1. Do you think a similar model could be developed were certain countries plays the role of the big savers, and certain other (stagnating?) countries plays the role as the big borrowers?

2. You mention the bargaining power of the middle class. Norwegian professor Karl Ove Moene (among many others, of course) have written interesting papers about equality and bargaining power in Norway and other Scandinavian countries. (A brief summary of the work, originally published in the World Bank development outreach series, is available here: http://www.frisch.uio.no/pdf/TheScandinavianModelandEconomicDevelopment.pdf) However, it appears that this work have received little attention internationally, both from the economics profession and from political circles, including the #Occupy campaigns. Do you have any idea why that is? (I have potential answer: The direct challenge to elite interests that the model poses.)

Great stuff Jared! We need more models that pick up on the wealth concentration leading to income concentration leading to more wealth concentration cycle. Demand for increased borrowing plays a huge role. But why doesn’t the increased risk of lending based on increased debt/income ratio show up in the cost of borrowing? Doesn’t the risk seeking behavior of the lenders have to be increasing as they become more wealthy to keep the price from increasing? If they were risk neutral, the cost of borrowing should increase as the risk does shouldn’t it?

And isn’t this just another effect of differing MPC’s that Keynes focused on as playing such an important role? Why is there so little discussion of this in recent economics? Has the effect of differing MPC’s been empirically shown to be something we can ignore like we did with our last “stimulus” spending?

Inequality is the consequence of a multiplicative process of returns to capital that results in wealth condensation. This is easily captured in a dynamic statistical model.

Debt is key to influencing both detailed distribution of income and wealth, and also the split between returns to labour and capital; the ‘Bowley Ratio’.

The solution to the problem is to move capital into the hands of poorer people via some form of compulsory saving. This could be acheived using a variation on the Chicago/Chile/Singapore style pension system, but applicable to all ages.

For more background information try googling “why money trickles up” or “the Bowley Ratio” or try:

http://arxiv.org/abs/1105.2122

http://www.econodynamics.org/sitebuildercontent/sitebuilderfiles/bullets.pdf

My apologies if you’ve responded to this elsewhere (the name “Mason” didn’t turn anything up in your search bar), but have you considered Mason and Jayadev’s paper on the causes of household leverage in the 80s and 90s?

They argue that not only was there was no increase in borrowing during that period, but that households actually ran a primary surplus. What drove up household leverage was not borrowing per se, but the mechanical effects of higher interest rates and lower GDP growth. That would call into question “the liberal theory explaining it in terms of efforts… to maintain consumption standards in the face of a falling share of income.”

What say ye?

(by the way, their argument doesn’t necessarily conflict with the IMF model. You could simply say that rather than increasing borrowing to maintain living standards, households simply refused to borrow less and save as much as was necessary given interest rates and GDP growth)