Inequality and Instability: A Study of the World EconomyJust Before the Great Crisis

James K. Galbraith

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks

to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the

banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing

power should be taken from the banks and restored to the people, to whom it properly belongs. 1 Thomas Jefferson (Attributed)

3rd president of USA (1743-1826)

“I’m sick and tired of hearing things from uptight, short-sighted, narrow-minded hypocrites.

All I want is the truth. Just gimme some truth. I have had enough of reading things

by neurotic, psychotic, pig-headed politicians”.John Lennon2

GALBRAITH, James K., Inequality and Instability: A Study of the World Economy Just Before the Great Crisis, New York: Oxford University Press, 2012, pp. 336. ISBN 13: 978-0-19-985565-0 (hardback).

Presentation (of the publisher)

1 “The system of banking we have both equally and ever reprobated. I contemplate it as a blot left in all our constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens […]. And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale”. (Thomas Jefferson, letter to John Taylor, May 26, 1816). Cf.: http://en.wikipedia.org/wiki/Thomas_Jefferson 2 Cf.: http://www.lyrics.net/lyric/21193594

As Wall Street rose to dominate the U.S. economy, income and pay inequalities in America came to dance to the tune of the credit cycle. As the reach of financial markets extended across the globe, interest rates, debt, and debt crises became the dominant forces driving the rise of economic inequality almost everywhere. Thus the "super-bubble" that investor George Soros identified in rich countries for the two decades after 1980 was a super-crisis for the 99 percent-not just in the U.S. but the entire world.

Inequality and Instability demonstrates that finance is the driveshaft that links inequality to economic instability. The book challenges those, mainly on the right, who see mysterious forces of technology behind rising inequality. And it also challenges those, mainly on the left, who have placed the blame narrowly on trade and outsourcing. Inequality and Instability presents straightforward evidence that the rise of inequality mirrors the stock market in the U.S. and the rise of finance and of free-market policies elsewhere. Starting from the premise that fresh argument requires fresh evidence, James K. Galbraith brings new data to bear as never before, presenting information built up over fifteen years in easily understood charts and tables. By measuring inequality at the right geographic scale, Galbraith shows that more equal societies systematically enjoy lower unemployment. He shows how this plays out inside Europe, between Europe and the United States, and in modern China. He explains that the dramatic rise of inequality in the U.S. in the 1990s reflected a finance-driven technology boom that concentrated incomes in just five counties, very remote from the experience of most Americans-which helps explain why the political reaction was so slow to come. That the reaction is occurring now, however, is beyond doubt. In the aftermath of the Great Financial Crisis, inequality has become, in America and the world over, the central issue.

A landmark work of research and original insight, Inequality and Instability will change forever the way we understand this pivotal topic.

The author

James K. Galbraith is professor at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin, where he holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations.

Galbraith holds degrees from Harvard (A.B., 1974) and Yale (PhD in Economics, 1981). He won a Marshall Scholarship to King’s College, Cambridge, and then served on the congressional staff, including as Executive Director of the Joint Economic Committee. He is chair of Economists for Peace and Security, and Senior Scholar at the Levy Economics Institute.

In 2010 he was elected to the Accademia Nazionale dei Lincei. In 2012, he was President of the Association for Evolutionary Economics. He is the 2014 co-winner of the Leontief Prize for advancing the frontiers of economic thought.

Galbraith is a leading economist whose books include The End of Normal: The Great Crisis and the Future of Growth (2014), Economic Reform Now: A Global Manifesto to Rescue our Sinking Economies (2013, with Heiner FLASSBECK, Paul DAVIDSON, and Richard KOO), The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too (2008), Unbearable Cost: Bush, Greenspan and the Economics of Empire (2006), Inequality and Industrial Change: A Global View (2001, with Maureen BERNER), Created Unequal: The Crisis in American Pay (1998), Balancing Acts: Technology, Finance and American Future (1989) and Macroeconomics (1993).

[…]. Leading active members of today’s economics profession, the generation presently in their 40s and 50s, have joined together into a kind of politburo for correct economic thinking. As a general rule –as one might expect from a gentleman's club– this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. They offer a “rape is like the weather” fatalism about an “inevitable” problem (pay inequality) that then starts to recede. They oppose the most basic, decent, and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs.

