Income Distribution and Economic Crisis of 2008: A Keynesian View

Thursday, 2 July 2015: 4:00 PM-5:30 PM
TW2.1.02 (Tower Two)
Mario Ivan Dominguez Rivas, UNAM, Mexico City, Mexico
Is there a relationship between income distribution and financial crisis? To answer
this question will be roughly a semblance of what a financial crisis, what are its main
characteristics and causes, and what its general structure. It will, first, the work of
Kindlebergery Aliber (2012) on the history of financial crises, then try theorize crises,
as several authors have done by Keynesian theory: Minsky, Lance Taylor, Leijonhufvud,
among other, the goal is to find the causes of the seizures and whether primarily relates
to the distribution of income among the major operators who are workers, financial and
non-financial businesses.

The crises are usually preceded by a boom, which creates overly positive expectations,
generating that all businesses want to invest, banks borrow and consume individuals,
it is believed that this situation will be permanent is generated mania, all people want
to participate in the economic boom "there is nothing so annoying for the welfare and
good judgment of oneself to see a friend get rich" [in Kindleberger and Aliber 2013,
p. 45 Schusner Simon and Stewart (Den of Thieves , New York , Touchestone Books
page . 97)]. But when expectations change by some external shock, a general panic
is generated due to the decline in asset prices, a situation which further increases the
decline. All calculations made before the game lost its validity, as Robert Solow in the
preface to Manias, Panic and cracs says " The irrationality can be above any calculation
sober." Hence the importance of expectations in the development of the crisis.
These events can be checked empirically, during the manias period generates an increase
in the share of profits in GDP and the financial sector occupies a larger place
in the economy, these are the signs we have of that is about develop a financial crisis.

That is why, in particular post- keynesian models of growth are best placed closer to
the prediction of a crisis like this, because they related positively share of profits in
income with the crisis and also it is positively related to the increased participation
of financial capital in the product. Because financial capital in booms usually make a
greater number of loans, and not only for productive investment but also enlarging its
role to provide consumer credit, reducing its role as an engine of development, further
funding operations do not productive.
In Latin America, countries that had a better income distribution (verifiable by lower
Gini rates and greater participation of profits in GDP) had higher growth rates after
2009, for example, Brazil which increased its share of wages in GDP from 52% in 2004 to
56% in 2007, had negative growth rate in 2009 of 0.33% but with considerable growth
for the next year of 7.53 %, and on the other hand, countries that did not improve income
distribution, were affected much more and did not have as good recovery as Colombia
and Mexico that wage share in GDP of 48 and 39% in 2004, Colombia remained the
same percentage, while Mexico to 37% reduced it, giving Colombia a rate of low growth
for 2009 of 1.6% and Mexico negative growth rate of 5.95 %, with a recovery rate for
the next year of 4 and 5.3% respectively. (According to the ECLAC and the World
Countries with better income distribution in Latin America, tend to have higher rates of
GDP growth in the period of crisis and in the years of recovery, which means that higher
levels of economic equality are economic downturns shallower and easier overcome.
[1] Dutt , Amitava Krishna in " Keynesian Growth Theory in the 21st Century” en
21st Century Keynesian Economics, Harvard University Press, 2010.
[2] Kindleberger y Aliber, “Manías, pánicos y cracs; historia de las crisis financieras”,
Ariel Economía y Empresa, 2012.
[3] Leijonhufvud, Axel “Out of the corridor: Keynes and the crisis” publish in Cambridge
Journal of Economics 2009, 33, 741–757.
[4] Taylor Lance, Maynard’s Revenge: The Collapse of Free-Market Macroeconomics,
Harvard University Press, 2010“.