Why the difference? Thorstein Veblen had one answer. In capitalist society, he said:
And Americans are more prone to do this than others because Americans, much more than Europeans, believe wealth comes from hard work rather than luck; even the poor remain hopeful of moving up. It is a cliché that Americans see a flash car and think; “if I work hard I’ll get one of those” whereas the British think “tosser.”
This naturally leads them to save little and spend much - to get into debt.
And this is where inequality comes in. As this rises, the less well-off feel the need to stretch further to appear to keep up with the wealthy. A 1000 square foot house might be adequate when others live in 1500 sq foot houses. But it’s not when they live in 3000 sq foot ones.
As inequality rises, then, so savings fall and debt rises as people scramble to keep up with the rich. The result is a greater vulnerability to financial crisis caused by people defaulting on loans.
This story is beautifully told by Jon Wisman in this new paper.
What’s the evidence for it? A few things:
1. The US has a much lower household savings ratio than most other developed countries. Is it really a coincidence that the US also has both a greater belief that wealth is due to hard work and greater inequality?
2. There have been three episodes in US history of rising inequality: the late 19th century, the roaring 20s and the post-1980 period. All were accompanied by general consumer booms.
3. Since 1980, the US savings ratio has fallen sharply. What, other than rising inequality, might explain this, given that many other developed economies have not experienced such a fall?
It is, therefore, at least plausible that measures to prevent this crisis happening again would have to include policies to reduce inequality.
However, although nationalization and “Keynesianism” are back in fashion, equality isn’t. Funny that.