The connection between class inequality and asset price
bubbles is well
established. That is, the gap between the very rich and everyone else
tends to widen around the same time that over-investment causes a
bubble. But why is that? Bloggers offer theories on the connections
between class and the economy.
- Rich Over-Investment, Poor Over-Borrow Econoblogger Steve Randy Waldman suggests
the rich and poor spend differently. The super-rich over-invest, while
the poor over-borrow, both to the greater detriment. "Whether an
economy generates asset price inflation or consumer price
inflation depends on the details of to whom cash flows. In particular,
flows to the relatively wealthy lead to asset price inflation, while
cash-flows to the relatively poor lead to consumer price inflation," he
writes. "Except when the world seems very risky, no one holds cash for
long. Poorer people disproportionately use their cash to purchase
goods, while richer people disproportionately 'save' by purchasing
financial assets. If the supply of both goods and financial assets is
not perfectly elastic, then increases in demand will be associated with
increases in price. If relative demand for goods and financial assets
is a function of the distribution of cash, what price changes occur
will be a function of who gets what." Waldman concludes, "We need to
build a system where changes in asset prices reflect the
quality of real economic decisions, and where the playing field isn't
tilted against the poor and disorganized in the name of promoting price
- Class Divisions Force Financial Irresponsibility Mother Jones's Kevin Drum points out
that a system with wide class divisions forces individual actors, rich
or poor, to behave in ways that harm the overall economy. "Rich people
tend to do really stupid things when they have too much
money lying around for too long. So do poor people, of course, but in
their case 'too much money' is only enough to buy a bigger TV, not
enough to blow up the world. That's why I think getting a handle on
rising income inequality is important. To paraphrase William F.
Buckley, if I had an extra million dollars to divvy up, I'd rather give
it to the first thousand names in the New York City phone book than to
the CEO of Goldman Sachs."
- OK, But How Do We Fix This? The Economist's Ryan Avent puzzles over how economic policy can stop this trend. "I last discussed this in the context of a post
noting that central bankers seemed to be coming around to [White House economic adviser Larry] Summers'
view of things--that low inflation and interest rates were enabling
damaging bubbles and financial crises," he writes. "But if this is more about to which groups the economic gains of growth
accrue, then the appropriate Fed response is more difficult to imagine.
Is it correct to say that by limiting the return to financial
activities, investment will flow to productive ends, thereby reducing
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