Journal of Financial Economics

REF 128 Finance and Inequalities

Inequalities have spurred in most countries with financial globalization. Nonetheless average inequalities of income between countries have abated with the rise in emerging market countries boosted by China. Absolute poverty has declined under this impetus.

Disparities are huge within advanced countries. Inequalities have been growing to the extreme in the US, while social security mechanisms have kept them moderate in most of Western Europe.

Those evolutions are explained by two determining forces in the long run: drastic changes in corporate governance on the one hand, very large rise in low cost labor force with the trade opening of large Asian countries on the other hand. A structural increase in the cost of capital relative to the cost of labor has ensued.

Ultra-liberalism has imposed the principle of shareholder value in corporate strategies. The latter has produced inequalities of wealth, hence of power much higher than inequalities of income. Furthermore it fosters leveraged financial cycles which generate macroeconomic instability sparking financial crises.

This unbalanced growth regime is going to meet challenges it cannot handle: demographic ageing, climate change, environmental degradation, under provision of public goods. It is why inclusive and sustainable development calls for a profound mutation of societies.

This article explores the interactions between neoliberalism and the development of the financial industry as drivers of primary and secondary income inequalities. While the rising inequalities should make neoliberal policies that exacerbate them, politically unsustainable, Finance in the broad sense - financial sector and associated activities, financialization, financial lobbies - comes in support of neoliberalism. Until the fall of Lehman, Finance accompanied the extension of neoliberalism, by the jobs it concentrated in the first converted countries, and by financial innovation, including allowing access to property for most. Since 2008, Finance has assumed the role of the culprit who would impose the prominence of neoliberal reforms, because it would require it either as a creditor of states, or as an intermediary of citizens attached to their pension savings, or, in the case of continental Europe, as a post-brexit industrial opportunity.

This paper argues that the mainstream economics profession is threatened by theories of the financial crisis and ensuing stagnation that attribute those events to the policies recommended and justified by the profession. Such theories are existentially threatening to the dominant point of view. Consequently, mainstream economists resist engaging them as doing so would legitimize those theories. That resistance has contributed to blocking the politics and policies needed to address stagnation, thereby contributing to a political vacuum which is being filled by odious forces. Those ugly political consequences are unintended, but they are still there and show the dangerous consequences of the death of pluralism in economics. The critique of mainstream economists is not about “values” or lack of “change”: it is about academic practice that suppresses ideas which are existentially threatening.

The increase of inequality since the 1990s further accelerated with the crisis of 2008. If this has finally triggered a consensus view that we should fight inequality, few see the contradiction between the contrast to combat inequality (the uneven distribution of income) and the emphasis, especially in Europe, on structural reforms, specially on the labour market. This article looks into this contradiction by noting that just looking at stylized facts one can show that increasing polarization of income does not lead to higher investment, nor to more competitiveness. In fact, the analysis of the German model shows that there is much more than price competitiveness at stake. Contrasting inequality should therefore be given priority with respect to wage moderation policies or even wage deflation.

Despite the persistent link between finance and inequality, established in very different contexts over the few thousand years of urban and monetary civilization, the nature of this link remains highly problematic. Is it a causality, the development of financial activities causing the rise of inequality? Or is it a simple correlation, the two phenomena basically arising from similar causes? We opt here for the second position, which does not mean that the financial tools and the rise of the financial professions cannot amplify the increase in inequalities, but rather that the latter finds its origin in social processes incorporating a strong political dimension. Better still, it highlights how, at least on certain occasions, financial techniques can contribute to social pacification - itself to be distinguished from progress towards equality. Thus, without falling into the ideological trap of an axiological or instrumental neutrality of finance, it seems to us that the capture of the latter by a dominant political group is more problematic than the nature of its activities.

The main paradigm in macroeconomics is shifting towards heterogeneous agents models, which are able to account for inequalities and financial imperfections. This evolution comes from new policy questions after the financial crisis, but also from the availability of individual data, which allows a better connection between theories and data. Within these models, financial markets are incomplete and a concept of liquidity naturally arises. This article presents the recent results in this dynamic literature, as the analysis of the inequalities in the United States, the need for a world liquidity, the effect of the public debt on asset prices, or the extent of precautionary saving of households.

