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

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. For example, in China, economic inequality reflects the difference in average income levels between city and countryside, or between coastal regions and the interior, and a simple ratio averages would be an indicator of trends in inequality over the country as a whole. 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. Cover 1 Contents 10 Acknowledgments 14 CHAPTER 1. The Physics and Ethics of Inequality 18 THE SIMPLE PHYSICS OF INEQUALITY MEASUREMENT 24 THE ETHICAL IMPLICATIONS OF INEQUALITY MEASURES 28 PLAN OF THE BOOK 29 CHAPTER 2. The Need for New Inequality Measures 35 THE DATA PROBLEM IN INEQUALITY STUDIES 35 OBTAINING DENSE AND CONSISTENT INEQUALITY MEASURES 44 GROUPING UP AND GROUPING DOWN 51 CONCLUSION 58 CHAPTER 3. Pay Inequality and World Development 62 WHAT KUZNETS MEANT 62 NEW DATA FOR A NEW LOOK AT KUZNETS’S HYPOTHESIS 65 PAY INEQUALITY AND NATIONAL INCOME: WHAT’S THE SHAPE OF THE CURVE? 77 GLOBAL RISING INEQUALITY: THE SOROS SUPERBUBBLE AS A PATT ERN IN THE DATA 84 CONCLUSION 88 APPENDIX : ON A PRESUMED LINK FROM INEQUALITY TO GROWTH 89 CHAPTER 4. Estimating the Inequality of Household Incomes 96 ESTIMATING THE RELATIONSHIP BETWEEN INEQUALITIES OF PAY AND INCOME 97 FINDING THE PROBLEM CASES: A STUDY OF RESIDUALS 102 BUILDING A DEEP AND BALANCED INCOME INEQUALITY DATASET 106 CONCLUSION 111 CHAPTER 5. Economic Inequality and Political Regimes 115 DEMOCRACY AND INEQUALITY IN POLITICAL SCIENCE 116 A DIFFERENT APPROACH TO POLITICAL REGIME TYPES 120 ANALYSIS AND RESULTS 122 CONCLUSION 128 APPENDIX I : POLITICAL REGIME DATA DESCRIPTION 128 APPENDIX II : RESULTS USING OTHER POLITICAL CLASSIFICATION SCHEMES 133 CHAPTER 6. The Geography of Inequality in America, 1969 to 2007 139 BETWEEN-INDUSTRY EARNINGS INEQUALITY IN THE UNITED STATES 143 THE CHANGING GEOGRA PHY OF AMERICAN INCOME INEQUALITY 155 INTERPRETING INEQUALITY IN THE UNITED STATES 161 CONCLUSION 163 CHAPTER 7. State-Level Income Inequality and American Elections 167 SOME INITIAL MODELS USING OFF-THE-SHELF DATA FOR THE 2000 ELECTION 170 NEW ESTIMATES OF STATE-LEVEL INEQUALITY AND AN ANALYSIS OF THE INEQUALITY-ELECTIONS RELATIONSHIP OVER TIME 173 INEQUALITY AND THE INCOME PARADOX IN VOTING 177 CONCLUSION 179 CHAPTER 8. Inequality and Unemployment in Europe: A Question of Levels 180 AN INEQUALITY-BASED THEORY OF UNEMPLOYMENT 182 REGION-BASED EVIDENCE ON INEQUALITY AND UNEMPLOYMENT 185 INEQUALITY AND UNEMPLOYMENT IN EUROPE AND AMERICA 194 IMPLICATIONS FOR UNEMPLOYMENT POLICY IN EUROPE 196 APPENDIX : DETAILED RESULTS AND SENSITIVITY ANALYSES 198 CHAPTER 9. European Wages and the Flexibility Thesis 213 THE PROBLEM OF UNEMPLOYMENT IN EUROPE: A REPRISE 216 ASSESSING WAGE FLEXIBILITY ACROSS EUROPE 218 CLUSTERING AND DISCRIMINATING TO SIMPLIFY THE PICTURE 221 CONCLUSION 228 APPENDIX I: CLUSTER DETAILS 229 APPENDIX II: EIGENVALUES AND CANONICAL CORRELATIONS 239 APPENDIX III: CORRELATIONS BETWEEN CANONICAL SCORES AND PSEUDOSCORES 240 CHAPTER 10. Globalization and Inequality in China 250 THE EVOLUTION OF INEQUALITY IN CHINA THROUGH 2007 251 FINANCE AND THE EXPORT BOOM, 2002 TO 2006 255 TRADE AND CAPITAL INFLOW 259 PROFIT AND CAPITAL FLOWS INTO SPECULATIVE SECTORS 262 CONCLUSION 264 CHAPTER 11. Finance and Power in Argentina and Brazil 267 THE MODERN POLITICAL ECONOMY OF ARGENTINA AND BRAZIL 268 MEASURING INEQUALITY 269 SOURCES OF DATA 271 PAY INEQUALITY IN ARGENTINA, 1994–2007 271 PAY INEQUALITY IN BRAZIL, 1996–2007 276 CONCLUSION 280 CHAPTER 12. Inequality in Cuba after the Soviet Collapse 284 DATA ON PAY IN CUBA 286 EVOLUTION OF THE CUBAN ECONOMY, 1991–2005 287 PAY INEQUALITY BY SECTOR 294 PAY INEQUALITY BY REGION 300 CONCLUSION 301 CHAPTER 13. Economic Inequality and the World Crisis 304 References 310 Index 324 A 324 B 324 C 325 D 327 E 328 F 329 G 330 H 331 I 333 J 333 K 333 L 333 M 334 N 334 O 335 P 335 R 336 S 336 T 337 U 337 V 339 W 339 Y 339 Z 339 Author is one of the leading experts in the field of economic inequality Challenges major trends within the development of economic theory in the United States Offers the most current research on the reasons behind the 2008 global financial crisis 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 alink 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. For example, in China, economic inequality reflects the difference in average income levels between city and countryside, or between coastal regions and theinterior, and a simple ratio averages would be an indicator of trends in inequality over the country as a whole. 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 tous 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 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. Demonstrates That Finance Is The Driveshaft That Links Inequality To Economic Instability. The Physics And Ethics Of Inequality -- The Need For New Inequality Measures -- Pay Inequality And World Development -- Estimating The Inequality Of Household Incomes -- Economic Inequality And Political Regimes -- The Geography Of Inequality In America, 1969 To 2007 -- State-level Income Inequality And American Elections -- Inequality And Unemployment In Europe : A Question Of Levels -- European Wages And The Flexibility Thesis -- Globalization And Inequality In China -- Finance And Power In Argentina And Brazil -- Inequality In Cuba After The Soviet Collapse -- Economic Inequality And The World Crisis. James K. Galbraith. Includes Bibliographical References (p. 295-307) And Index.