Friday, August 6, 2010

Raghuram Rajan on India’s ‘Fault Lines’

Chicago Booth economist Raghuram Rajan said he wanted to get past the “greedy bankers” and “lazy regulators” explanations for the economic crisis that slammed the U.S. in 2008. What he came up with: Income stagnation for the U.S. middle class.

Mr. Rajan, in his new book Fault Lines: How Hidden Fractures Still Threaten the World Economy, says American politicians on both sides of the aisle looked the other way as cheap housing credit flowed to people in the middle class, letting them own homes and consume at a level that their earnings wouldn’t have allowed (read the WSJ’s David Kessel on the book here).

“From the household perspective it means you’ve got consumption going up, wealth going up and you don’t focus on your stagnant income,” he said, calling it a “populist” solution to growing income inequality in the U.S. that both Democrats and Republicans could live with.

More difficult solutions would have involved figuring out how to increase jobs and real wages for workers with only high school degrees or how to increase education levels and skills to allow more Americans to qualify for higher-paying jobs.

Other economy watchers are also looking at the links between income inequality and financial crises as well as the links between income inequality and this particular crisis. The Global Policy Journal points to  a 2001 article that looked at how, even as U.S. income gaps widened over two decades, household consumption didn’t vary by as great a degree.

When he was in New Delhi on August 5 evening for the official release of the Indian edition of the book, which has an extra chapter on India, Mr. Rajan drew parallels between the two nations.

“There is a fundamental problem in India, which is that significant parts of the population are not benefiting from the growth process,” said Mr. Rajan. “This is very similar to what happened in the U.S.”

Full report here WSJ

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