Tuesday, August 3, 2010

New fault lines in the US economy

So many books have been written about the recent financial crisis that it would seem impossible to find one that has anything new to offer. One such is University of Chicago economist Raghuram Rajan’s latest book Fault Lines: How Hidden Fractures Still Threaten the World Economy.

Much of the previous discourse on the subject has pinned the blame for the crisis on bankers, regulators or government. These discussions have rarely, if ever, sought to get to the root cause of why people—particularly politicians— pressed the US Federal Reserve to support a low interest rate regime. Rajan does so by exploring causes other scholars have chosen to ignore, and describes some of these as “fault lines”.

The growth in income inequality in the US over the last 30 years emerges as the most critical of these. Rajan points out how the benefits of growth have accrued exclusively to the top 10% of the population, and how the rest, particularly the politically influential middle class between the 50th and 90th percentile of the population, have seen stagnation in real incomes. He juxtaposes this with the fact that an increased focus on profitability and global competition have meant that there has been a structural shift in unemployment in the US in the last 30 years. Whereas employment after a recession would recover within nine months, the recent recession has not recovered even after almost two years. These relatively anti-middle-class trends have been compounded by a system where social security benefits are small compared with those of other nations.

Full report here Mint 

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