1
Title of the Paper in Full Goes Here
Student Name Here
Walden University
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Abstract
Abstracts are not required for all course papers. Please ask your instructor if you have questions
regarding whether an abstract is required for a particular assignment.
3
Title of the Paper in Full Goes Here
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rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj
kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc
dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv
wwww xxxx yyyy zzzz.
Level 1 Heading
AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq
rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj
kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc
dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv
wwww xxxx yyyy zzzz.
Level 2 Heading
AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq
rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj
kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
4
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc
dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv
wwww xxxx yyyy zzzz.
Another Level 2 Heading
AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq
rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj
kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc
dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv
wwww xxxx yyyy zzzz.
Level 3 heading. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn
oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff
gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx
yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp
qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh
iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz.
Level 4 heading. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz.
5
Level 4 heading. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz.
Level 3 heading. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn
oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff
gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx
yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp
qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz.
Level 1 Heading
AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq
rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj
kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA
bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt
uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc dddd eeee ffff gggg hhhh iiii jjjj kkkk llll
mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv wwww xxxx yyyy zzzz. AAA bbb cccc
dddd eeee ffff gggg hhhh iiii jjjj kkkk llll mmmm nnnn oooo pppp qqqq rrrr sssss tttt uuuu vvvv
wwww xxxx yyyy zzzz.
6
References
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15.555/GGE.64.1.76-82
Laureate Education, Inc. (Producer). (2007). How to cite a video: The city is always Baltimore
[DVD]. Baltimore, MD: Author.
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Retrieved from http://articlesextollingrecordingsofyore.192/fs.com
Smasfaldi, H., Wareumph, I., Aeoli, Q., Rickies, F., Furoush, P., Aaegrade, V., … Fiiel, B.
(2005). The art of correcting surname mispronunciation. New York, NY: Supportive
Publisher Press. Retrieved from
http://www.onewaytociteelectronicbooksperAPA7.02.com
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White, S., & Red, R. (2001). Stop and smell the what now? Floral arranging for beginners
(Research Report No. 40-921). Retrieved from University of Wooded Glen, Center for
Aesthetic Improvements in Fairy Tales website: http://www.uwg.caift/~40_921.pdf
The Social Science Journal 52 (2015) 415–424
Contents lists available at ScienceDirect
The Social Science Journal
journal homepage: www.elsevier.com/locate/soscij
Theorizing income inequality in the face of financial
globalization
Li Sheng
Macao Polytechnic Institute, Edif. Kind Light Garden, Rua de Chiu Chau, No. 48–52, Taipa, Macao
a r t i c l e
i n f o
Article history:
Received 25 November 2013
Received in revised form 6 June 2014
Accepted 6 June 2014
Available online 2 July 2014
JEL classification:
F63
G01
O14
Keywords:
Savings rate
Income inequality
Financial globalization
Global imbalances
a b s t r a c t
Based on an extended post-Keynesian model, we find that the association between the
savings rate and income inequality is negative if savers’ funds are borrowed by spending
households for consumption but positive if savings are channeled to investing firms for
production. A negative association, such as the one that exists in the U.S., hinges on an
income illusion created by an asset bubble and cheap credit. Thus, financial globalization
leads consumption and income inequality to diverge, and the divergence is more extreme
if lower-income groups have higher debt ratios. A positive association, such as the one that
exists in China, relates to liquidity constraints faced by consumers such that consumption
inequality closely follows income inequality. Our results imply that income inequality must
be reduced in both types of countries to increase savings in deficit economies with negative
associations and to reduce savings in surplus economies with positive associations.
© 2014 Western Social Science Association. Published by Elsevier Inc. All rights reserved.