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And when finally they sense that some position cannot be sustained, they do not re-examine their ideas. Instead, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in. […]. (GALBRAITH, James K., “How the Economists Got It Wrong”, The American Prospect, December 19, 2001. Cf.: http://prospect.org/article/how-economists-got-it-wrong

More on James K. Galbraith:

Lyndon B. Johnson School of Public Affairshttp://www.utexas.edu/lbj/directory/faculty/james-galbraith

University of Texas Inequality Project ***UTIP is a small research group concerned with measuring and explaining movements of inequality in wages and earnings and patterns of industrial change around the world. http://utip.gov.utexas.edu/about.html

Institute for New Economic Thinking (INET) James K. Galbraith The Institute for New Economic Thinking was created to broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century.

http://ineteconomics.org/people/james-k-galbraith

Employment Policy Research Network (EPRN): James K. Galbraith. Cf.: http://www.employmentpolicy.org/people/james-galbraith

Speakers Associates: James Galbraithhttp://www.speakersassociates.de/James-K-Galbraith.aspx

World Wide Speakers Group: James K. GALBRAITHhttp://wwsg.com/galbraith-james-k

James K. GALBRAITH, TOPWONKS http://www.topwonks.org/experts/james-galbraith/

James K. GALBRAITH, BABELIO (Français) http://www.babelio.com/auteur/James-K-Galbraith/176140

James K. GALBRAITH, Wikipedia: (English) http://en.wikipedia.org/wiki/James_K._Galbraith

James K. GALBRAITH, Wikipedia: (Français) http://fr.wikipedia.org/wiki/James_K._Galbraith

James K. GALBRAITH, Wikipedia: (Español) http://es.wikipedia.org/wiki/James_K._Galbraith

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James K. Galbraith interviewed for 2014 Leontief Prize. James K. Galbraith spoke with GDAE Senior Researcher Brian Roach about inequality, public policy, and the financial sector, 17 April, 2014. Cf.: https://www.youtube.com/watch?v=JU0dXXZZkgc

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Table of Contents

Acknowledgements XIII

Chapter 1. The Physics and Ethics of Inequality 3

1. The Simple Physics of Inequality Measurement 92. The Ethical Implications of Inequality Measures 133. Plan of the Book 14References

Chapter 2. The Need for New Inequality Measures 20

1. The Data Problem in Inequality Studies 20

2. Obtaining Dense and Consistent Inequality Measures 29

3. Grouping Up and Grouping Down 36

4. Conclusion 43

References

Chapter 3: Pay Inequality and World Development 47

1. What Kuznets Meant 47

2. New Data for a New Look at Kuznets' Hypothesis 50

3. Pay Inequality and National Income: What's the Shape of the Curve? 62

4. Global Rising Inequality: the Soros Super-bubble as a Pattern in the Data 69

5. Conclusion 73

References

Appendix: On a Presumed Link from Inequality to Growth 74

Chapter 4. Estimating the Inequality of Household Incomes 81

1. Estimating the Relationship Between Inequalities of Pay and Income 82

2. Finding the Problem Cases: A Study of Residuals 87

3. Building a Deep and Balanced Income Inequality Data Set 91

4. Conclusion 96

References

Chapter 5. Economic Inequality and Political Regimes 100

1. Democracy and Inequality in Political Science 101

2. A Different Approach to Political Regime Types 105

3. Analysis and Results 107

4. Conclusion 113

References

Appendix I: Political Regime Data Description 113

Appendix II: Results Using Other Political Classification Schemes 118

Chapter 6. The Geography of Inequality in America, 1969 to 2007 124

1. Between-Industry Earnings Inequality in the United States 128

2. The Changing Geography of American Income Inequality 140

3. Interpreting Inequality in the United States 146

4. Conclusion 148

References

Chapter 7: State-Level Income Inequality and American Elections 152

1. Some Initial Models Using Off-the-Shelf Data for the 2000 Election. 155

2. New Estimates of State-Level Inequality and an Analysis of the Inequality-Elections Relationship over Time 158

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3. Inequality and the Income Paradox in Voting 162

