Raghuram Rajan says in Fault Lines that “the political response to rising inequality [in the US]…was to expand lending to households, especially low-income ones.” And Jean-Paul Fitoussi and Francesco Saraceno claim (pdf) that increasing inequality involved a shift in income from people with a high propensity to consume to people with a low propensity, and this created a tendency towards weak aggregate demand which in turn led to low interest rates and asset price bubbles.
Personally, I’m a little sceptical here. Rajan’s argument seems crudely functional; I’d rather stress that lower- income people borrowed heavily in an attempt to keep up with the Jones’. And Fitoussi and Saraceno give us no evidence on the size of the demand shortfall created by increased inequality.
I suspect, though, that inequality matters in other ways.
First, a major cause of inequality was also a cause of the crisis. Ravi Jagannathan and colleagues say the crisis (pdf) originated with the increased labour supply coming from China in the late 90s. This at least contributed to increasing inequality in the west. And it led to the crisis by giving China a huge current account surplus, which it tried to recycle into AAA-rated securities, which in turn fuelled the demand for mortgage derivatives. In this sense, equality might not have caused the crisis, but it was on the scene of the crime.
And it might have been one of the villains in another sense. One of the ideological justifications for “winner-take-all” inequalities was that top bosses had the skill to “add value” to huge companies. This contributed to a combination of over-confident bosses and a lack of adequate control of them - what Nick calls a “dictatorship of the manageriat“ - which bred the poor corporate governance that destroyed some banks.
So, maybe inequality did generate the crisis - not (just?) through macroeconomic channels, but through an ideological one.