Wednesday, October 06, 2010

Economic inequality does lead to bubbles that burst

Steven Pearlstein, Business columnist in the Washington Post, points out that from the end of WWII to 1976, the top 10% of earners in the U.S. took in about 1/3 of the income in the country. In 2007, it was 50%.

This is all outlined in a column “The Costs of Rising Inequality” today (Oct. 6) in The Washington Post, link here.

Pearlstein mentions the moral indignation arguments familiar as far back as the 1960s. But he also adds a converse: too much inequality adds to bubbles that burst. It happened in 1929, and it happened again in 2008.

This time around, the middle class was encouraged to take on debt. He does suppose that individual borrowers, who might have seen subprime loans a few years ago as “getting a lot of house for nothing,” may have not been completely without fault on their own. But still, many people with families saw no other way to proceed than to do what others do. Herd mentality still takes over.

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