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Inequality did not cause the crisis

Widening inequality in the US should be seen as a symptom, rather than a cause, of today's economic malaise.

Daniel Ben-Ami

Topics Politics

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The notion that high inequality caused the economic and financial crisis that emerged in America in 2007-8 has become widely accepted. This claim should not be confused with the argument that an unequal society is morally or political undesirable. Instead it holds that, according to objective economics, the downturn was itself the result of excessive inequality.

This preoccupation with inequality is not confined to those associated with the egalitarian left. On the contrary, many mainstream politicians and economists, including some high-profile ones, are pushing it hard. US President Barack Obama has himself gone a long way down this road.

In some cases, leading free-market figures, usually associated with the political right, have also accepted all or part of the argument. Raghuram Rajan, the chief economic adviser to the Indian government and a professor at the University of Chicago, was one of the first to blame excessive inequality for the crisis.

The pro-market Economist magazine, although not going as far as Rajan, has argued for a ‘true progressivism’ where ‘the priority should be a Rooseveltian attack on monopolies and vested interests’. Its reference is to Theodore Roosevelt, the American president from 1901-9, who was an avid ‘trust buster’: a supporter of the break-up of corporations when it was deemed they had become too large.

This essay will examine the claim that high inequality is to blame for the crisis. It will consider whether inequality played a direct role or whether the impact was indirect. In addition, it will outline the political consequences of such arguments as well as outlining an explanatory alternative.

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Topics Politics

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