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

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Inequality and InstabilityA Study of the World
Economy Just Before the Great Crisis
By James K. Galbraith The University of Texas at
Austin For the Institute for New Economic
Thinking Berlin April 14, 2012
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Kepler undertook to draw a curve through the
places of Mars, and his greatest service to
science was in impressing on men's minds that
this was the thing to be done if they wished to
improve astronomy that they were not to content
themselves with inquiring whether one system of
epicycles was better than another, but that they
were to sit down to the figures and find out what
the curve, in truth was. -- Charles Sanders
Peirce (1877)
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Inequality as Global Macroeconomics

• At the national level, inequality is in part a
  curvilinear function of income level a matter
  of macroeconomics.
• The Kuznets Curve remains a good starting point,
  though with modifications for high-income
  countries.
• Changes in inequality are driven by changing
  economic structure and economic geography, and
  changing inter-sectoral terms of trade.
• Global factors dominate movements in global pay
  inequality.
• Changing financial regimes dominate this picture.

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A Stylized Augmented Kuznets Curve
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This broad picture of the world economy from the
standpoint of inequality measure suggests that
the super-bubble was also, for most of the
worlds population, a super-crisis. The
super-bubble came to a peak in 2000-20001. The
period since then was marked in the United States
by efforts to keep the bubble going, in part
through aggressive efforts to relax standards,
which may be described as the growth of a
predator state. This led to the corruption of
the financial markets whose collapse produced the
great crisis.
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Concept 4 Inequality The Common Movement of
Inequality Measured within Countries, Across Time
9/11
Milanovic Concept 1
The Super Bubble
End of Bretton Woods
Profit Share in OECD
Debt Crisis
Note The vertical axis represents the time
element in a two-way fixed effects panel
regression, across the panel of country-year
observations. Vertical scale is log(T) units.
Source Kum 2008.
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United StatesIncome inequality and the Stock
Market
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The US Income Inequality and the NASDAQ,
1969-2006
Super Bubble
Tax Reform Act
Inequality
Log of NASDAQ
Income inequality measured between counties, from
tax data
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U.S. Income Inequality Between Counties 1969
2005 Plotted Against the NASDAQ Composite, with
Three Counterfactual Scenarios of Inequality
Growth from 1994 2000
Without Manhattan
Without Silicon Valley
Without Top 15
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Income Inequality in the United States,
1969-2009Measured Between Counties
Calculation by Amin Shams
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Contribution of Each County to Income
Inequality, Late 2000s
Contribution to inequality is presented as
shading and as height above or below the zero
plane. Calculation and map by Amin Shams.
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For more information
Oxford University Press, 2012