The following paper (pdf of full paper available here) provides an interesting analysis of causes of the Great Recession, analysis that we should ponder as we hear of Romney and Ryan's policies designed to greatly exaggerate current economic disparities:
Income inequality as a cause of the Great Recession?
A survey of current debates
Till van Treeck & Simon Sturn, Geneva, 2012
The recent debates about the role of income inequality in causing the “Great
Recession” are surveyed along different dimensions. First, we review the
controversy about the “Rajan hypothesis” for the United States. In his widely
discussed book “Fault Lines” (2010), Raghuram Rajan argues that many U.S.
consumers have reacted to the decline in their relative permanent incomes since
the early 1980s by reducing saving and increasing debt. This has temporarily
kept private consumption and thus aggregate demand and employment high, despite
stagnating incomes for many households. But it also contributed to the creation
of a credit bubble, which eventually burst, and a large current account deficit
in the United States. We place the Rajan hypothesis in the context of competing
theories of consumption, and survey the empirical literature on the effects of
inequality on household behaviour beyond the largely anecdotal evidence provided
in Rajan (2010).
Second, we discuss the macroeconomic effects of income distribution in China and
Germany, which both experienced pronounced declines in the share of wages and
household income in national income, strong increases in personal inequality,
rising personal saving rates, weak private consumption demand and strong
improvements in the current account in the years before the Great Recession.
Specifically, we argue that the ways in which consumers react to changes in
relative income depend on such institutional factors as the deepness and
regulation of the credit markets, the organisation of the labour market and the
education and welfare systems, and the reactivity of monetary and fiscal policy
We conclude that reducing inequality in these countries is crucial for
overcoming macroeconomic instability and the global and European current account
imbalances over the longer term.