4. Conclusion 164

References

Chapter 8. Inequality and Unemployment in Europe: A Question of Levels 165

1. An Inequality-based Theory of Unemployment 167

2. Region-based Evidence on Inequality and Unemployment 170

3. Inequality and Unemployment in Europe and America 179

4. Implications for Unemployment Policy in Europe 181

References

Appendix. Detailed Results and Sensitivity Analyses 183

Chapter 9. European Wages and the Flexibility Thesis 198

1. The Problem of Unemployment in Europe: A reprise 201

2. Assessing Wage Flexibility Across Europe 203

3. Clustering and Discriminating to Simplify the Picture 206

4. Conclusion 213

References

Appendix A: Cluster Details 214

Appendix B: Eigenvalues and Canonical Correlations 224

Appendix C: Correlations between Canonical Scores and Pseudoscores 225

Chapter 10: Globalization and Inequality in China 235

1. The Evolution of Inequality in China through 2007 236

2. Finance and the export boom, 2002 to 2006 240

3. Trade and capital inflow in post-WTO China 244

4. Profit and Capital Flows into Speculative Sectors 247

5. Conclusion 249

References

Chapter 11. Finance and Power in Argentina and Brazil 252

1. The Modern Political Economy of Argentina and Brazil 253

2. Measuring Inequality in Argentina and Brazil 254

3. Sources of Data 256

4. Pay Inequality in Argentina 1994-2007 256

5. Pay Inequality in Brazil 1996-2007 261

6. Conclusion 265

References

Chapter 12. Inequality in Cuba After the Soviet Collapse 269

1. Data on Pay in Cuba 271

2. Evolution of the Cuban Economy 1991 – 2005 272

3. Cuban Pay Inequality by Sector 279

4. Cuban Pay Inequality by Region 285

5. Conclusion 286

References

Chapter 13: Economic Inequality and the World Crisis 289

References 295

Index 309

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Excerpts from Inequality and Instability …

http://www.nas2endwork.org/contactgalbraith.html

Review

“A new approach to economic analysis based on the idea that “you can't actually study economic inequality without measuring it.

The author presents the results as a new approach to answering two critical questions: How has inequality in a given place changed over time? To what extent is inequality in one area greater than another? Finding appropriate solutions required new methods and new sources of evidence. […]. Applying this potentially groundbreaking new methodology, Galbraith discredits a number of shibboleths of the economics profession […]. In this rich study, the author brings both transparency and a fresh approach to a profession where a shake-up seems more than overdue.

Economics specialists will enjoy this book, but so too will general readers disenchanted with current economic orthodoxies.”

Kirkus Review

“In Inequality and Instability, James K. Galbraith brings to bear his considerable experience in government and academia to examine one of the most pressing issues of our time. In this accessible and far-reaching volume, he investigates not only the depth and breadth of inequality in Europe, America, and elsewhere, but also its implications for politics and society. It's no surprise that Galbraith, who is well known for having pioneered new understandings of economic inequality, leaves no stone unturned in his discussion of metrics and methodologies... It is a must-read for anyone who wishes to understand our political and economic era.”

Joseph E. Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy, winner of the 2001 Nobel Prize in economics

“Inequality is at the heart of our modern economic predicament, but its kaleidoscopic nature makes it as hard to summarize as it is to understand. In this important book, Jamie Galbraith and colleagues develop a powerful new measure of global inequality trends and show how it can be used to shed new light on everything from economic growth to voter turnout. The result is a truly pathbreaking work of scholarship.”

Barry Eichengreen, author of Exorbitant Privilege

“While most economists ‘slept’ and some were busying themselves making sure there is no level playing field, Jamie Galbraith was one of the few who kept on insisting on the dangers of runaway inequality, financial-sector driven growth and crony capitalism. In this book, he takes the reader on a journey through the years that preceded the financial meltdown, skillfully links inequality and macroeconomics, and, after showing the why and the how of the crisis, points the way out of it.”

Branko Milanovic, author of Worlds Apart: Measuring International and Global Inequality

“Based on a mountain of new data, this book undermines much of what scholars thought they knew about economic inequality. James Galbraith's readable and compelling dissections of how financial bubbles and macroeconomic forces shape inequality and its effects on society and the state are seminal. Inequality and Instability is a work not just for scholars, but for citizens.”

Thomas Ferguson, Professor of Political Science, University of Massachusetts, Boston

“The most comprehensive examination to date of the connection between the financial sector, the Achilles heel of 'free enterprise' economies, and income inequality across countries. Galbraith and his fellow researchers at the University of Texas Inequality Project demonstrate how the seeds of the current economic crisis were sown by the refusal to confront and reverse an unequalizing worldwide spiral of income disparity. This could be the empirical Bible for the Occupy movement.”

William Darity, Arts and Sciences Professor of Public Policy, Economics,

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and African American Studies, Duke University

“Galbraith’s timely and provocative book adds some economic and statistical ballast to the vague rhetorical slogans of the Occupy protesters. Drawing on meticulous academic research, it argues that the main source of the growing inequality across the world in recent years has been not industrial change, educational reform, or geopolitical shift but the financialization of the modern world.”

