When economic inequality is rising within a country, it's common for leaders to offer a fiscal Band-Aid that makes people feel richer — even if they aren't.
That's what happened in the U.S. over the past few decades, Raghu Rajan argues in his new book, Fault Lines. The Band-Aid, in our case, was the easy credit that ultimately led to the financial crisis.
Rajan, a University of Chicago professor and former chief economist for the IMF, recently spoke with Alex Blumberg. Here's that interview, the latest in Planet Money's occasional Deep Read series.
Here's a key passage from the interview:
There has been a stagnation in the wages of a significant part of the U.S. population ... over the past 20, 25 years, the answer has been increasing borrowing.
You borrow in order to finance a better lifestyle, but in fact you're going deeper and deeper into debt.
... if you can offer more credit to housing, people have a house, which is an asset ... as the house price rises, you feel wealthier, you don't feel you're borrowing, you don't feel you're going deeper and deeper into hock...
It's credit as a palliative. And of course, it accords well with the fact that, at least in the short run, it can make people feel much happier. The problem is the bill has to be paid in the longer run.
For more from Rajan: Read Rajan's 2005 paper, "Has Financial Development Made the World Riskier?"
Listen to our first Deep Read: 'The War Between States And Corporations.'
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