Joseph Stiglitz on the Connection Between Inequality and Bubbles

We know there's a lot of wealth inequality in America. And we know it's been getting worse.

But why should anyone care? How does wealth inequality actually effect the economy? And you?

I asked Joseph Stiglitz, the Nobel Prize-winning economist, earlier this month. Have a look. (A transcript follows.)

Joseph Stiglitz: "The growth of inequality in the United States has weakened demand. Now we made up for that weakening demand, because people at the top don't spend as much of their money as the people at the bottom, who have to spend everything to get by.

"We try to offset that by creating a bubble. That's what the Fed did, and one way of interpreting what happened before the crisis, if we had not created the bubble, demand would have been low and the economy would have been weak and the Fed said, 'Let's go ahead, lower interest rates, deregulate, not put any restriction on loan-to-value ratios or anything like that,' and it worked for a while in getting demand up.

"But it wasn't sustainable. It wasn't the basis of creating a strong economy. And now the unfortunate thing is we're left with an economy with even more inequality. A result of the downturn, wealth of the middle, the median individual in our society, the wealth is back to the level of the early '90s. So basically we've had two decades in which all the increase to the wealth has gone to the top, none of it to the middle or the bottom. That can't be the basis of a robust economy. You can't have a strong economy in which so many, more than 50%, see their wealth, no progress."