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Do Huge Income Gaps Spur Downturns? Legal and Economics Experts Mull the Idea

Posted Aug 23, 2010 9:45 AM CDT
By Debra Cassens Weiss

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The gap between top earners and those on the lower economic rungs reached 100-year high points before the Depression and the latest economic downturn, leading some experts to ponder whether there is a connection.

Harvard economic and policy historian David Moss began studying the connection when a colleague suggested he overlay two graphs—one showing financial regulation and bank failures, and the other depicting trends in income inequality, the New York Times reports.

“It was a stunning correlation,” Moss told the newspaper. “And it began to raise the question of whether there are causal links between financial deregulation, economic inequality and instability in the financial sector. Are all of these things connected?”

One of the experts pondering the issue is Vanderbilt University law professor Margaret Blair, the New York Times says. She is studying whether financial workers engage in trading strategies that promote financial bubbles that can lead to higher returns. The cycle leads to even greater income inequality, she told the newspaper.

R. Glenn Hubbard, dean of the Columbia Business School, isn’t buying the connection. He says the latest downturn was caused by policymakers who wanted to expand home ownership and democratize credit, all in the name of reducing income inequality.

“Cars go faster every year, and [gross domestic product] rises every year, but that doesn’t mean speed causes GDP,” he told the Times.

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