1. Introduction
The 2008 financial meltdown continues to have a major
effect on the world economy and certain economic factors are believed to be associated with what was the
largest financial crisis since the 1929-1933 Great Depression. These factors include rising income inequality in
both emerging and advanced countries, which has weakened effective demand and consumption spending (Sheng,
2014). Furthermore, a savings glut has occurred in Asian
countries, primarily in China, and a savings deficiency has
occurred in Western nations, primarily in the U.S (Broome,
2009; Gu & Sheng, 2010). Relaxed monetary policies and
low interest rates are utilized in many economies, which
have caused a large asset bubble and rampant financial
speculation (Peterson & Venteicher, 2013; Seabrooke &
E-mail address: edmundsheng@ipm.edu.mo
Tsingou, 2010). Additionally, overdeveloped capital markets in the West and underdeveloped financial systems
in Asia have driven Asian savings into Western markets
and led to even lower interest rates, a fueling of consumer
credit, and an exacerbation of bubble speculation (Lambie,
2009; Sheng, 2011a, 2011b). At a global level, financial,
physical and knowledge infrastructure is poorly integrated,
which is a concern in the face of the globalization of
financial capital and Internet communication. Traditional
industrial policies based on closed national economies
and partnerships between national governments and local
multinational corporations have failed, and a new policy
focused on institutional infrastructures is needed (Choi,
Berger, & Kim, 2010). At a micro level, moral hazards lie at
the core of many of the causes of financial turbulence; at a
macro level, inadequacies of political institutions bear the
majority of the blame (Hou, 2011). Benefits from foreign
financial resources may not outweigh the costs of destabilizing speculation. The real appreciation of currency may
http://dx.doi.org/10.1016/j.soscij.2014.06.003
0362-3319/© 2014 Western Social Science Association. Published by Elsevier Inc. All rights reserved.
416
L. Sheng / The Social Science Journal 52 (2015) 415–424
be a major determinant of the deterioration of the current
account imbalances. Hence, rapid disinflation policies are
necessary to avoid financial crises (Dropsy, 1995).
Previous studies have provided competing explanations for the causes and effects of the global crisis. The
present study offers a concise explanation by integrating
the main themes of other studies that have evolved separately. Whereas some studies claim the importance of the
relationship among income inequalities, credit booms, and
financial crises, other studies invalidate this inequalitycredit-crisis nexus by highlighting the importance of low
interest rates and typical business cycles. Nevertheless,
recent studies continue to emphasize the adverse effects
of inequality on current accounts, government debt, and
aggregate savings. This study focuses on international differences in the association between inequality and savings
for three reasons. First, many authors view income inequality as one of the most important global economic problems,
and these authors connect inequality with savings. Second,
high public and household debt or low aggregate savings
contribute to account deteriorations, which is implied by
the national accounts identity (Ang, 2011). Third, the root
causes of large global imbalances coincide with those of
the financial crisis. Thus, studies should focus on intercountry differences in the association between inequality
and savings to determine how these factors are involved in
economic globalization (Sheng, 2010, 2013).
The negative savings rate in the U.S. plays an important role in the development of global imbalances because
of the effect of savings on the current U.S. account deficit.
The term global imbalances refers to the fundamental
imbalance in global payments; a widening U.S. current
account deficit is associated with surpluses in a number
of countries. According to simple accounting identities, a
current account deficit necessarily equals capital inflows to
the country. Therefore, a current account deficit equals the
negative difference between domestic savings and investments. Hence, global imbalances have often been studied
by analyzing savings and investments from both a global
and U.S. perspective (Salotti, 2010).
Although inequality is generally increasing in many
places, national savings rates have increasingly diverged
across countries. This recent phenomenon implies the
development of a new association between inequality
and savings that merits further study, as the associations directly implicates global imbalances. The association
between inequality and savings is negative in most OECD
countries but positive in some Asian economies (Mah-Hui
& Ee, 2011). Global imbalances can be epitomized by comparing the U.S. and China. Because they are perceived to
be major sources of the global imbalances, as their large
account imbalances have global impacts, the differences
between the U.S. and China are a focal point in this study.
This study offers an explanation for the differences in the
association between inequality and savings between the
U.S. and China.
Finance may play an important role in determining what
type of association between inequality and savings prevails
in an economy. This study develops a theory that suggests
that income inequality is positively associated with the savings rate if savers’ funds are allocated to investing firms for
production in the financial sector, which occurs in China;
however, the theory also suggests that income inequality is
negatively associated with the savings rate if savers’ funds
are lent to spending households via financial intermediation for consumption, which occurs in the U.S. Our theory
is based on an extended post-Keynesian model that introduces household leverage because modern credit facilities
and lending offers constrained spending via liquidity rather
than income. Furthermore, when foreign savings are available at low cost, domestic spending is no longer constrained
by national income (Hamouda & Harcourt, 1988). Our
extension has a critical impact on our understanding of
the association between inequality and savings. The traditional Cambridge approach predicts a positive association
because spending is subject to income, but our model
accounts for a negative association that is caused by habitual consumer credit use for deficit spending, and there is no
need to resort to complicated inter-temporal calculations.
The fundamental change to the Cambridge model is
that our extension incorporates the fact that sophisticated
finance and marketing services create income illusion as
a long-term effect on spending behavior. Individuals in
the U.S. can use their credit limits as a way of forecasting incomes; in particular, with access to a large amount
of credit for a long period of time, individuals are likely to
infer that their lifetime incomes are permanently higher.
