This book tells two stories. First, it shows that rising income inequality played a major role in causing the financial crisis and Great Recession of 2008-2009. While others have argued that rising, indeed surging, household debt in the 1990s and 2000s contributed to the financial collapse, none have related rising household debt to the dramatic rise in income inequality. The rise in household debt was not the result of a rash of luxury, but instead was the effort to maintain consumption despite stagnant incomes. Part of that effort is reflected in the unprecedented drop in the rate of saving ... More

This book tells two stories. First, it shows that rising income inequality played a major role in causing the financial crisis and Great Recession of 2008-2009. While others have argued that rising, indeed surging, household debt in the 1990s and 2000s contributed to the financial collapse, none have related rising household debt to the dramatic rise in income inequality. The rise in household debt was not the result of a rash of luxury, but instead was the effort to maintain consumption despite stagnant incomes. Part of that effort is reflected in the unprecedented drop in the rate of saving from around 10 percent to near zero. It is also reflected in the sharp rise of relative spending on three necessities of a middle class lifestyle -- housing, education, and health. Some of that jump in relative spending was brought about by steep price increases. Their prices were bid up by those whose incomes had skyrocketed. Thus to the usual suspects causing the recession–unsustainable residential mortgage debt, low interest rates, predatory lending and the housing price bubble–income inequality must be included. The second story is that mainstream economists have misunderstood the causes of the recession because they have adhered to a macroeconomic theory that ignores the role of income distribution. Mainstream economic theory maintains that inequality has no impact on macroeconomic outcomes. That view is incorrect and led most economists to ignore the serious consequences of rising inequality, despite the striking parallel with the Great Depression.