Increased inequality is well explained by the credit expansion induced by deregulation, so says a winning paper by Vancouver School of Economics alumnus Christopher Cummings.
Using panel data in the United States from 1994 to 2005, Cummings looked at the timeline of US banking deregulation across states to show that an expansion in credit has significant effects on multiple measures of inequality.
“Some inequality may be due to poor financial competences. With increased access to credit, some people will have the ability to put this credit to good use, but some will not. And it may even hurt those people,” said Cummings, who won the 2017 Undergraduate Award in Economics for the United States and Canada region for his honours thesis research.
Cummings’ paper points to the significance of financial literacy as an indicator of how credit expansion can affect inequality, with financial literacy acting as “a proxy for the ability to reap benefits from financial opportunities.”
“Financial literacy varies considerably within the population. It’s been shown that those with low financial literacy are more likely to transact in higher cost manners, incur higher fees, use higher cost borrowing, or accumulate excessive debt,” he said.
Cummings was drawn to his research by both an interest in the origins of the 2008 recession and an interest in explaining the fundamental causes of rising inequality.
Cummings is pursuing a Master of Arts in Economics at Queen’s University and will start a position as an Economist at the Department of Finance Canada in September.