James Galbraith describes the research on inequality over the last two decades at the University of Texas Inequality Project:
Since 2000, inequality has declined in the post-neoliberal countries of South America, and we believe it has been falling since 2008 in China. There, ever more comprehensive urbanisation plays a major role. In Europe and the US, inequality fell after the financial crisis, but rose again as stock markets recovered.
Rising inequality is not necessarily a sign of bad times. The boom creates jobs, reduces poverty and expands wellbeing. But high inequality tends to prefigure a crisis. After a crisis inequality falls – like blood pressure after a heart attack. But that is a bit late.
Read more at Policy, not capitalism, is to blame for the income divide – FT.com.
From a FRBSF paper Private Credit and Public Debt in Financial Crises by Òscar Jordà, Moritz Schularick, and Alan M. Taylor:
Recovery from a recession triggered by a financial crisis is greatly influenced by the government’s fiscal position. A financial crisis puts considerable stress on the government’s budget, sometimes triggering attacks on public debt. Historical analysis shows that a private credit boom raises the odds of a financial crisis. Entering such a crisis with a swollen public debt may limit the government’s ability to respond and can result in a considerably slower recovery.
In financial crises, steep declines in output worsen the ratio of public debt to gross domestic product (GDP) even if the nominal amount of debt remains unchanged. Progressive tax systems cause government revenues to decline at a faster rate than output. Meanwhile, other automatic stabilizers, such as unemployment insurance programs, quickly swell public expenditures. The public sector often assumes private-sector debts to prevent a domino effect of defaults from toppling the financial system. Programs to stimulate the economy put further stress on public finances. As budget deficits balloon, deep economic downturns resulting from a private credit crunch often turn into sovereign debt crises.
Read more at Federal Reserve Bank San Francisco | Private Credit and Public Debt in Financial Crises.
Hat tip to Barry Ritholz