Jared Bernstein — Wealth, Leverage, and Bargaining Power: Another Compelling Model of the Impact of Inequality

Bernstein summarizes Leveraging Inequality by  Michael Kumhof and Romain Rancièr

–Factors outside the model lead to income stagnation for middle and low-income workers, while high-income households acquire more capital assets. This increases the savings of wealthy households relative to lower-income households.

–In order to keep their living standards from declining, the middle class borrows more.  Financial innovations, including new types of securitization, increase the liquidity and lower the cost of loanable funds available to the borrowers.  As the authors put it:

The bottom group’s greater reliance on debt—and the top group’s increase in wealth—generated a higher demand for financial intermediation. 

–The financial sector thus grows rapidly as do the debt-to-income ratios of the middle class relative to the wealthy.

–The combination of rising middle class debt and stagnant middle class incomes increases instability in financial markets, and the system eventually crashes.

Sound familiar to all you Minskians?

Read it at On the Economy
Wealth, Leverage, and Bargaining Power: Another Compelling Model of the Impact of Inequality

by Jared Bernstein — formerly Chief Economist and Economic Adviser to Vice President Joe Biden