Income inequality and bubbles

Concentrated wealth is a cause of instability as well as an obstacle to recovery.

bubbles-0004Obama recognizes the risk. Here he is in a July 24 speech: “When wealth concentrates at the very top, it can inflate unstable bubbles that threaten the economy.”

Bubbles form when the wealthy lend ever-greater amounts to the less-affluent. Credit, although it comes at a high cost to the borrowers, allows them, despite flat or declining real income, to continue to participate in the housing market, buy automobiles, go to college. Debt eventually becomes unsustainable. Things crash.

That was the analysis of two IMF economists in 2010. Michael Kumhof and Romain Ranciere found parallel trends in wealth distribution before the 1929 and the 2008 crashes.

In that context, a new study is worrisome: It finds the income gap between the rich and the rest of the nation again widening.

The study, published in the Journal of Economic Perspectives, finds that the top 1 percent earned 22.5 percent of all household income, including capital gains, the most since 2006. The top 10 percent earned 50.4 percent, the most in a century.

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