Meant to share this the other day - a paper by Jon Wisman in the CJE: Wage stagnation, rising inequality and the financial crisis of 2008.
What's interesting is how he moves past the normal inequality/MPC argument to talk about the implication of inequality for other influences on macroeconomic performance. First, the normal MPC weakening from inequality is argued to have driven policymakers to increasingly low interest rates to encourage growth. In a sense the claim is that the Taylor Rule isn't as effective in the lower MPC environment, driving the Fed to lower rates. The second argument is that greater household leveraging was a consequence of rising income inequality. The third argument is that with increased concentration of wealth, the wealthy had considerably greater power over shaping ideology, which lead to bad policy.
All seem plausible. All are more interesting then the plain old lower MPC story. I couldn't say how substantial in practice each of these effects is, though.
How did this happen?
1 hour ago