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Jerome Lyle Rappaport

Jerome Lyle Rappaport
Founder and Board Member
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Edward Glaeser

Edward Glaeser
Professor of Economics at Harvard University
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Stephen P. Johnson

Stephen P. Johnson
Executive Director of Phyllis and Jerome Lyle Rappaport Foundation
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Greg Massing

Greg Massing
Executive Director for the Rappaport Center for Law and Public Service
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Alasdair Roberts

Alasdair Roberts
Professor of Law and Public Policy at Suffolk University Law School
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Joseph Curtatone

Joseph Curtatone
Mayor, City of Somerville
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Tim H. Davis

Tim H. Davis
Independent Research Consultant
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Scott Harshbarger

Scott Harshbarger
Senior Counsel, Proskauer Rose LLP
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Vivien Li

Vivien Li
Executive Director of The Boston Harbor Association
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Guest contributors

Monika Bandyopadhyay
Suffolk University Law Student

David Barron
Harvard Law School and former Deputy Counsel for the Office of Legal Counsel in the US Department of Justice

Linda Bilmes
Senior lecturer in public policy at the Harvard Kennedy School. Assistant Secretary of Commerce during the Clinton Administration.

Brandy H.M. Brooks
Director, Rudy Bruner Award for Urban Excellence, Bruner Foundation

Felicia Cote
Rappaport Fellow, Harvard Law School/Harvard Kennedy School.

Amanda Eden
Suffolk University Law School student

Sara Farnum
Student, Suffolk Univ. Law School

Kristin Faucette
Student at Suffolk University Law School

Benjamin Forman
Research Director, MassINC

Arthur Hardy-Doubleday
JD/MBA student at Suffolk University Law School and the Sawyer School of Business

Theodore Kalivas
Boston Green Blog, Dukakis Center for Urban & Regional Policy

David Linhart
Student, Boston University School of Law

Antoniya Owens
Research Analyst, Mathematica Policy Research, Inc.

Susan Prosnitz
Senior Advisor, TSA, Washington, DC

Ben Thomas
Boston Green Blog, Dukakis Center for Urban & Regional Policy

Matthew Todaro
Student at Boston College Law School

Alexander von Hoffman
Senior Researcher, Joint Center for Housing Studies

Brett Walker
Student, Boston College Law School

Margarita Warren
Student at Suffolk University Law School

Does Economic Inequality Cause Crises?

Tuesday, December 14th, 2010
By Edward Glaeser

Did inequality cause the recent housing and financial crisis? For decades, a growing literature has tried to establish links between inequality and adverse outcomes, such as low economic growth, weak social cohesion and mortality and, most recently, financial crises.

If true, these arguments would provide even more reasons to worry about our unequal income distribution. If false, we should still worry about income inequality, because in a just society everyone should have a decent standard of living and the opportunity to succeed.

Empirically, it is true that inequality has risen since the 1970s, and, by many measures, America was a more unequal country in 2005 than it had been during any year since the 1920s. The echo of the Roaring Twenties reminds us that inequality also seems to have risen during that decade, in the years before the crash. These two periods have suggested to some people that inequality was actually playing a role in generating overpriced assets.

Why might widening inequality lead to a banking crisis? The Nobel Laureate Joseph Stiglitz’s theory is that “growing inequality in most countries of the world has meant that money has gone from those who would spend it to those who are so well off that, try as they might, they can’t spend it all.” This “flood of liquidity” then “contributed to the reckless leverage and risk-taking that underlay this crisis,” he asserts.

Jean-Paul Fitoussi and Francesco Saraceno have made similar arguments. A related view, called the Stiglitz hypothesis, by Sir Anthony Atkinson and Salvatore Morelli, is that “in the face of stagnating real incomes, households in the lower part of the distribution borrowed to maintain a rising standard of living,” and “this borrowing later proved unsustainable, leading to default and pressure on over-extended financial institutions.”

Another view, associated with Raghuram Rajan, former chief economist of the International Monetary Fund, is that “the political response to rising inequality – whether carefully planned or the path of least resistance – was to expand lending to households, especially low-income households.”

According to this hypothesis, public policies, like tacit acceptance of the implicit public guarantee enjoyed by Freddie Mac and Fannie Mae, encouraged people to bet big on housing and ultimately led to an unstable financial system.

A final housing-oriented hypothesis, given in the “Superstar Cities” work of Joseph Gyourko, Christopher Mayer and Todd Sinai, is that “continued growth in the number of high-income families in the U.S. provides support for ever-larger differences in house prices.” As the rich grew richer, they were willing to pay more for access to the best housing, like that on the California coast, and this led to rising prices in places where land was inelastically supplied.

For the full text of this article click here.



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