Does Income Inequality Explain The Boom?

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THE STASH JULY 16, 2009

Does Income Inequality Explain The Boom?

Ezra Klein thinks the rise in income inequality is closely to tied to the debt boom:

The acceleration in inequality and the acceleration in debt mirror each other pretty closely. Both accelerate in the early-80s. Both flatten a bit in the 90s. Both kick back into gear in the early-Oughts. (There's some divergence around the pop of the tech bubble in 2001, but it's obvious why that would temporarily bring down inequality without easing the pressures that were causing middle-class families to borrow). It would be quite a coincidence if the two were unrelated. But I rather doubt it.

Klein's theory seems to complement another one tracing a link between income inequality and asset bubbles, nicely encapsulated by Justin Fox back in April:

The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.

And taking a look at the following charts showing the top-income shares (that is, the share of income that accrues to the top 1 percent of income-earners) for most of the rich countries around the world, methinks they're onto something:

It's not pure cause-and-effect, but most of the countries that went through a housing bubble (U.S., U.K., Canada, Singapore, Norway, and New Zealand) also saw top- income shares rise -- the exceptions were France and Sweden; perhaps that's the volatility-dampner a strong public sector provides.

(The charts are from a new paper by two Swedish economists, Jesper Roine and Daniel Waldenstr

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