Post by: Benjamin Landy , on May 29, 2012
Policymakers and academics have identified income inequality as a proximate cause for a number of society's ills, from deteriorating social cohesion and unhappiness to high mortality rates. But could America's widening income gap also be responsible for the 2008 financial crisis?
That's the controversial conclusion reached by economists Michael Kunhof and Romain Rancière, whose 2011 report for the IMF explains how rising inequality incentivizes poorer households to over-leverage, eventually leading to financial crises. In their model, households are broken down into two groups—the richest 5 percent, representing capital; and the bottom 95 percent, representing labor. As in the real world, Kunhof and Rancière assume the capital group experiences large and persistent income gains over time, while wages for labor grow slowly or stagnate. But the top 5 percent cannot consume all of their disposable income (you can only buy so many cars), so they create financial wealth through loans to the bottom 95 percent, who need credit to maintain their accustomed level of consumption. As inequality grows, credit supply from the top and credit demand from the bottom expand simultaneously, increasing the probability of systemic default as risk and debt build.
If Kunhof and Rancière's model sounds familiar, that's because it is. In the United States, real average annual earnings for production and other non-supervisory workers peaked in 1972 at $40,884, while total consumer credit amounted to just $2,804 per person. By 2008, average annual earnings had fallen by $6,408 to $34,476, and households were making up the gap with an extra $4,940 in credit per person—more than triple the ratio of credit to earnings as in 1972.
This is a transcript of a conversation, taped May 9, 2012, featuring Century Foundation fellow Amy Dean, Century Foundation senior fellow Richard D. Kahlenberg, and Richard Bensinger, acting organizing director for the United Auto Workers union.
To date, the education policy and philanthropy communities have placed a premium on funding charter schools that have high concentrations of poverty and large numbers of minority students. While it makes sense that charter schools have focused on high-needs students, thus far this focus has resulted in prioritizing high-poverty charter schools over other models, which research suggests may not be the most effective way of serving at-risk students. There is a large body of evidence suggesting that socioeconomic and racial integration provide educational benefits for all students, especially at-risk students. Today, some innovative charter schools are pursuing efforts to integrate students from different racial and economic backgrounds in their classrooms. A new report, Diverse Charter Schools: Can Racial and Socioeconomic Integration Promote Better Outcomes for Students? by Richard D. Kahlenberg and Halley Potter explores this topic.
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