In this situation, individuals’ willingness to use credit for
spending is also higher. This income illusion is reinforced
by financial globalization and enters into our definition of
borrowing households’ consumption propensity in the U.S.
but not in China. In China, individuals could not previously
borrow against future income growth and now only have a
limited capacity to do so. Instead, individuals in China must
save to make large purchases.
With regard to the income illusion, Kumhof and
Ranciere (2010) point out that much of the increased aggregate income in the past three decades was distributed to the
top income group, so the group of households with stagnant real wages created political pressure to improve their
living standards. Policymakers responded to this pressure
by providing easy access to mortgage finance for which
these households would not have otherwise qualified.
Eased housing financing allowed millions of workers to
buy new homes and receive cheap credit for increased consumption through the equity in their homes, the prices of
which rose rapidly with the resultant lending boom, which
generated a long-held income illusion. Liberalizing loans
to workers without addressing inequality itself would only
increase household indebtedness and postpone the costs
of the inequality problem. Rising inequality leads workers to borrow to maintain their consumption as their real
incomes decline relative to those of the wealthy. This cycle
leads workers to borrow more as they become increasingly
indebted. The trigger for a financial crisis occurs when their
leverage begins to be perceived as unsustainable. Because
rising household leverage caused by income inequality in
the U.S. has been built on housing bubbles, the sudden
burst in 2007 led to a negative net worth in household
balance sheets. This drastic change led to enormous loan
losses that exceeded bank capital reserves, and many banks
were forced into insolvency or mergers. The consequence
L. Sheng / The Social Science Journal 52 (2015) 415–424
was that a systemic financial crisis began in 2008. In fact,
over-indebtedness caused by inequality may arise as people on the losing side of the income distribution emulate
the consumption habits of their wealthier peers, thereby,
triggering expenditure cascades and further deteriorating
household balance sheets.
We provide an aggregate theory to account for the
role of financial depth in shaping international differences
in the association between savings and inequality. After
decades of research, the effect of inequality on savings
remains unresolved as a result of analytical ambiguity
and mixed empirical findings. While some studies find
no systematic effect, others identify a positive or negative
effect. This issue has attracted renewed attention because
of the worsening global imbalances and the resulting financial crisis that has aroused widespread social tension. Our
study contributes to this literature by emphasizing both
the differing effects of income inequality on the savings
rate between surplus and deficit economies and the implications of savings or leverage for global imbalances and
financial crises.
2. Literature review
The relationship between savings and inequality has
been studied extensively. A brief review of the associations
between savings and inequality is provided in the context
of global imbalances and financial crises. Although studies of these topics have evolved separately, we attempt to
connect them to recent events in a logical and orderly manner. We first consider the following issues that apply to
countries with account deficits:
(1) Since the 1980s, employment protection in OECD
countries has decreased in favor of financial development, which causes an unequal income distribution
and a declining wage share in GDP (Palma, 2011).
(2) Consumer credit is expanded through financial liberalization to replace reduced wages and prevent worker
consumption from contracting so that the drop in
worker consumption does not exceed the reduction in
wages (Stiglitz, 2011).
(3) Credit consumption based on asset bubbles leads to a
high and rising household debt-to-income ratio, a sharp
decline in aggregate savings, and financial fragility
and crisis when the household debt-to-income ratio
becomes unsustainable (Eichler & Sobanski, 2012).
(4) Soaring profits that are made possible by falling wages
are not extensively used as real savings for producible
investment; rather, these profits are primarily recycled
as interest-bearing liquid assets that are backed by
loans to workers for consumption, thereby, depressing
savings rates and exacerbating current account deficits
(Palley, 2012).
(5) Rising income inequality is followed by political interventions that do not address the sources and delay the
consequences of the inequality by promoting cheap
credit for workers, which protects their living standards
from the stagnating real wages. Legislators who represent areas with higher inequality are more likely to vote
(6)
(7)
(8)
(9)
417
for policies that increase credit availability or reduce
lending rates (Dixon & Rimmer, 2001).
As complementary measures to financialization,
relaxed monetary policies or the associated low
interest rates create asset bubbles and encourage speculative trading, which makes savers prefer financial
over real assets, ignoring the future consequences
(Sheng, 2012a, 2012b).
Economic growth is thus primarily driven by credit consumption and related financial services but not by real
investment or producible capital accumulation, which
further depresses current accounts and increases the
risk of financial crises (Love & Zaidi, 2010).
