Reflections on the Current Disorder by Doug Henwood

Lest you think that this analysis, tying debt growth to increased inequality, is just the fevered product of a radical mind, let me assure you that it recently got support from a very orthodox corner. A bit over a year ago, the International Monetary Fund—normally thought of as a bastion of economic orthodoxy—published a working paper with the provocative (by IMF standards) title “Inequality, Leverage and Crises.”

In any case, in the paper, IMF economists Michael Kumhof and Romain Rancière wondered aloud whether the increase in inequality we’ve seen over the last few decades contributed anything to the causes of our economic crisis. They attempt to model, in rigorous mathematical fashion, the perception that poor and middle-income households borrowed aggressively to maintain or expand their standard of living while wages and employment were growing only weakly, at the same time that rich households had more money than they knew what to do with, so they sought profitable opportunities to lend all that spare cash to those below them on the income ladder.

Kumhof and Rancière draw parallels between the recent period and the 1920s. In both periods, the share of income claimed by the top 5% rose dramatically, and by similar magnitudes. And during the 1920s and the recent period, roughly the last 25 years, the ratio of household debt to underlying incomes doubled.