This is part two in a series about why we should care about economic inequality. Part one is here.
There is no question about whether income inequality is worse today than almost any time in the last century. There is a question about whether we should care.
We know that the share of national income held by the top ten percent in 2007 was higher than any time since the late 1920s. I don't know what this means, or what we should do about it. Still, this data point is finding its way into a new theory that income inequality could create economic crises like the one we just suffered.
Economist Raghuram Rajan explains the link between economic inequality and economic calamity this way. Middle-income wages stagnated in the 2000s, so when workers continued to increase their spending on everything from hand bags to houses, they took on more debt, which the government made readily available. When Americans realized that they had bought and borrowed more than they could pay for, the house of cards came falling down.
Many of the recession's ingredients had nothing to do with income inequality. Low interest rates encouraged Americans to take on more debt. Government homeownership incentives encouraged us to buy larger houses. Exotic and complicated securities obfuscated the health of their underlying assets and contributed to mass hysteria when the housing market imploded. All three of these variables contributed significantly to the economic crash, and they all could have happened with faster growing middle income wages or slower growing upper income wages. They might be related to income inequality, but they are not the inevitable product of the rich being very much richer than the rest of us.