Rising Income Inequality Essay

Evaluate to what extent rising income inequality was one of the triggers of the subprime mortgage crisis in the U.S in the 2008. The United States have suffered two major economic shocks in the last century, in 1929 and in 2008. In both cases, the pre-crisis stages had one common feature, a sharp increase in income inequality, followed by a sharp increase in households debt leverage. Between 1983-2008 there was a rapid increase in the United States’ debt-to-income ratio, this increased the probability of the economy facing a financial crash, such as the one experienced in 2008. For example, during this period, U.S. households became increasingly indebted, as J.D.Wisman stated “the ratio of disposable-personal-income to debt rose from 77% in 1990 to 127% at the end of 2007”(P.923, 2010). The majority of this increase was fuelled by mortgage-related consumption, through which low-income and middle-class households tried to keep up with the expenditure of high-income households something called “keeping up with the Joneses effect” (Thomas Goda, P.26, 2013) , although the former group increased their debt much more than the latter group. “Many low and middle-income consumers reduced their saving and increased debt since income inequality started to soar in the United States in the early 1980s” (Rajan, 2010). This is why income inequality highly contributed to the credit bubble in the U.S in 2007, as arguably was the main trigger

The benefits for the economy were obvious; greater consumption, more jobs and the rising profits for banks from the interests of the subprime mortgages given to low-income families. The philosophy of this whole situation was very simple: “The benefits were immediate, whereas paying the inevitable bill could be postponed into the future”. (Till van Treeck, P.422,