People like to suppose that record inequality in America is responsible for all our problems, including especially the financial crisis.
But there is no evidence of a link between inequality and financial crisis, according to economists Michael Bordo and Christopher Meissner, who looked data from 14 countries between 1920 and 200.
They write in a paper published by the National Bureau of Economic Research:
We find very little evidence linking credit booms and financial crises to rising inequality. Instead, the two key determinants of credit booms are the upswing of the business cycle or economic expansion and low interest rates. This is very much consistent with a broader literature on credit cycles. While inequality often ticks upwards in the expansionary phase of the business cycle, this factor does not appear to be a significant determinant of credit growth once we condition on other macroeconomic aggregates. Neither is income concentration a good predictor of the financial crises that often follow above average growth in credit. The anecdotal evidence from several historical credit booms finds little support for the inequality/crisis hypothesis.
The paper debunks one link proposed by former IMF chief Raghuram Rajan, which is that rising inequality in America led to subsidized housing, which led to the housing crash. Mordo and Meissner showed instead that subsidy programs were not present in many countries that saw a housing crash.
Even if inequality doesn’t cause financial crises, it has been shown by Richard Wilkinson and others to have negative social effects.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.