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  • Economic crises and Inequality1

    A B Atkinson, Nuffield College, Oxford and London School of Economics

    Salvatore Morelli, University of Oxford

    1. Introduction: Sustainability, crises and inequality

    2. Macroeconomic crises

    2.1 Banking crises

    2.2 Economic crises: Consumption and GDP collapses

    3. Inequality

    3.1 Identifying inequality

    3.2 The data challenge

    4. Crises, inequality and policy: Case studies

    4.1 Nordic banking and economic crises

    4.2 Asian financial and economic crises

    5. Do crises lead to inequality?

    5.1 Window plots

    5.2 Banking crises and Inequality : a summary

    5.2 GDP/Consumption collapses and Inequality: a summary

    6. Does higher inequality lead to crises?

    6.1 Different possible mechanisms

    6.2 The historical record as a whole

    7. Conclusions

    1 Paper prepared for the 2011 Human Development Report, funded by the United Nations

    Development Programme. The research forms part of the work of the Institute for Economic

    Modelling (EMoD) at the University of Oxford, supported by the Institute for New Economic

    Thinking (INET) and the Oxford Martin School.

    The paper develops the analysis of financial crises reported in Atkinson and Morelli (2010), a

    study carried out with the support of the International Labour Organisation. The paper is based

    on a data-base for 25 countries covering 100 years described in Atkinson and Morelli (2011),

    which draws on earlier research by Atkinson (2003), Brandolini (2002) and by the authors of the

    country studies in the top incomes project published in Atkinson and Piketty (2007 and 2010).

    None of these institutions or authors should be held responsible for the views we have


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    Appendix: The identification of crises

    1. Introduction: Sustainability, crises and inequality

    Sustainability for a society means long-term viability but also the ability to

    cope with economic crises and disasters. Just as with natural disasters, we can seek

    to minimise the chance of them occurring and can set in place policies to protect the

    worlds citizens against their consequences. Both avoidance and protection are

    essential. Indeed, in the case of economic crises and disasters, the balance is more

    favourable to avoidance than with natural phenomena. Economic crises typically

    concern the institutions created by humans and, in principle at least, are more subject

    to influence by governments and international organisations. Historically, economic

    crises have often led to changes in these human institutions, such as the introduction

    of Social Security in the United States in the 1930s.

    The paper is concerned both with the impact of economic upheavals on the

    inequality of resources and with the reverse direction of causality: the impact of

    inequality on the probability of economic crises. These are two related, but different,

    questions. The first question asks how far economic crises lead to rising inequality in

    access to resources. Is it the poor who bear the brunt? Or are crises followed by a

    reversal of a previous boom in top incomes? Or do both occur? The period prior to the

    2007-8 financial crisis did see rising income inequality in a number of countries,

    notably an increased share of total income accruing to those at the very top. Has the

    current crisis reversed this trend? What can we learn from past crises? The answer

    will depend not only on impact of the initial crisis but also on the policy responses of

    governments and monetary authorities, as is illustrated for the case of financial crises

    in Figure 1. The consequences depend on whether the financial crisis is followed by a

    deep recession. These different factors may work in different directions. The impact

    of bankruptcies and falling asset prices may have greater impact on the better-off, but

    an ensuing recession may hit hardest those at the bottom. It is for this reason that we

    look, not only at financial crises, but also at macro-economic disasters. As we shall

    see, they do not necessarily come together.

    But are the effects of a crisis today the same as those in the past? In the US, is

    the recent crisis like that of 1929? Some crises may be defining moments, leading to

    a permanently changed level of inequality or to a change in direction of its trend. Such

    change may, like US introduction of Social Security, or like increased financial

    regulation, work to increase the level of protection for individuals and their families

    and reduce inequality. The recent study by Roine, Vlachos and Waldenstrm using

    data covering the period 1900-2000 for 16 countries concluded that a banking crisis

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    would permanently reduce the share of the top 1 per cent by about 0.2 percentage

    points for each year of the crisis2 (2009, Table 7). But change today may work in the

    opposite direction. Pressures for fiscal consolidation may lead to a permanent scaling-

    down of the welfare state. Put the other way round, the avoidance of economic crises

    may be necessary to ensure the sustainability of the social institutions we have

    developed to keep inequality in check, such as the welfare state and the stability of

    democratic political governance. (In this paper, we focus on inequality within

    countries, but the same issues apply in the case of global inequality.)

    The second question approaches the issue the other way round and asks how

    far inequality has increased the probability of crises. Was the recent financial crisis

    the result of the prior rise in income inequality? Have previous periods of high

    inequality led to the increased risk of economic crisis? The last 100 years has seen a

    broad pattern where inequality within countries was high before the Second World

    War, was lower and, in some cases, falling, over the next 35 years of the Golden

    Age, and then rose in the latter part of the century. Banking crises, as we shall see,

    almost all occurred before 1945 or after 1980. Is there then a smoking gun? On the

    other hand, we shall see that economic crises in the form of sharp falls in consumption

    or output are spread more evenly over the century (abstracting from wartime). Is

    inequality causally linked with financial crises, but not directly with collapses in


    The two causal processes can be mutually self-reinforcing. Increased

    inequality may have increased the probability of a crisis, and the crisis may have had

    distributional effects that have strengthened the link. This may have happened if the

    underlying mechanism is a political one, where money buys influence, for example to

    secure the liberalisation of previously regulated financial markets, which in turn

    increased earnings in the financial sector (Philippon and Reshef, 2008). It has been

    argued that liberalisation increased the probability of financial crises: the number of

    banking crises per year more than quadruples in the post-liberalisation period

    (Kaminsky and Reinhart, 1999, page 476). On a political economy explanation, the

    crisis strengthens the hand of those in control of the financial sector, giving them

    political influence, and allowing them to protect their earnings, transfer the cost of

    crisis-resolution to the taxpayer, and resist the re-introduction of regulation.

    On the other hand, it is possible that we have a case of co-incidence, rather

    than causality. The common experience of crises and inequality may be due to a third

    causal mechanism. Liberalisation and rising top incomes may be a common result of a

    rightward shift in political thinking, as has been argued by Krugman (2010) and

    Acemoglu (2011). If that is the case, then there may be an intermediate path, where

    2 Morelli (2010) undertakes a similar study focusing entirely on US and using a different methodology.

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    market de-regulation is combined with effective progressive taxation to secure social


    In examining these questions, the paper takes a long-term perspective, drawing

    on data for the past hundred years from 1911-2010. A long-run view is essential since

    crises are, fortunately, relatively rare events. As was noted by Reinhart and Rogoff,

    the study of financial crises requires a much longer run of years: a data set that

    covers only twenty-five years simply cannot give one an adequate perspective (2009,

    pages xxvii and xxviii).

    The paper considers the history of crises over the 100 year period in 25

    countries.3 Looking across countries is valuable for several reasons. First, the fact that

    economic crises are rare means that we have few observations for a single country,

    even when we take a 100-year perspective. To quote Barro, to use history to gauge

    the probability and size distribution of macroeconomic disasters, it is hopeless to rely

    on the experience of a single country (2009, page 246). Secondly, the comparative

    experience of different countries, with differing institutions, is a potential source of

    evidence about the two relationships we are investigating. For instance, Norway,

    Sweden and Finland all experienced financial crises in the early 1990s, but did

    inequality follow the same path? In selecting the countries covered, we have sought

    to include those fro