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May 7, 2014

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Posted: 07 May 2014 12:06 AM PDT

Why Economists Are Finally Taking Inequality Seriously

Posted: 06 May 2014 08:47 AM PDT

New column:

Why Economists Are Finally Taking Inequality Seriously, by Mark Thoma: In economics, the examination of questions surrounding the distribution of income have been ignored or pushed into the background in the academic literature. However, rising inequality over the last several decades coupled with recent work by Thomas Piketty – which has had a surprisingly large and positive reception by the public – have propelled these questions to the forefront of economic analysis. ...

Interview with Mark Gertler

Posted: 06 May 2014 08:46 AM PDT

From an interview with Mark Gertler:

EF : Is there anything you've learned from the Great Recession about the role of finance that you weren't aware of before?
Gertler: I liken the crisis to 9/11; that is, there was an inkling that something bad could happen. I think there was some sense it wa s going to be associated with all the financial innovation, but just like with 9/11, we couldn't see it coming. When we look back, we can piece everything together and make sense of things, but what w e didn't really understand was the fragility in the shadow banking system, how it made the economy very vulnerable. I always think of the Warren Buffet line, "You don't know who's naked until you drain the swimming pool." That's sort of what happened here.
I think when we look back on the crisis, we can explain most of what happened given existing theory. It's just we couldn't see it at the time.
EF : What do you think is the best explanation for the policies that were pursued?
Gertler: At the time, I think it was partly unbridled belief in the market — that financial markets are competitive markets, and they ought t o function w el l, not taking int o account that any individual is just concerned about his or her welfare, not about the market as a whole or the exposure of the mark et a s a whole. And so you had this whole system grow up without any outside monitoring by the government. It just had individuals making these trades and making these bets; nobody was adding everything up and understanding the risk exposure. And there was this attitude that we ought to be inclusive about homeownership — that was going on as well. Plus, complacency set in. We had the Great Moderation of the 1980s and 1990s, and we all thought we'd solved the major problems in macroeconomics. There were some prominent macroeconomists saying, "Look, we shouldn't be wasting our time on these conventional issues; we've already solved them." That led to most people just being asleep at the wheel.

Much more here.

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