Recently there have been a spate of articles in the most of the major publications about either the effects of the financial crisis or its cause. This NY Times article is the latest in a long line of them.
The article is about the research of David Moss who found that income inequality — the gap between the share of national income accruing to the top 10% and the bottom 10% — is positively correlated with both deregulation and financial crises. In particular, he suggests that when the top 10% exceed 49% of national income/ when the top 1% exceed 24% of national income, we should observe both some kind of economic crisis and deregulation.
From the article: “Income disparities before that crisis and before the recent [crisis] were the greatest in approximately the last 100 years. In 1928, the top 10 percent of earners received 49.29 percent of total income. In 2007, the top 10 percentearned a strikingly similar percentage: 49.74 percent. In 1928, the top 1percent received 23.94 percent of income. In 2007, those earners received23.5 percent. Mr. Moss and his colleagues want to know if huge gaps inincome create perverse incentives that put the financial system at risk. Ifso, their findings could become an argument for tax and social policiesaimed at closing the income gap and for greater regulation of Wall Street.”
This is a very interesting line of questioning, but, ultimately, it raises more questions than it answers about our economy and our politics.
I suppose what I would like to see is a line graph that depicts on the Y-axis (% of total income received by the top 1%) and on the X-axis (Years in 5 year intervals since 1900 -2010) with notations for every recession or depression during that time period. [Note that this graph, on the White House website, begins to get at this.]
I would specifically want to know how many times has the top 1% exceeded 22% of national income, and were there ever times in which that disparity was achieved and there was not a recession/depression/de-regulation.
Other interesting bits of information would be: (a) what is the cut-off for the top 1% in real 2009 US dollars by year of analysis (i.e. does the cut off for the top 1% change over time and if so how quickly), (b) a theory of preferences by income distribution (that is how do the strategies of the “poor” and the “wealthy” shift through periods of extreme equity and extreme inequality. Are those preferences themselves stable?)
In the emerging debate on the last financial crisis, a popular if somewhat uncharitable position is that the expansion of credit allowed many non-credit worthy family units to take on debt that they ultimately could not finance. Once most of these (poor) people defaulted on their debt, this fueled the collapse of the housing bubble, and with it, the broader economy via the (speculative) derivatives markets based on that debt and that debt’s insurance.
This story of the financial collapse, however, begs two important questions that this study could help answer. Let’s take the expansion of credit to be exogenous to this story. One, why did the expansion of credit necessarily lead the poor to take on debt they could not support, particularly in the form of home “ownership”? (We know, for instance, that most American households are in debt from three principal sources: (a) education loans, (b) mortgages, and (c) health care related costs.) The typical answer is that these folks didn’t know better but that in turn begs the second question.
Two, why did the poor taking advantage of the expansion of credit fuel a speculative market based on debt and insurance? The actions of the poor may have enabled this, but, ultimately various institutions of capital had to pour the resources into the bubble. Generally this question remains un-addressed in the ‘unworthy poor people’ story of the financial collapse.