The Social structural argument to the economy is do we first fix income inequality before fixing unemployment or the opposite? It’s disappointing to have few Sociologists weigh in, so we have to rely on the Economists. This question is the main difference between Minsky & Stiglitz. But what are the indicators to either? My take is that household debt is an indicator to both income inequality and future unemployment. This is because people are trying to create wealth from credit, since true wealth (created by wages) is fleeting. Two examples and one warning can be found in the U.S. and Canadian Household Debt comparisons:
Thanks to Dr. Krugman for the chart, which came from his data efforts. We all know that the largest debt factor in America was (and is) housing mortgages. How over leveraged were Americans? By the 2008 crash, for every dollar a person had left over from wages, they owed almost $1.40 in debt. That’s known as over leveraged.
Here’s the Canadian version which I ran on StatsCan, with some additions, and it’s looking like the American problem:
2010 were the lastest numbers charted, however, a recent press release reported by the CBC shows that the current debt to disposable income ratio is 165%. It’s a pretty bleak picture for Canada. The interesting thing is that both Economists and Sociologists get to see what happens when housing bursts under a Canadian System.
The difference in Canada to the U.S. bubble is that banks won’t collapse due to Canada’s heavy banking regualtions. Instead, the Canadian Governement will be on the hook directly for failed mortgages (as opposed to AIG in the states). While Americans likes to think of Canada as “socialist” because they have free health care, they are still a market based economy (a.k.a. Capitalist), capable of income inequality.
As old as it is for me to keep repeating myself, wealth is created by wages and cash investments, not by credit. Credit becomes bad when people (or banks) are over leveraged. When people become over leveraged, they are essentially trying to create wealth from credit because wealth cannot be had any other way for average people. This is what caused the Great Depression (most scholars, including Ben Bernanke, agree), and caused the 2008 Great Recession; most Keynesian scholars, including Krugman & Stiglitz agree.
Put me in the Minsky camp, with no disrespect to Stiglitz because as an Economist, few have fought Income Inequality harder than him on a policy level. Increasing output demand, which increases labor demand, lowers unemployment. From a Sociologist’s viewpoint, money (otherwise known as class) effects status and power. More balance in income inequality is likely to happen when more people have more money. This will only happen with (near) full, and equitable employment.