How did we get here?

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In understanding how to come out from this crisis, we need to first identify how wages were allowed to stagnate in the first place. In doing so, we can effectively tailor policy changes and actions to return wages back on track for economic growth.

In his paper published in the Cambridge Journal of Economics, Jon D. Wisman explores wage stagnation and rising inequality that led to the financial crisis of 2008.

“Between 1976 and 2006, wages were relatively stagnant: whereas inflation-adjusted per capita income increased by 64 percent, for the bottom 90 percent of households it increased only by 10 percent” (Wisman, 2013, p. 923)

According to Wisman, there is a clear imbalance between the bottom 90 percent and the top 10 percent of households. For the total income to increase by 64 percent while almost all incomes only increased by 10 percent, it is indicative of a much larger problem tilted towards those at the top of the wage distribution.

With all the wealth hoarded at the top, the wealthy had to find ways to use all their newfound cash. Since wages were stagnated, investments in production gradually phased out and was replaced with investments in finance.

“The relative lack of new investment opportunities in the real economy prior to 2008 created a premium for financial entrepreneurs devising new financial investment instruments to recycle the rich’s surplus funds as loans to less well off households.” (Wisman, 2013, p. 925)

These “new financial instruments” included a new loan model, the ‘securitisation’ model. This package of mortgage and credit card debt allowed profits to be generated from its fees instead of traditionally interest, giving rise to a ‘originate to distribute’ method of loaning. Banks and traders got rich saddling Americans with loans, not realizing or ignoring the risk they passed on along the way. Eventually, the rising debt and risk culminated in the financial crisis of 2008, crashing the housing market and impacting the lives of millions of American families.

While we have recovered since 2008, not much has changed in terms of our wages. The financial crisis is a real example of what happens when wage stagnation is collectively ignored in favour of fabricated unbridled growth. Currently, the same underlying problems that led to the crash still exist in some form. So the question is: If wages are basically in the same state they were twelve years ago, are we headed towards another financial crash?

References

Wisman. (2013). Wage stagnation, rising inequality and the financial crisis of 2008. Cambridge Journal of Economics, 37(4), 921–945. https://doi.org/10.1093/cje/bes085

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