Rising current account deficits are increasingly
financed through foreign savings by promoting free
capital mobility and taking advantage of the problematic international monetary system (Hung & Gamber,
2010).
Piketty (2014) focuses on income inequality in Western countries since the 18th century. He finds that
wealth will concentrate if the rate of return on capital
is greater than the rate of economic growth, as wealth
tends to accumulate more quickly from profits, dividends, interests and rents than from labor, and tends
to accumulate more among the top centile, increasing
inequality. This, however, will lead to financial instability as evident in the face of the ongoing financial
crisis. The central thesis of his book is that inequality
is not an accident, but rather a feature of capitalism,
and can only be reversed through state interventions.
Piketty proposes a global wealth tax combined with a
progressive national income tax up to 80% in order to
avoid a society that has a rigid class structure based on
accumulated savings.
The literature also discusses the following issues that
apply to countries with account surpluses:
(1) Despite rapidly rising labor productivity, income
inequality is caused by low real wages. Income inequality directly contributes to low and falling consumption
relative to quickly growing national income. High and
rising savings cannot be fully absorbed by domestic
investment and must flow out for “reliable” stores of
value abroad (Fails, 2012).
(2) During global underinvestment, savings outflows help
to lower global interest rates and fuel financial bubble
speculation. For example, China’s high savings rate is
said to be responsible for cheap debts, housing bubbles, and financial crises elsewhere in the world (Ma,
McCauley, & Lam, 2013). China is the world’s largest
trade nation, with diverse trading partners, and is an
emerging international financial hub, able to project its
domestic issues on the global economy. In fact, China’s
large savings and foreign exchange reserve, monetary
expansion and real estate bubble have increased financial volatility around the globe through asset price
channel as well as other indirect channels. Moreover,
expectations of an economic hard landing in China are
418
L. Sheng / The Social Science Journal 52 (2015) 415–424
threats to global economic recovery from the crisis
(Zhang, Song, & Breece, 2013).
(3) Persistent trade imbalances that hinge on large differences in savings rates between Asia and the West,
primarily between China and the U.S., have triggered trade protectionism and disagreements about the
exchange rate. The problem of imbalances is widely
attributed to the currency misalignment, but some
authors highlight economic fundamentals, such as savings and productivity, as the cause (Benassy-Quere,
Lahreche-Revil, & Mignon, 2008).
(4) Salotti (2010) finds that wealth does not negatively
affect U.S. household savings; rather, government savings better explain the decline in household savings. By
not saving, the state household influences the current
account deficit, thereby helping to create and sustain
global imbalances.
This literature review demonstrates the importance
of understanding the causes and effects of the relationships between savings and inequality. Weak labor
protection causes income inequality in both deficit and
surplus countries in relation to their finance-led and
export-based growth, respectively. Inequality affects savings in various ways in those economies, depending on
the degree of financial development, and has different
implications for the trade balance and financial risk. Rising
inequalities cause global imbalances through international
differences in savings, and global financial crises emerge
as consequences. Therefore, our study concentrates on the
inter-country differences in the associations between savings and inequality.
The term global imbalances can be misleading, as the
term actually refers to national imbalances. These imbalances occur for many reasons. For example, using capital
flows, a savings deficiency in one country can be balanced by a savings glut in another. In the case of China
and the U.S., the borrowing needs for deficit spending in the U.S. are matched by the lending willingness
of China, which is a result of depressed consumption.
Another example occurs when a country’s liberal cost
outsourcing policy is accommodated by another country’s support for foreign investment at the expense of
low-skilled labor in both countries, with rising income
inequality as a direct consequence. For example, worker
dislocation in the former country and low wages in
the latter. One country’s financial underdevelopment can
also be compensated for by another country’s overdevelopment until the surplus savings from the former
country are channeled through markets for long-term
cheap use by the latter country. Alternately, high wages
in one country’s service sector with low productivity
can be made possible by low wages in another country’s manufacturing sector with high productivity. Another
example is that the borrowing needs of some countries
with generous social welfare spending can be met by
the lending willingness of other countries with high
savings that is partially a result of inadequate social
security. Additionally, one country’s capital gains from
financial speculation can be implied by another country’s
capital losses in international markets, or one country’s issuance of the world’s reserve currency can be
matched by another country’s accumulation of forex
reserves. Finally, one country’s rising demand for consumption goods under deindustrialization can be satisfied by
another country’s manufacturing export growth, so the
former provides business services that are absorbed by the
latter.
