“The Asset Bubble Theory of Income Inequality”

Awhile back, I asked “Do large bubbles cause income to become more concentrated, or does the concentration of income cause the bubbles?” There are other possibilities too, causation could be simultaneously and run in both directions, or it could be that there is no causation at all and both bubbles and inequality are driven by a third factor. Justin Fox says he’s looked at the data, and the answer is that inequality is driven by bubbles:

The asset bubble theory of income inequality, by Justin Fox: There’s been a debate going on for a few years about whether the big rise in income inequality in the U.S. over the past three decades has been at least partly a political phenomenon or purely an economic one. The first camp, whose members include political scientist Larry Bartels and economists Thomas Piketty and Emmanuel Saez (pdf), argues that decisions about taxing and government spending made since the early 1980s have increased the disparity of incomes. The second … contends that globalization and technological advance have increased the rewards to the most skilled and reduced pay for those whose work can be done by machines or lower-paid workers overseas. Since globalization and technological advance are good things, the increase in inequality thus isn’t really something we’d want to stop.

Well now, after looking at the data about the country’s 400 highest earners and reading the comments by pneogy and shepherdwong, I am ready to offer an important new theory (well, not entirely new): The rise in income inequality over the past 30 years has to a significant extent been the product of a series of asset-price bubbles. Whenever the market (be it the market in stocks, junk bonds, real estate, whatever) booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble. It’s not the same people raking it in every time—there’s lots of turnover in the top 400—but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades. …

Originally published at the Economist’s View and reproduced here with the author’s permission.

3 Responses to "“The Asset Bubble Theory of Income Inequality”"

  1. Guest   April 16, 2009 at 6:23 pm

    You mean people got rich by taking a risk? Seems fair :). Although, I really disagree that Globalization is a good thing when we have such over population. Over population needs to be addressed as a root cause of poverty.

    • paul94611   April 16, 2009 at 10:22 pm

      Actually, many folks got rich by taking risks with the governments money absorbing their losses while they were able to structure the deal so the gains were retained.That is far from taking a risk. It is simply getting what one pays government regulators and politicians for. Maximum profit while undermining your government while it is waging a war.

  2. Anonymous   April 17, 2009 at 8:19 am

    Mark: “but skimming the top off of asset bubbles appears to have become the leading way to get rich in these United States in the past three decades”; that is saying a mouthful. Defining “rich” by the top 400 appears to me to be geared for headlines – not empirical economic study.