Inequality and Leverage: Toward an Analytical Framework
David M. Anderson, Ph.D.
Adjunct Faculty Member
The Johns Hopkins University Center for Advanced Governmental Studies
Washington, D.C.
February 5, 2015
This paper outlines an analytical framework for exploring the relationship between the concept of economic inequality in advanced capitalist societies and the concept of leverage. The concept of leverage is taken from my edited volume, Leveraging: A Political, Economic, and Societal Framework (Springer, 2014). The analytical framework of this paper is one of more than a dozen research projects that take their origin in Leveraging.
Many scholars and writers have been exploring how excessive leverage –investment leverage in contrast to both resource leverage and bargaining leverage – led to the financial crisis of 2008-09 and the Great Recession. Both individuals and financial services organizations, ranging from investment banks to mortgage companies, engaged in highly risky investments which relied on heavily borrowed funds. The bottom fell out for many individuals and financial services organizations when loan payments that were due could not be paid and complex financial instruments could not be valued properly.
I address an empirical literature which shows how increasing inequality played a major role in causing the financial crisis. This literature identifies a causal connection between rising inequality and excessive investment leveraging. Thus the causal chain is from inequality to leveraging to crisis. I focus on the argument by Michael Kumhof, Romain Ranciere, and Pablo Winant, “Inequality, Leverage, and Crises,” (forthcoming American Economic Review, based on a 2010 Working Paper). I am not concerned to defend or criticize this empirical argument, but rather to show how my theory of leveraging can be integrated with this kind of analysis. The argument of Kumhof et al. is also briefly contrasted with the main line of argument of Thomas Piketty’s Capitalism in the Twenty-First Century.
The analytical framework shows how resource and bargaining leveraging, both when used to promote the desired Leverage Mean and when used in excessive or deficient ways that deviate from the desired Leverage Mean, can be studied systematically along with excessive investment leveraging and inequality. I show how the research topic of understanding political dysfunction in Washington is a complex empirical inquiry into the process by which excessive resource and bargaining leveraging have upheld or even worsened unjust economic inequalities. Likewise, I show how families who pursue the Leverage Mean in their relations, which typically involves considerable bargaining and resource leveraging, must confront the burdens generated by excessive investment leveraging in the political and economic sectors.
Normative questions are also explored, for example: To what extent is the practice of resource leveraging via public-private partnerships (e.g., the Inter-Oceanic Highway in South America discussed by Parag Khanna in How to Run the World) serving to reduce unjustified economic inequality, especially poverty in South America? The paper also briefly sketches how leveraging analysis can be integrated with Communitarian Ideals as articulated by Amitai Etzioni.