Foreign Affairs

“Galbraith's book presents an extremely varied and nutritious fare for all of those who want to find out more about the things that they 'were afraid to ask' during the last twenty years: why did inequality increase so much and who benefited from it? But Galbraith did notice the increase, wrote about it, and here in a sort of collected works, are his essays, fully vindicated by time. Not many economists can say so.”

Journal of Economic Literature

Inequality is a charged topic. Measures of income inequality rose in the USA in the 1990s to levels not seen since 1929 and gave rise to a suspicion, not for the first time, of a link between radical inequality and financial instability with a resulting crisis under capitalism. Professional macroeconomists have generally taken little interest in inequality because, within the parameters of traditional economic theory, the economy will stabilize itself at full employment. In addition, enlightened economists could enact stabilizing measures to manage any imbalances. The dominant voices among academic economists were unable to interpret the causal forces at work during both the Great Depression and the recent global financial crisis.

In Inequality and Instability, James K. Galbraith argues that since there has been no serious work done on the macroeconomic effects of inequality, new sources of evidence are required. Galbraith offers for the first time a vast expansion of the capacity to calculate measures of inequality both at lower and higher levels of aggregation. Instead of measuring inequality as traditionally done, by country, Galbraith insists that to understand real differences that have real effects, inequality must be examined through both smaller and larger administrative units, like sub-national levels within and between states and provinces, multinational continental economies, and the world. He points out that inequality could be captured by measures across administrative boundaries to capture data on more specific groups to which people belong. […].In a comprehensive presentation of this new method of using data, Inequality and Instability offers an unequaled look at the US economy and various global economies that was not accessible to us before. This provides a more sophisticated and a more accurate picture of inequality around the world, and how inequality is one of the most basic sources of economic instability.

Goodreads

“James Galbraith elegantly and effectively counters the economic fundamentalism that has captured public discourse in recent years, and offers a cogent guide to the real political economy. Myth-busting, far-ranging, and eye-opening.”

Robert B. Reich, Professor of Public Policy, UC Berkeley [on The Predator State]

See also:

MILANOVIC, Branko [World Bank], “Book(s) Reviewed. Inequality and Instability: A Study of the World Economt Just Before de Great Crisis by James K. Galbraith”, Journal of Economic Literature, vol. 51, n.º 1, 2012 , pp. 195-197.

http://www.aeaweb.org/articles.php?doi=10.1257/jel.51.1.190.r4

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STOCKHAMMER, Engelbert, “James K. Galbraith, Inequality and Instability. A Study of the World Economy Just Before the Great Crisis Oxford University Press, 2012, 324 pages, ISBN 978-0199855650”. Cf.:

http://weboeconomia.org/bro_stockhammer_galbraith.pdf

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ZÓCALO PUBLIC SQUARE, “Don’t Sweat the Squalor. Five Leading Economists Reflect On Wether American Wealth Disparity is Inherent to the American Way”. July 12, 2012. [James K. Galbraith, Luca Flabbi, Branko Milanovic, Sam Pizzigati and Sean F. Reardon]. Cf.:

http://www.zocalopublicsquare.org/2012/07/08/dont-sweat-the-squalor/ideas/up-for-discussion/

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KERVICK, Dan, “The Social Dimension of Poverty”, New Economics Perspectives, December 3, 2012. Cf.: ***

http://neweconomicperspectives.org/2012/12/the-social-dimension-of-prosperity.html

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CAIRE, Guy, « Analyse bibliographiques. James K. Galbraith. Inequality and Instability: A Study of the World Economy Just Before the Great Crisis, 2012 », Revue Tiers-Monde (IEDES, Paris), n.º 216, 2013, pp. 213-214.

http://www.vjf.cnrs.fr/clt/php/vf/Page_sommaire.php?ValCodeSom=2013_TIERS_VN216&ValCodeRev=TIERS

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MARTIN, Lisa L., “Polanyi’s Revenge”, Review Essay, October 2012.

Books reviewed:

Inequality and Instability: A Study of the World Economy Just Before the Great Crisis . By James K. Galbraith. Oxford: Oxford University Press, 2012. 324 pp. $29.95.

The Globalization Paradox: Democracy and the Future of the World Economy. By Dani Rodrik. New York: W.W. Norton, 2011. 346 pp. $26.95.

