Financialization and Income Inequality in the United States
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This paper proposes that financialization, exacerbated by financial policy decisions such as the repeal of the Glass Steagall Act, has polarized the income distribution within the United States during the past 50 years. Broadly defined, financialization is the increased role of financial activities in the economy and has been observed within the United States since the 1970s. Alongside this financial transformation, income inequality has grown, arising from market power held by financial firms which allow them to extract economic rent (profit earned through manipulation of market forces). The culmination of this change was the Great Recession, during which important financial institutions were exposed by the housing-bubble. To analyze the effects of financialization and policy changes as they relate to income inequality, multiple tools are employed. The first of which is an ordinary least squares regression statistical model (OLS), modified with dummy variables and the Wald break test. Next, vector autoregression and difference-in-difference models are used. The most reliable result comes from the difference-in-difference model, which is the most effective at showing the effects of policy change over time. What the difference-in-difference model indicates is that there was a significant break in the United States after the Gramm-Leach-Bliley Act was passed; this change was associated with more income inequality. Also, the connection between CEO pay and stock-market performance is rediscovered (see Mishel & Schider, 2018). These results imply that corporate governance for CEOs must be modified to restore competition in this market.