The post-1980 era witnessed an increase in the frequency and severity of financial crises around the globe, the majority of which took place in low- and middle-income countries. Studies of the impacts of these crises have identified three broad sets of consequences. First, the burden of crises falls disproportionately on labor in general and low-income segments of society in particular. In the years following financial crises, wages and labor share of income fall, the rate of unemployment increases, the power of labor and labor unions is eroded, and income inequality and rates of poverty increase. Capital as a whole, on the other hand, usually recovers quickly and most of the time gains more ground. Second, the consequences of crises are visible not only through asset and income distribution, but also in government policies. Government policies in most cases favor capital, especially financial capital, at the expense of large masses. In addition, many crises have presented opportunities for further deregulation and liberalization, not only in financial markets but in the rest of the economy as well. Third, in the aftermath of financial crises in low- and middle-income economies, capital inflows may increase as international capital seeks to take advantage of the crisis and acquire domestic financial and non-financial assets. The 2007–2008 financial crisis in the US provides an opportunity to extend this analysis to a leading high-income country and see if the patterns visible in other crises are also visible in this case. Using the questions and issues typically raised in examinations of low- and middle- income countries, we study the consequences of the 2007–2008 US financial crisis and complement the budding literature on the ‘Great Recession.’ In particular, we examine the impacts of the crisis on labor and capital, with a focus on distributional effects of the crisis such as changes in income shares of labor and capital, and the evolution of inequality and poverty. We also analyse the role of government policies through a study of government taxation and spending policies, and examine capital flow patterns.
Mathieu Dufour and Özgür Orhangazi
Mathieu Dufour and Ian J. Seda-Irizarry
The explanation of complex issues usually requires techniques that imply some sort of abstraction. In economics, and popular discourse in general, dichotomies are an example of such devices. Be it the opposition between monetary and real phenomena, free trade and protectionism, or idealism and materialism, dichotomies are pervasive heuristic techniques. Students taking introductory courses in economics come with preconceived ideas that are, in many senses, shaped by dichotomies, which makes them a useful but tricky teaching tool. In this article, we outline a way to make use of this to transcend these priors and foster critical thinking, using one of the prominent dichotomies, that between the market and the state.