Inequality, Financialization and the US Current Account Deficit

A large and growing body of literature documents a long-term trend of rising inequality in the distribution of income and wealth in the United States, the origins of which date back at least to the early 1980s. This trend has been linked to changes in the occupational and wage structure and paralleled by the deepening financialization of the US economy. This paper challenges prevailing views which attribute the causes of rising inequality to differences in educational attainment and the so-called rising return to skill driven by skill-biased technological changes in the US economy. It further challenges popular accounts that conceive of financialization as a phenomenon primarily driven by developments within the US financial sector. The paper argues instead that rising inequality and the deepening financialization of the US economy are not only related but can be traced to common causes arising from the changing US position in the global division of labor epitomized in the global restructuring of US production through foreign direct investment and outsourcing which underlie the structural transformation of the domestic economy. As the analysis of the US trade and income balance reveals, the US is the biggest exporter of capital and worldwide provider of financial services; on the other hand, it is the world’s biggest importer of foreign goods often produced with the involvement of US capital. Thus, domestic deindustrialization – a major factor behind the loss of middle-wage, middle-class jobs – and the outsourcing of US production have gone along with the insourcing of profits which have not been used for productive investment but for activities associated with the so-called financialization of the domestic economy, such as the buyback of companies’ own stock for the purpose of driving up their stock prices or the purchase of various financial instruments. Hence, both rising inequality and the financialization of the US economy can be linked to the transnationalization of US production as evidenced, among other things, by the development of the US current account deficit.