Wage stagnation, rising inequality and the financial crisis of 2008

Explanations of the financial crisis of 2008 have centred upon inadequate regulation stemming from laissez-faire ideology and low interest rates. Although true, the deeper determining forces of wage stagnation and dramatically increasing inequality in the USA over the preceding 35 years have received less notice. Wage stagnation and heightened inequality generated three dynamics that made the economy vulnerable to systemic dysfunction. First, consumption was constrained, reducing profitable investment potential in the real economy and encouraging an ever-wealthier elite to flood financial markets with credit, helping keep interest rates low, stimulating the creation of new credit instruments, greater indebtedness and speculation. The second dynamic is that consumption externalities were generated, forcing households to struggle harder to maintain the welfare of their families and their relative social status, resulting in plummeting household saving, ever-greater indebtedness and longer work hours. The third dynamic is that as the rich took larger shares of income and wealth, they gained more command over ideology and hence politics, resulting in tax cuts for the rich, reduced welfare for the poor and deregulation.