Posted by: Dirk | February 1, 2013

Stiglitz and Krugman discuss inequality and the crisis

In a recent back and forth, Paul Krugman and Joseph Stiglitz traded thoughts. Stiglitz went first, saying things like:

There are four major reasons inequality is squelching our recovery. The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth.

Second, the hollowing out of the middle class since the 1970s, a phenomenon interrupted only briefly in the 1990s, means that they are unable to invest in their future, by educating themselves and their children and by starting or improving businesses.

Third, the weakness of the middle class is holding back tax receipts, especially because those at the top are so adroit in avoiding taxes and in getting Washington to give them tax breaks.

Fourth, inequality is associated with more frequent and more severe boom-and-bust cycles that make our economy more volatile and vulnerable. Though inequality did not directly cause the crisis, it is no coincidence that the 1920s — the last time inequality of income and wealth in the United States was so high — ended with the Great Crash and the Depression.

Paul Krugman agrees with #2 and #4 but disputes claims #1 and #3. I just looked up Real Personal Consumption Expenditures which is more direct than looking at the savings rate. Consumption seems not to be a problem:

fredgraphPC

The tax issue is something which I also would see not be a pressing concern. Of course the way the system works a budget deficit will result, but this itself does not have to be a problem. Who pays what is about distribution and, yes, you can run an economy where workers built Corvettes. The forth issue is the one I find most interesting. The National Institute of Economic and Social Research discusses the link between inequality and financial problems in the video below.

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