Income Inequality and Wealth Concentration in the Recent Crisis

Abstract

This article shows that the increase of income inequality and global wealth concentration was an important driver for the financial and Eurozone crisis. The high levels of income inequality resulted in balance of payment imbalances and growing debt levels. Rising wealth concentration contributed to the crisis because the increasing asset demand from the rich played a key role in the growth of the structured credit market and enabled poor and middle-income households to accumulate increasing amounts of debt. This analysis thereby puts both income and wealth inequality at the epicentre of the recent crisis, and as crucial for social scientists analysing the causes of the crisis. The authors' findings suggest that the policy response to the crisis should not be limited to financial regulation but must involve policies to address inequality by increasing the bargaining power of labour as well as redistributive tax policies.

An investigation of the effects of income inequality on financial fragility: Evidence from Organization for Economic Co‐operation and Development countries

“…This shows that the dynamics of debt accumulation are interlinked and, hence, the borrowing decisions of households follow a similar pattern with the ones of the private sector (Goda et al, 2017). However, almost every variable exerts a significant effect on the growth rate, thus providing evidence that real GDP growth depends on the decisions of the private sector and households influencing their net debt accumulation.…”

“…As highlighted by the studies of Kumhof et al (2015) and Goda et al (2017), income inequality is reflected by the difference between the earnings of capital and labour; the higher the deviation between these measures, the higher income inequality will tend to be. 34 The results presented by the estimation techniques enhance the robustness of the argument that income inequality significantly affects private sector indebtedness when particular control variables are accounted for.…”

“…Perugini et al (2015) employ the credit-to-GDP ratio as a measure of financial instability arguing that excess credit to the private sector can be a signal of systemic destabilization. For this reason, its formulation is based on the analyses of Kumhof et al (2015) and Goda et al (2017) according to which the top shares of the income distribution consist of capital owners and, hence, of entrepreneurs whose returns are reflected by operating surplus. 19 Moreover, the leverage ratio is expressed in levels and not in growth rates as in the study of Bordo and Meissner (2012), which is one of the main criticisms and, possibly, the reason for the inconclusive outcome between income inequality and financial fragility.…”

Income Inequality in Latin America and Eastern EU through the Great Recession: An Ordered Probit Analysis

“…Furthermore, concentration of savings in top of the distribution is associated with financial deepening and transferring these assets to the rest of population through credits. Since these are less stable this could contribute to likelihood of financial crisis (Goda et al [6]) closing the feedback from inequality to crisis and to growth. Moreover, inequality lowers the capacity of middle and lower income households to contribute to capital accumulation and investment in human capital lowering productivity and long term growth.…”

Secular stagnation and progressive economic policy alternatives

“…In the UK between 1974 and 1979 the top income tax rate in the UK was 83% on incomes above approximately £91,000 in today's prices (£24,000 at 1979's; Onaran, 2015). Another possibility is suggested by Goda et al (2016) to link top income and wealth taxes to median incomes and median wealth holdings, e.g. a top marginal tax rate of 70% for income above 10 times the median income, a top marginal tax rate of 10% on all personal net wealth (excluding primary residence) that is above 100 times the median wealth, and of 90% for all inheritances that are above 100 times the median wealth.…”