Rising inequality and economic stability

For a long time, the distribution of income or wealth was not a critical factor for understanding economic per for mance. Part of this is due to the separate treat- ment, in economics, of the conceptual issues of equity and effi ciency. A key question to consider, however, is the role of rising in equality— especially in the wake of the fi nancial crisis and the ensuing recession felt worldwide. Does in- equality aff ect economic stability? If so, how? What do we know and what more do we need to know to advise policy makers on this question? Th ese are the questions asked by economist Salvatore Morelli. In this chapter Morelli critically surveys the existing body of evidence and hypotheses on the link between in equality and macroeconomic instability in order to ascertain what guidance, if any, the lit er a ture can off er us. He drills down specifi cally on the question of economic instability. He argues that a new hypothesis has emerged (or perhaps reemerged) that excessive in equality can have negative macrolevel impacts. At the same time he warns us that such a hypothesis cannot be robustly demonstrated without qualifi cations, and many empirical and the- oretical caveats need to be solved by future research. He makes three contributions. He begins by showing that defi nitions matter. Th ere are many ways to conceive of in equality, and these diff ering defi nitions often lead to divergent conclusions. Level of in equality or changes? Personal income or wealth? Factor incomes? In equality of opportunity? In- equality of other resources? Top or bottom in equality? Middle class? This issue will also likely rise in importance, because researchers now have access to a seemingly ever- expanding set of distributional data. Morelli then exam- ines the theoretical and empirical evidence on whether and how in equality aff ects macroeconomic outcomes. He concludes by identifying ave nues of future research