Normally, national imbalances merge into a globally
balanced economy through international integration, as
the world economy has maintained output growth even in
the midst of enlarging national imbalances. The real question is either “To what extent can various deficit countries
tolerate their respective national imbalances?” or “In the
context of rising national imbalances, can the globally balanced economy continue to grow without culminating in
a global crisis?” Addressing these questions requires academic research and policy design to focus on the role of
financial development in the association between inequality and savings.
3. Differing associations between inequality and
savings under different financial systems
Different financial systems have different influences
on the association between inequality and savings across
advanced and emerging economies. This observation can
be explained by a new theory, proposed below, that
extends the Cambridge model to credit consumption and
aggressive financialization in advanced countries. Global
imbalances are affected by international differences in
aggregate savings, including public and private savings. In
the absence of Ricardian equivalence, higher taxes increase
public and aggregate savings. Private savings are firm savings plus household savings. Studies disagree about the
determinants of firm savings. A number of hypotheses exist
to explain how household savings account for the overwhelming share of private savings, but the results from the
hypothesis testing are far from conclusive. These hypotheses include Keynes’s absolute-income hypothesis (AIH),
Duesenberry’s relative-income hypothesis (RIH), Friedman’s permanent-income hypothesis (PIH), Modigliani’s
life-cycle hypothesis (LCH), Kaldor’s class-savings hypothesis (CSH), and other hypotheses as well, such as credit
unavailability, missing markets, and precautionary motives
(Khor & Pencavel, 2006).
By focusing on the aggregate, our model does not distinguish among various savings categories. Instead, we
are concerned with different patterns of saving behavior
related to income inequality under three financial circumstances: a liquidity constraint, the presence of domestic
credit, and the presence of foreign financing. We use a
unified framework to address international differences in
the associations between aggregate savings and income
inequality. Our framework extends Keynes’s hypothesis
by embracing useful elements from the other savings
hypotheses described above and by stressing the role of different financial systems in shaping particular associations
between savings and inequality.
L. Sheng / The Social Science Journal 52 (2015) 415–424
3.1. A positive savings-inequality association under a
liquidity constraint
A positive association is derived below from the traditional Cambridge model with changes that better describe
the saving behavior observed in China and other East Asian
economies. Consider two income groups: B for bottom and
T for top. Group B is composed of workers with stable, low
labor income. Group T comprises individuals with variable, high non-labor income or high executive pay, such
as property income and capital gains earned by capitalists,
tax revenue collected by governments, and illegal income
extracted by public and corporate officials, which is widely
observed in developing or transition economies. We establish the savings-inequality association by analyzing the
differing patterns of saving behavior between these two
groups.
In emerging Asian economies, consumption is constrained by income. Few borrowing opportunities exist for
households, as there is limited or nonexistent consumer
credit and most savings are allocated by the financial sector
for real investments. Much of income YB in Group B is permanent income that is used for consumption CB . Because
wage earners rarely receive transitory income, they will
be unable to save much but will have a high propensity
to consume: ˛B = CB /YB . Most of income YT in Group T is
transitory income ready for saving. This income largely
carries a variable yield, as its sources include previous
investments with volatile market values; pro-cyclical tax
collections; uncertain firm performances; or secret, dishonest, and risky channels. The recipients of this yield have
high savings and a low consumption propensity: ˛T = CT /YT ,
where CT is their consumption. Normally, ˛B > ˛T is postulated to reflect differences in the long-term behavioral
patterns between the two groups; consumption habits are
persistent under behavioral inertia.
Given the aggregate income Y = YB + YT , the income share
YT /Y is used as a proxy for income inequality. Analyzing
the ratio of aggregate consumption C = CB + CT to aggregate
income yields the Cambridge model:
C
YT
= ˛B + (˛T − ˛B )
Y
Y
(1)
Clearly, YT /Y affects C/Y negatively under ˛B > ˛T . Thus,
we derive the following:
In the absence of consumer credit, the rate s (=S/Y) of
aggregate savings S (=Y − C) increases with higher income
inequality.
This result applies to emerging Asian economies. Later,
this approach is extended to include consumer credit and
foreign financing. The theoretical result from Eq. (1) relies
on the assumption that ˛B > ˛T , which can be validated
by combining useful elements from the main hypotheses regarding savings in the literature. Wealthy individuals
have low normal labor incomes relative to their total
incomes, and their non-labor or abnormal labor incomes
are substantial but fluctuating. Moreover, the yields from
their invested savings can partially or fully cover the
expenses of their future consumption. Typically, individuals in Group T are powerful at dictating an unequal income
distribution, and there are strong incentives to perpet