This article provides a synthetic survey of the recent literature addressing the links between income inequality and finance, in order to disentangle the various factors underlying the two-way relationship between these two variables. On the one hand, the literature does not provide decisive conclusions concerning the sign of the distributional impact of financial development, financial deregulation and financial crises, the institutional context appearing crucial. On the other hand, there has been recently strong and increasing evidence of a causal positive link running from inequality to (household) credit. Several theoretical mechanisms related to credit supply or demand may provide rationalizations for these results. In this regard, the causal impact seems stronger when middle-classes are concerned. Policy implications are substantial, and several avenues for future research are to be considered.

Financial sectors have massively expanded in advanced economies over the past fifty years, a period that has also been characterised by rising income inequality in most OECD countries. These two developments are not just simultaneous but linked. Econometric enquiries suggest that the overaccumulation of debt and the expansion of stock markets have contributed to increases in inequality. Analysis of micro-level pay data uncovers that this effect stems in part from the compensation premium that financial workers enjoy over their peers with similar profiles in other sectors. This analysis also shows that, in finance as elsewhere, men get higher pay than women with similar profiles. There are ways of economic reforms to tackle these challenges, so that the financial sector contributes to a more inclusive path for economic growth.

The debate about wealth inequality has recently hit the sphere of monetary policymaking: some analysts argued that the unconventional monetary policy would benefit the rich at the expense of the poor. This contribution reviews the channels explaining the relationship between monetary policy and income inequality. An empirical test on the Euro area suggests that ECB unconventional monetary policy may have increased inequality in favour of households who are employed and hold a financial portfolio.

This article documents the interaction between wealth accumulation and different types of inequalities. First, wealth inequalities are themselves substantial and increasing. Differences of saving opportunities in terms of vehicles lead to returns increasing with respect to the size of individual wealth, which accelerates inequality dynamics. In addition to the housing issue due to the sharp increase of real-estate prices, this inflation combined to the decrease of real-estate returns, contributes to the inequality increase due to returns differentials. This meets the issue of increasing income inequalities, driven by the extreme concentration of capital income. In addition, the increase share of bequest and inheritance in wealth accumulation impacts the issue of inter-generational mobility and the persistence of inequalities.

The repeated tax scandals (Panama and Paradise papers, etc.), the information they have to disclose as well as recent academic studies show how closely banks are tied to tax havens. They use them for themselves and play the role of intermediaries for the users of these territories. Beyond tax aspects, the activities they develop there feed international financial instability. Serving the most powerful players (individuals and companies), they contribute to the reinforcement of inequalities.

Departing from a brief story about the emergence of cooperative banks, the article questions the capacity of these banks to reduce inequalities and the conditions under which they can do it. In a constant evolving environment, particularly since the deregulation of the 1980s, cooperative banks have to assert their ability to adapt while preserving their values and responding to the needs of the real economy. According to the information provided in their annual reports, cooperative banks are showing better results in terms of reducing inequalities compared to their counterparts.

Regulators frequently work for the firms they were formerly regulating. According to the literature, this so-called phenomenon of ‘revolving door' is supposed to generate a risk of conflict of interest, and even a risk of capture of the regulator. The article analyses the potential existence of a revolving door in central banks. We produce an overview of central bankers' careers before and after the central bank. Our database shows that revolving door is significant, especially at the exit of the central bank. Our results allow to provide a portrait of a typical revolving door: entry in a central bank follows a career in the banking sector and exit from a central bank is followed by an appointment to a managerial position in the asset management sector after a median period of one year. We propose to lengthen this delay to two years, to regulate the revolving door.

Created in 1912, the Financial Affairs Section is originally a mere division of the Public Prosecutor Office of the former Seine Department. In the early 1930s, it turned into a firmly established organization, provided with its own assistant prosecutors, examining judges, judicial policemen and experts. All of which specialized in financial matters. The current article looks into this more than 100 years old organization that has an important role in the financial and judicial French history. In this respect, it highlights two major points: the origin of the creation of this Section within the Seine Public Prosecutor Office and the development of its activities during the interwar period.