Daron Acemoglu on Inequality and the Financial Crisis

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🗓️ 21 February 2011

⏱️ 64 minutes

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Summary

Daron Acemoglu of MIT talks with EconTalk host Russ Roberts about the role income inequality may have played in creating the financial crisis. Raghuram Rajan in his book, Fault Lines, argues that growing income inequality in the last part of the 20th century created a political demand for redistribution and various policy changes. This in turn created the push for higher home ownership rates and led to the distortions of the housing market that in turn led to excessive risk-taking in the financial market. Acemoglu suggests a simpler story where the financial sector through its political influence distorted the rules of the game, benefiting executives in the industry, which in turn led to outsized rewards and ultimate instability in the financial industry. The conversation discusses ways of distinguishing between these two arguments and what might be done to change the incentives of politicians.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you. Today is February 9th, 2011, and my guest is Darren Asimoglu, Elizabeth
0:44.6	and James Killian Professor of Economics at MIT. Darren, welcome back to Econ Talk. Thanks very
0:50.4	much for having you back Russ. You recently made a presentation on the financial crisis
0:54.7	and the role of inequality. And inequality is often invoked as a potential explanation for
1:04.6	various crises. I think sometimes the evidence for that is a little bit weak. But you were
1:10.1	criticizing some of that work, particularly you're criticizing or at least providing an
1:15.0	alternative to an argument put forward by Raghu Rajan and his book Fault Lines. What is Rajan's
1:20.2	argument and your alternative? Let me first start by saying that I think Raghu Rajan
1:28.4	is one of the most creative and accomplished economists of his generation and somebody I
1:36.2	always learn a lot from. And he always comes up with interesting ideas and this is no
1:44.6	exception and I think he has actually come up with a very rich analysis of the financial
1:50.8	crisis and its implications that causes in his book Fault Lines. And one of the ideas
1:57.2	or one of the lines of argument in that book has attracted a lot of attention and it is
2:04.3	a very creative and interesting argument that some other people have also kind of supported
2:10.6	or expressed in somewhat different forms. And I think to me it sounded like an intriguing
2:17.1	hypothesis that it made me think of related ideas and sort of also why perhaps I am not
2:25.2	fully convinced by this idea. And I guess this is what I've tried to argue in a presentation
2:33.9	in the American Economic Association in Denver last month. And so let me start with
	...

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