Thomas Palley : "Inequality, the financial crisis and stagnation: competing stories and why they matter"

Palley74.pdf

Abstract

This paper examines several mainstream explanations of the financial crisis and
stagnation and the role they attribute to income inequality. Those explanations are
contrasted with a structural Keynesian explanation. The role of income inequality
differs substantially, giving rise to different policy recommendations. That highlights
the critical importance of economic theory. Theory shapes the way we understand the
world, thereby shaping how we respond to it. The theoretical narrative we adopt
therefore implicitly shapes policy. That observation applies forcefully to the issue of
income inequality, the financial crisis and stagnation, making it critical we get the story
right.