Economists Argue over Distribution Question

ECONOMISTS ARGUE OVER DISTRIBUTION QUESTION

Income inequality destabilizes national economies; more and more economists are convinced. Many of them see the cause for the worldwide financial crisis in the growing chasm between poor and rich

By Hans Christian Mueller

[This article published 11/4/2012 is translated from the German on the Internet, http://www.handelsblatt.com/politik/international/wirtschaftswissenschaften-oekonomen-streiten-ueber-verteilungsfrage/7328592.html.]


Berlin. The class struggle has long disappeared from the vocabulary of economists. Most researchers are not interested any more in the distinctions between the particular classes of society, between poor and rich, working and wealthy, Nobel Prize winner Robert Lucas explained. Economists should not be seduced by the dangerous temptation of focusing on distribution questions, he wrote ten years ago. Whoever wants increased prosperity should worry about growth and not re-distribute.

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In the meantime, a rethinking is occurring in the economic guild. More and more economists take distribution questions seriously as shown by the November 2012 conference on the “Macro-economy Research Network” in Berlin. On invitation of the Hans Boeckler foundation, more than 300 economists discussed the future of macro-economic research. Income distribution was one of the central themes. The chasm between poor and rich has grown tremendously in the US and many other industrial countries.

ECONOMISTS UNTEACHABLE

Reforms are carried out in all departments except among economists. More and more now call for a reform of antiquated myths.

When inequality becomes too great in a national economy, the economy becomes unstable, the International Monetary Fund vice-director Michael Kumhof showed. With colleagues, he expanded a standard macro-economic model with distribution questions. In this model, there are workers and wealthy instead of homogeneous households with uniform interests.

Kumhof’s research findings reveal that income inequality in the US was one of the main reasons for the collapse in 2007. The rich who became richer and richer before the crisis had to invest their surpluses, Kumhof says – and eager customers can always be found among the poor. “The likelihood of massive crises clearly increases,” Kumhof says in the Handelsblatt interview. The liberalization of the financial markets has roused this spiral of indebtedness.

CRITICAL ROLE OF FINANCIAL MARKETS

The economist Robert Frank from Cornell University also sees the enormously increased income inequality as a cause of the credit bubble and the financial crisis. The desire of people was to not fall back compared to the richer sectors that caused the debt boom. The poorer sectors tried to stabilize their prosperity with the help of credits.

This mechanism could be an explanation for the crisis after 2007 and also for the Great Depression, the Linz economist Christian Alexander Belabed argued. “Becoming indebted lost its stigma at that time.” Many households then began buying cars on credit.

EURO IN CRISIS

Private indebtedness and income inequality massively increased in the US of the 1920s – as before 2007. This view puts in question the traditional explanation for the Great Depression. For a long while, most economists referred the worldwide economic crisis back to mistakes of central banks.

The role of the financial markets should be especially criticized. These had uncoupled nearly completely from the real economy, the US researcher Michael Hudson from the University of Missouri in Kansas City said. This economist who is regarded as one of the seminal intellectuals of the Occupy Wall Street movement makes an historical comparison: “The big landowners in the 18th and 19th century are the financial markets today.”

NEW GDP CALCULATION DEMANDED

Like the big landowners at that time, the financial sector today does not create any real assets today. The economy merely posts profits and drives workers with falling wages into heavy debts. In Berlin, many economists questioned whether it is sensible to analyze distribution questions with the traditional methodological toolbox. Instead they demanded a very new paradigm or initiatives that closely follow the theory of John Maynard Keynes.

WORLD ECONOMY

Along with Kumhof, the Berlin macro-economist Michael Burda defended the traditional approaches. Burda, the current chairperson of the Association for Social Policy, urges the unification of German-speaking economists.

On the other hand, the American economist Michael Hudson urges a very new measurement of prosperity. In the future, the true economic output realized by the real economy should be separated from the apparent output arising in the unproductive financial world. “They only produce debts, not prosperity.”

RELATED LINKS:

Mamdani, Mahmood, “Four Questions to Professor Joseph Stiglitz,” 7/25/2012
http://www.pambazuka.org/en/category/features/83875/print
http://www.buzzflash.com
http://thinkprogress.org
http://www.progressive-economics.ca

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