« More than Projected, Less than Feared | Main | Roubini: End of Gloom? »

Thursday, April 16, 2009

"The Asset Bubble Theory of Income Inequality"

Awhile back, I asked "Do large bubbles cause income to become more concentrated, or does the concentration of income cause the bubbles?" There are other possibilities too, causation could be simultaneously and run in both directions, or it could be that there is no causation at all and both bubbles and inequality are driven by a third factor. Justin Fox says he's looked at the data, and the answer is that inequality is driven by bubbles:

The asset bubble theory of income inequality, by Justin Fox: There's been a debate going on for a few years about whether the big rise in income inequality in the U.S. over the past three decades has been at least partly a political phenomenon or purely an economic one. The first camp, whose members include political scientist Larry Bartels and economists Thomas Piketty and Emmanuel Saez (pdf), argues that decisions about taxing and government spending made since the early 1980s have increased the disparity of incomes. The second ... contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn't really something we'd want to stop.

Well now, after looking at the data about the country's 400 highest earners and reading the comments by pneogy and shepherdwong, I am ready to offer an important new theory (well, not entirely new): 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. It's not the same people raking it in every time—there's lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades. ...

    Posted by on Thursday, April 16, 2009 at 12:42 AM in Economics, Equity, Income Distribution, Politics | Permalink  TrackBack (0)  Comments (48)


    TrackBack URL for this entry:

    Listed below are links to weblogs that reference "The Asset Bubble Theory of Income Inequality":


    Feed You can follow this conversation by subscribing to the comment feed for this post.