Articles, Media Library
Jan 14, 2012

Unequal and unstable

Anant Thaker of the Boston Consulting Group and Elizabeth Williamson of the Frontenac Company look at the strong historical relationship between income inequality and America’s vulnerability to financial crises:
The correlation between income inequality and financial crises raises an important question: could it be that extended periods of increased income inequality help to cause financial crises? Evidence suggests this may well be the case, through three primary mechanisms that reinforce each other:
  • Sharp increases in debt-to-income ratios among lower- and middle-income households looking to maintain consumption levels as they fall behind in terms of income;
  • The creation of large pools of idle wealth, which increase the demand for investment assets, fuel financial innovation, and increase the size of the financial sector;
  • And disproportionate political power for elite financial interests which often yields policies that negatively affect the stability of the financial system.

Read their analysis here.