat, at least). Probably other things I’m forgetting.
So, it’s a question rather than an answer that I have here: why isn’t a higher inflation target even remotely on the Eurozone agenda? I guess I should start looking for some data on this.
P.s. Jörg Bibow makes clear that a higher inflation target would not have (necessarily) stopped the crisis from developing.
It is unhelpful to deny the ultimate cause of the euro bust: Germany’s reneging on the golden rule of a monetary union, commitment to a common inflation rate. Germany’s Über-competitiveness, obtained by wage disinflation rather than productivity gains, bankrupted its partners.
The point is that it seems like it would mitigate the costs in a fairly positive-sum kind of a way.