1. Income inequality as a cause of the Great Recession?
Till van Treeck, Simon Sturm
Florian Puntscher, ,
Felipe Cotta d‘Ávila e Silva, ,
Hatice Yildirim-Metz, ,
Volker Ziegler, ,

2. Teammembers Felipe Cotta Volker Ziegler Florian Puntscher
Hatice Yildirim-Metz

3. Overview The Rajan-Hypothesis and short summary of the study
Was the U.S. financial crisis caused by income inequality?
Export-led growth: the case of China
Growing inequality and domestic stagnation: the case of Germany

4. The Rajan-Hypothesis Easy credits
Raghuram Rajan: Fault Lines (2010)
Increase in income inequality
Rapid technological changes
Easy credits
Contradiction of dominant theories of consumption
Current account balance

5. The Rajan Hypothesis: Critique
Bordo and Meissner: estimated a panel of 14 economies for , the hypothesis cannot be applied to all other economies
Lack of emphasis on the explosion of incomes within the very top 5 or 1 per cent

6. Yi + NT = Yp = C + IHH + IF + G + (X – M)
Link between income distribution, private household expenditure and current account balances
Gross national income Yi:
Yi = YHH + YF + T = W + P + T
Gross domestic product Yp:
Yi + NT = Yp = C + IHH + IF + G + (X – M)
Current account balance:
(X – M – NT)=(YHH – C – IHH) + (YF – IF) + (T – G)
NT net transfers to the world
IHH private household investment
IF private business investment
G government C+I expenditures
X exports
M imports
YHH household disposable income
YF business income
T taxes
W wages
P profits

7. Decreasing s or increasing YHH/Y leads to an increaase in C/Y
Findings:
C/Y = (1 – s)*YHH/Y
Decreasing s or increasing YHH/Y leads to an increaase in C/Y
USA: current account deficit, increase in C/Y, higher labour
supply, reduced savings and higher personal debt
China: current account surplus, decline in C/Y, increased
personal saving rate, imperfect credit markets
Germany: current account surplus, decline in C/Y, higher
personal saving rate, financial balance improvements

8. Overview The Rajan-Hypothesis and short summary of the study
Was the U.S. financial crisis caused by income inequality?
Export-led growth: the case of China
Growing inequality and domestic stagnation: the case of Germany

9. Trends in income distribution and aggregate demand

10. Trends in income distribution and aggregate demand

11. Trends in income distribution and aggregate demand

12. Trends in income distribution and aggregate demand

13. Trends in income distribution and aggregate demand

14. The Rajan hypothesis and the relative income hypothesis
The permanent income and life-cycle hypothesis
The relative income hypothesis

19. Household behavior Longer working hours Keep up with the Joneses
Credits compensate the lack of income growth

20. Immoral debtors, predatory lenders or coward politicians
Heated political debate

21. Overview The Rajan-Hypothesis and short summary of the study
Was the U.S. financial crisis caused by income inequality?
Export-led growth: the case of China
Growing inequality and domestic stagnation: the case of Germany

22. China’s role in the global imbalances
connection to the United States
goals addressed by the scientific community
future considerations

23. Trends in income distribution/aggregate demand
short overview of historic development
income distribution and the role of consumption (table)
wage share decline as a result of structural reforms (table)

25. Distortions cause overinvestment and low household income
Goals
financial distortions
labour market distortions
other factors

26. Explanations why households's saving rates are high and rising (1)
explanations based on life-cycle and demographic effects
the role of income uncertainty and precautionary saving

27. Explanations why households's saving rates are high and rising (2)
status seeking and wealth accumulation (figure)
governmental spending (figure)

30. Overview The Rajan-Hypothesis and short summary of the study
Was the U.S. financial crisis caused by income inequality?
Export-led growth: the case of China
Growing inequality and domestic stagnation: the case of Germany

31. CA imbalance/Export dependent
The German case
Inequality
Low domestic demand
CA imbalance/Export dependent

32. Trends

33. Trends

34. Trend

35. Explaining the Link Triggers Reactions Consequences Recession Euro
Exchange rate
Low interest
High inflation
Slim government
Deregulation
Institutions
Consequences
Inequality
Increased savings
Low demand
High exports
CA dependent

36. Skilled industry Gender issues Locus of inequality Incentive to save
German differentials
Skilled industry
Gender issues
Locus of inequality
Incentive to save

37. Summary Germany Lower wages More firm profit More savings Slim gov.
Inequality
Low domestic demand
Export dependent
Lower wages
More firm profit
More savings
Slim gov.

38. General Wrap-Up Inequality Environment Household Response Labor Supply
Savings
Consumption
Financing
Environment
Credit m.
Labor m.
Regulation
Education
Welfare
Policy
Inequality
Progress
Crisis

39. Bibliography All quotations and figures taken from basis text
Treeck, T. V. and S. Sturn (2012), “Income inequality as a cause of the Great Recession? A survey of current debates,” International Labour Office, Conditions of Work and Employment Branch, Geneva.