Causes, Costs, and Alternatives
Economists consider the link between rising inequality and economic instability
Two

primary causes of
depressions
1. Concentration of Wealth
Exploitation
2. Blockages in the circulation of

money

...
 Political

capture

• Wealthy lobby for
 Tax relief
 Pro-globalization, anti-labor policies
 Deregulation of financia...
Dependent Variable: PCTGDPFALL
Method: Least Squares
Date: 08/04/13 Time: 23:55
Sample: 1 139
Included observations: 139

...
 Poor

neighborhoods targeted for predatory
mortgage lending
• Fraudulent loans (Ninja loans)

• Excessive fees
• Frequen...
/

www.ritholtz.com/blog/2011/12/measuring-the-financial-sector-2
From Simon Johnson, MIT
 Encourages

risk

• Perverse incentives
 Distorts

consumption towards luxury goods
 Predatory towards the poor
 Robs...
 920

suicides
 648 Homicides
 20,240 fatal heart attacks or strokes
 494 deaths from liver cirrhosis
 4227 admission...
CBO February 5, 2013
Source: Reifschneider, Wascher, and Wilcox, Figure 1.1. From Federal Reserve
 Co-op-based economy inherently stable
• Locally-based, resistant to international contagion.
• Co-op workers reduce inco...
 Unemployment

Spain:

• 26%
 Basque

• 15%

Region:
Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman
Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman
Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman
Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman
Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman
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Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman

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  • Notice how the share of the nation’s income going to the top 10% increases sharply just before the stock market crash preceding the Great Depression and in 2007, just before the financial crisis and the Great Recession.
  • U.S. housing policy: throw poor to loan sharks. Irony of rich rigging economy in their favor.
  • 2003-2006 increase in MIT grads going into finance 13% to 25%. Harvard MBAs at 34%, down from 40% before recession. Concern from Nobel prize winning economists, Robert Solow and Robert Schiller
  • Explain, due to lost investment, long term unemployed lose skills, many drop out of the labor force, are no longer productive
  • Investment: no bubbles Less spending out of insecurity, keeping up with Joneses
  • Desigualdades e Desastre Económico – Novas Evidências - Mark Friedman

    1. 1. Causes, Costs, and Alternatives
    2. 2. Economists consider the link between rising inequality and economic instability
    3. 3. Two primary causes of depressions 1. Concentration of Wealth Exploitation 2. Blockages in the circulation of money   “Rolling” of money Spreads crisis
    4. 4.  Political capture • Wealthy lobby for  Tax relief  Pro-globalization, anti-labor policies  Deregulation of financial industry  Stagnant or declining average wages • Borrowing to maintain consumption  Greater risk preference for rich
    5. 5. Dependent Variable: PCTGDPFALL Method: Least Squares Date: 08/04/13 Time: 23:55 Sample: 1 139 Included observations: 139 Variable Coefficient Std. Error t-Statistic Prob. C TOPSHARE CURRENCYCRISIS DEBTCRISIS STOCKMKTCRASH BANKCRISIS INFLCRISIS LIFEEXPECT2000 YRSSCHOOL2000 -0.155758 -0.006128 0.004792 0.018260 0.011438 -0.007440 -0.053885 0.002331 -0.002049 0.088834 0.001435 0.014668 0.031538 0.013044 0.014561 0.018865 0.001339 0.003330 -1.753358 -4.269316 0.326711 0.578981 0.876893 -0.510936 -2.856326 1.741151 -0.615096 0.0819 0.0000 0.7444 0.5636 0.3822 0.6103 0.0050 0.0840 0.5396 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat 0.244224 0.197714 0.070052 0.637949 176.9535 1.786557 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) -0.067373 0.078209 -2.416597 -2.226595 5.251069 0.000011
    6. 6.  Poor neighborhoods targeted for predatory mortgage lending • Fraudulent loans (Ninja loans) • Excessive fees • Frequent refinacing • Fraudulent foreclosures  Encouraged by biggest banks and gov’t  No criminal convictions yet
    7. 7. / www.ritholtz.com/blog/2011/12/measuring-the-financial-sector-2
    8. 8. From Simon Johnson, MIT
    9. 9.  Encourages risk • Perverse incentives  Distorts consumption towards luxury goods  Predatory towards the poor  Robs resources from the rest of the economy • Talent goes to financial sector
    10. 10.  920 suicides  648 Homicides  20,240 fatal heart attacks or strokes  494 deaths from liver cirrhosis  4227 admissions to mental hospitals  3340 admissions to state prisons *Brenner, 1976
    11. 11. CBO February 5, 2013
    12. 12. Source: Reifschneider, Wascher, and Wilcox, Figure 1.1. From Federal Reserve
    13. 13.  Co-op-based economy inherently stable • Locally-based, resistant to international contagion. • Co-op workers reduce incomes rather than lay-off in downturns • Co-ops limit income inequality  Investment is community-determined  Automation brings leisure, not unemployment  Government policy of 100% employment
    14. 14.  Unemployment Spain: • 26%  Basque • 15% Region:

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