Posted by: Dirk | November 19, 2015

Income inequality and the Great Depression II

More than five years ago (actually, six) I had wondered whether it is a coincidence that inequality in the US hit a peak in 1929 and 2007. While I did not have time to follow-up on this with an academic paper, Christian Belabed of the IMK just did. Here is his abstract:

There is a growing literature comparing the current financial crisis or Great Recession to the worst economic crisis of capitalism, the Great Depression. However, the role of rising income inequality, which has risen dramatically before both crises, is rarely discussed. In this paper we discuss the rise of top-end inequality and its effects on household consumption, saving, and debt for the 1920s by applying a non-standard theory of consumption, the relative income hypothesis, to the period of interest. We argue that income inequality is linked to the increase of household consumption and the simultaneous decline of household savings as well as rapidly increasing household debt. Thus, the rise of top-end inequality in connection with a broader institutional change, such as the deregulation of financial markets, has contributed to a build-up of financial and macroeconomic instability, in the period leading to the Great Depression.

The paper finds that households financed consumption through debt, which connects to the story of Thorstein Veblen on conspicuous consumption. Let’s not forget that the US experience a real estate and stock market bubble that both burst in 1929 and the following years. So, the build up of private sector debt papered over a structural weakness in demand that probably was rooted in the income inequality of the Roaring 2os. Interesting result, especially with a view on today’s situation.


Responses

  1. Dirk – – –

    I haven’t looked at the data for quite a while but I believe that in the U.S. wages were not growing (or growing very slowly) in the U.S.in the 1920s, much like the 2000 decade. There are many parallels in the patterns between 1920-1940 and what we have seen so far 2000-2015.

    John Lounsbury

  2. Reblogged this on perfectlyfadeddelusions.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: