Inequality and the link to economic performance and financial markets. A litterature review

Abstract

Something is going wrong. Governments around the world do not manage to handle key economic problems. Economic, political and financial systems are fundamentally unfair. Striking aspects of the evolution of most developed countries in the past decades are the increase in the wealth-to-income ratio, the stagnation of median wages and an increase in capital returns. The growth in top-incomes happens at the cost of the rest of the population and the rise in the share of rents happens at the expense of wages. While overall wealth increases, this doesn’t coincide with an increase in the productive capacity of the economy. Institutions and politics influence the share of capital and labor. More recently, it is also the expansionary monetary policy of central banks that redistribute wealth from the bottom to the top with adverse effects for productive assets. The gap between what institutional systems and politicians do and what they are supposed to do, becomes too large to be further ignored. This is a problem of unfairness, but there is so much more at stake. The price of inequality for the economy is high, inequality reduces the efficiency and productivity of the economic system and also leaves the functioning of financial markets not unaffected. Growing inequality is not inevitable, but governments need new rules that work for everyone.