The Price of Inequality: How Today's Divided Society Endangers Our Future. By Joseph E. Stiglitz. New York: W.W. Norton, 2012. 414 pp. $27.95.

http://www.polisci.wisc.edu/Uploads/Documents/IRC/Martin.pdf

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PROGRESSIVE ECONOMY: *** www.progressiveeconomy.eu

A Call for Change, April 2014 http://www.progressiveeconomy.eu/sites/default/files/PROGRESSIVE_ECONOMY_ACallforChangesEN.pdf

Appel au Changement, Avril 2014http   ://www.progressiveeconomy.eu/sites/default/files/ PROGRESSIVE_ECONOMY_ACallforChangesFR.pdf

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Read more:

James K. GALBRAITH: Comments and Interviews (2008-2014). Cf.: http://utip.gov.utexas.edu/JG/Comments%20and%20Interviews.html

James K. GALBRAITH “Publications”, Levy Economics Institute of Bard College [1996-2013]

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http://www.levyinstitute.org/publications/james-k-galbraith

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YoutubeRepeat.org, “ETUI Conférence Décembre 2012: James K. Galbraith on the crisis and inequality in Europe”. [Français-Anglais]. Cf.:

http://youtuberepeat.org/?videoId=9Tv_7DgncbA

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James K. Galbraith in YoutubeRepeat.org: http://www.yourepeat.com/g/James+K.+Galbraith

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SCHALL, Lars, “James K. Galbraith: ‘There Is No Return To Self-Sustaining Growth’”, Business Insider, February 2, 2010. ***

http://www.businessinsider.com/galbraith-lack-of-regulation-got-us-into-this-mess-bring-it-back-2010-2

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Galbraith, James K. “6 Reasons the Fiscal Cliff is a Scam”, AlterNet, November 22, 2012. Cf.:http://www.alternet.org/economy/6-reasons-fiscal-cliff-scam?paging=off#bookmark

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Galbraith, James K.: “Inequalities: a few comments from the front lines”, EPS Quarterly. The Newsletter of Economist for Peace & Security, Vol. 24, n.º 3, September 2012, pp. 7-9. Cf.:

http://www.epsusa.org/publications/newsletter/2012/sept2012/sept2012.pdf

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the real news.com : “Inequality and Instability” http://therealnews.com/t2/index.php?option=com_content&task=view&id=33&Itemid=74&jumival=865

---------------James K. Galbraith on Inequality and Instability, Naked Capitalism:

Posted on April 21, 2012 by Ives Smithhttp://www.nakedcapitalism.com/2012/04/jamie-galbraith-on-inequality-and-instability.html

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Galbraith, James K. and J. Travis Hale, “The rich, the poor and the presidency”, Reuters (edition US), October 22, 2012. Cf.: ***

http://blogs.reuters.com/great-debate/2012/10/22/the-rich-the-poor-and-the-presidency/

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Galbraith, James K., “Fixing Inequality Can Save Us From The Next Crisis”, Bloomberg View, September 23, 2013. Cf.: http://www.bloombergview.com/articles/2013-09-23/fixing-inequality-can-save-us-from-the-next-crisis

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Marco Passarella [University of Leeds], James K. Galbraith, Inequality and instability, Oxford University Press, 2012. Cf.:

http://www.marcopassarella.it/wp-content/uploads/Galbraith-2012-Full.pdf

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Dr. Arne HOLMES (Economics), “Some economic effects of inequality”, Parliament of Australiahttp://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/EconEffects

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LENZER, Robert, Only Fifteen U.S. Counties Account for Wealth Increase, Forbes July 20, 2012. Cf.: ***

http://www.forbes.com/sites/robertlenzner/2012/07/20/increasing-wealth-inequality-is-a-warning-sign-of-instability/

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THOMA, Mark, “Income Inequality Is Hobbling the Middle Class”, The Fiscal Times, October 25, 2011. http://www.thefiscaltimes.com/Columns/2011/10/25/Income-Inequality-Is-Hobbling-the-Middle-Class

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Gabraith, James K., “With Economic Inequality for All”, National Jobs for All Coalition (NJFAC), September 1998. Originally publish in The Nation, September 7-14, 1998. Cf.:

http://www.njfac.org/gal-ineq.htm

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ZÓCALO PUBLIC SQUARE, “Don’t Sweat the Squalor. Five Leading Economists Reflect On Wether American Wealth Disparity is Inherent to the American Way”. July 12, 2012. [James K. Galbraith, Luca Flabbi, Branko Milanovic, Sam Pizzigati and Sean F. Reardon]. Cf.:

http://www.zocalopublicsquare.org/2012/07/08/dont-sweat-the-squalor/ideas/up-for-discussion/

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Oxford USA. Critical reviews on Inequality and Instability…, http://global.oup.com/academic/product/inequality-and-instability-9780199855650;jsessionid=C2AD39B93EE87140F491D67D65C29A3B?cc=fr&lang=en&#

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