Raghuram, like many economists, notes that in recent decades, most of the economic growth gains have gone to the rich while the middle of the income distribution has lost ground in relative terms. Of course, rising inequality does not have to go hand in with lack of income growth for those in the bottom or middle, but in the United States the trend since the mid- to late-1970s has been for a few at the very top of the income distribution to see their incomes rise sharply, while everyone else has seen relatively slow growth, both compared to the top earners and compared to the 30 years prior to the late 1970s.
The crux of Raghuram's argument is that the problem is not simply that families took on too much debt in the run-up to the crisis; the problem is that high inequality created the macroeconomic conditions for those at the top to have both the capacity and the incentives to lend evermore amounts of money to everyone else.
WHAT DOES INEQUALITY REALLY COST?
In his new book, The Price of Inequality, Columbia University economist and Nobel Laureate Joseph Stiglitz argues that, "today's divided society endangers our future." He, like Raghuram, begins from the recognition that the level of inequality in the United States is unprecedented among modern societies in how vast the gap is between those at the top and everyone else.
Also like Raghuram, Stiglitz focuses his attention on the ways that rising inequality--specifically, the rise of the super-rich--are affecting the U.S. political process and what this portends for economic growth. In his analysis, rising inequality has led to a rise in what economists call "rent seeking," that is, actors seeking to take a bigger piece of the pie, rather than seeking to grow the pie. He points to a variety of ways that the wealthy have used their outsized power and influence to rig the game in their favor, documenting how the financial industry for years focused its energies on selling products to low- and moderate-income families that they could ill afford. And when the bubble collapsed, it was the industry that put all this in motion that received massive taxpayer funds as policymakers sought to avert a full-on repeat of the Great Depression.
Raghuram and Stiglitz's conclusions are not outliers in the economics profession. In November 2011, my organization held a conference with more than 30 economists, including two Nobel Laureates, asking them how inequality and the strength of the middle class affect economic growth and stability. One of themes repeatedly discussed was the idea that inequality--especially the form taken in the Untied States--is associated with the kinds of political institutions that hinder economic growth.
Another book putting the quality of institutions at the center of an economic growth theory is How Nations Fail by M.I.T. economist Daron Acemoglu and Harvard political scientist and economist James Robinson. Their central premise is that there is a "link between inclusive economic and political institutions and prosperity." They take the reader across the globe, through hundreds of years of history to make the argument that "while economic institutions are critical for determining whether a country is poor or prosperous, it is politics and political institutions that determine what economic institutions a country has."