By Chris Benner and Manuel Pastor

(An adapted and updated excerpt from the introduction to Just Growth: Inclusion and Prosperity in the New Economy, a new book released in early January 2012 from Routledge Press. See http://justgrowth.org for more details. )

The financial crisis of 2008-2009 and the lingering Great Recession that resulted have raised some profound questions about the nature of our very economic system. Some have suggested that the meltdown was an inevitable consequence of deregulation and have called for firmer control over the creation and implementation of new financial instruments. Others have pinned the blame on an unsustainable run-up in housing prices and argued that the Federal Reserve should slow future bubbles in asset prices. Still others have pointed to excess consumer demand, particularly in the U.S., and argued that we need to lift our savings rate to a higher and healthier level.

We agree on the need for regulation, protection against asset run-ups, and the need for a more future-oriented approach to savings and investment. However, we would suggest that another element at play in the crisis also deserves attention: income inequality. After all, what emerged in the years before the crisis was a nearly unprecedented – well, except before that other Great Depression – rise in the gap between the rich and the poor. With some so wealthy that they shifted to increasingly speculative investments to place their excess funds and others so strapped that they borrowed to prop up their falling household incomes, the financial trap was set. It could have been better regulated, to be sure, but the fundamental problem was not the market but the distribution that the market confronted. Continue reading. . .