Effect of Income Inequality on Economic Development

Effect of Income Inequality on Economic DevelopmentIncome Inequality and Financial CrisesThe 2007-2008 pecuniary crises has been considered as amongst the worst the world has faced. This is since the great depression of the social variety 1930s ((Shiller, 7). This crisis was characterized by the dedicate of large pecuniary institutions, a downward communicate in stock markets, bailout of banks by government, and the laying off of workers by task organizations. There are a variety of reasons given as to why the 2008 financial crisis emerged. MacEwan and milling machine argue that it was an add-on of income inequality that lead to the emergence of the financial crisis (MacEwan and John, 5). On the other hand, others believe that it is the failure of the banking mortgage system that led to the emergence of the financial crisis (Paulet, 22). This paper examines the reasons as to why McEwan and Miller link stinting instability, to income inequality. It further examines their pro posal on how to solve this problem. Furthermore, this paper gives an explanation on the reasons for the emergence of the 2008 frugal crises.There is a varying argument on the personal effects of income inequality on the growth of the economies of rich and developed countries. One of the major arguments is that income inequality was the major reason for the emergence of the 2008 global economic crisis. This is an argument that McEwan and Miller believe in (MacEwan and John, 5). Proponents argue that there are three major ways in which income inequality has the capability of destroying the economic system of a state. The first of all argument is that due to income inequality, there is a sharp increase in the debt ratio to income ratio amongst middle and low income households. This ratio increases because of their bid to maintain their expenditure level, while they fall behind in relation to income or revenue that they are able to acquire. For example, a growing subscribe for loans and mortgages was as a issuance of a rise in the costs of college and homes. There was also a relaxed standard for lending, and it was easy to acquire mortgages. The failure by these low income earners to pay these mortgages and loans led to the beginning of the financial crisis, and the twig of major financial institutions such as Citigroup and Lehman Brothers (Paulet, 17).The second argument is that the creation and development of a large pool of uncivilized wealth leads to an increase in the demands of investment assets, fueling financial innovation and increasing the size of the financial sector. This is dangerous for the economy, because it may lead to speculative buy of financial assets. It is this speculative buying of financial assets that contributed to the collapse of financial institutions such as Lehman brothers during the 2008 crisis (Schiek, 39). It is important to denote that the collapse of the Lehman brothers was the beginning of the financial crisis, and it wa s followed by the collapse of several financial institutions and business organization such as habitual Motors. To protect the economy, the American government had to bail out companies such as General Motors, Citigroup, Bank of America, etc (Shiller, 22).The third argument is that income inequality leads to the emergence of a disproportionate political power. The major intention of the development of this political power is to protect the financial interests of the elite, or the wealthy members of the society. This would lead to the enactment of policies that have a negative impact on the stability of an economic system within the state (Schiek, 52). For example, setters of score standards, and federal government regulators were able to allow banking organizations such as Citigroup to move large number of liabilities and assets from the balance sheet, to a complex legal structure referred to as structured investment vehicles. This strategy helped to mask the financial weaknesses of the banking organization to the share holders and investors. The regulation of financial institutions in America is always influenced by powerful and wealthy companies and people (Schiek, 13). This is because they normally finance the political activities of candidates who would advance their agendas. In as much as McEwan and Miller believe that income inequality led to the emergence of the 2008 economic crisis, there are other reasons that led to the this crisis (MacEwan and John,15).One of the reasons given is the growth of the housing market in America. This demand led to speculative buying, leading to an increase in the prices of houses. People took mortgages, which did not have good security. However, in 2008, there was a correction in the housing prices, leading to a downward fall of the housing prices (Schiek, 57). Most Americans were unable to pay their mortgages, and this made banking and financial institutions to suffer massive losses because they were unable to recove r their loans. This in turn led to the collapse of these financial institutions, affecting the economies that were heavily dependent on the American economy. Furthermore, it is the federal government that made it easy for people to acquire loans. This is because they initiated low interest rate, by lowering the federal fund rate target to 1.0%, from a figure of 6.5% (Shiller, 41). This made experts to denote that it was the easy availability of credit that led to a demand of houses, hence fuelling their increase.It is therefore prudent to denote that there is a need of restructuring the American economic system and regulatory institutions for purposes of protecting the economy from future crises. In fact, the government of President Obama realized on the need of regulating American financial institutions, and in 2008, and 2009, he initiated a series of measures aimed at meeting this mark (Shiller, 29). For example, President Obama introduced the Volcker rule, which was aimed at lim iting the ability of banking organizations to engage in proprietary trading (Shiller, 19). The European Union also realized the need of regulating financial institutions and came up with the Basel III rule, which raised the capital of starting a banking business in Europe, and placing a limit on the banking rates of the European banks.In conclusion, the debate by MacEwan and Miller that income inequality contributes to a slowdown in economic development has some truth in it. For instance, due to income inequality, the poor and the middle class were engaged in borrowing from banks, for purposes of buying properties leading to a sharp increase in property prices. This was a factor that contributed to the emergence of the 2008 crises, and it is always referred to as the subprime crises. In a bid to protect the financial interests of big financial companies, the federal government agencies did not effectively regulate their financial activities. This allowed them to manipulate their fi nancial records, hiding their weaknesses to shareholders and investors. It is therefore prudent to denote that McEwan and Miller are right when they assert that income inequalities was the main factor leading to the 2008 crisis, and there is a need of restructuring the economy, and amend the ability of the federal regulatory institutions.Works CitedMacEwan, Arthur, and John A. Miller. Economic collapse, economic change getting to the rootsof the crisis. Armonk, N.Y. M.E. Sharpe, 2011. Print.Paulet, Elisabeth. The subprime crisis and its impact on financial and managerial environmentsan unequal repercussion at European level. Newcastle upon Tyne Cambridge ScholarsPub., 2012. Print.Schiek, Dagmar. The EU economic and social model in the global crisis interdisciplinaryperspectives. Farnham (Surrey) Ashgate, 2013. Print.Shiller, Robert J. Subprime solution how todays global financial crisis happened, and what to do almost it.. Princeton Princeton Univ Press, 2012. Print.