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Causes, Costs, and Alternatives
Economists consider the link between rising inequality and economic instability
Two primary causes of depressions1. Concentration of WealthExploitation
2. Blockages in the circulation of money
“Rolling” of money
Spreads crisis
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
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 -0.155758 0.088834 -1.753358 0.0819
TOPSHARE -0.006128 0.001435 -4.269316 0.0000
CURRENCYCRISIS 0.004792 0.014668 0.326711 0.7444
DEBTCRISIS 0.018260 0.031538 0.578981 0.5636
STOCKMKTCRASH 0.011438 0.013044 0.876893 0.3822
BANKCRISIS -0.007440 0.014561 -0.510936 0.6103
INFLCRISIS -0.053885 0.018865 -2.856326 0.0050
LIFEEXPECT2000 0.002331 0.001339 1.741151 0.0840
YRSSCHOOL2000 -0.002049 0.003330 -0.615096 0.5396
R-squared 0.244224 Mean dependent var -0.067373
Adjusted R-squared 0.197714 S.D. dependent var 0.078209
S.E. of regression 0.070052 Akaike info criterion -2.416597
Sum squared resid 0.637949 Schwarz criterion -2.226595
Log likelihood 176.9535 F-statistic 5.251069
Durbin-Watson stat 1.786557 Prob(F-statistic) 0.000011
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
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 resources from the rest of the
economy• Talent goes to financial sector
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
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 incomes rather than lay-off in downturns
• Co-ops limit income inequality
Investment is community-determinedAutomation brings leisure, not
unemploymentGovernment policy of 100% employment
Unemployment Spain:
• 26%
Basque Region:
• 15%