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

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Overview

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 ...

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

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Overview

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.

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Editorial Reviews

From the Publisher
"[P]otentially 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 Reviews

"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, 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

Kirkus Reviews
A new approach to economic analysis based on the idea that "you can't actually study economic inequality without measuring it." Galbraith (Public Affairs, Government and Business Relations/Univ. of Texas; The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, 2008, etc.) directs both a team at the University of Texas Inequality Project and a group of international experts; their collaborative work resulted in this book. 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. His team members cross-checked both domestic and international data on earnings, employment and population, and they processed the data using a modern refinement of older econometrics methods, which allowed them to compare global, regional, national and subnational aggregations. Combining macroeconomics and econometrics, they were able to view economic data through a framework that included the effects of financial governance and financial instability. Applying this potentially groundbreaking new methodology, Galbraith discredits a number of shibboleths of the economics profession--e.g., the notion that unemployment in Europe is the result of labor rigidities and social expenditures. He compares economic disparities within Europe to the United States and shows that inequalities in Europe are actually greater. County-level data identifies increasing U.S. inequality as a function of financial markets, with income effects restricted to just 15 counties nationwide. 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.
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Product Details

  • ISBN-13: 9780199855650
  • Publisher: Oxford University Press, USA
  • Publication date: 3/30/2012
  • Pages: 336
  • Sales rank: 986,514
  • Product dimensions: 9.30 (w) x 6.40 (h) x 1.00 (d)

Meet 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. He is a leading economist whose books include The Predator State, Inequality and Industrial Change, and Created Unequal.

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Table of Contents

Chapter 1. The Physics and Ethics of Inequality
1. The Simple Physics of Inequality Measurement
2. The Ethical Implications of Inequality Measures
3. Plan of the Book
References
Chapter 2. The Need for New Inequality Measures
1. The Data Problem in Inequality Studies
2. Obtaining Dense and Consistent Inequality Measures
3. Grouping Up and Grouping Down
4. Conclusion
References
Chapter 3: Pay Inequality and World Development
1. What Kuznets Meant
2. New Data for a New Look at Kuznets' Hypothesis
3. Pay Inequality and National Income: What's the Shape of the Curve?
4. Global Rising Inequality: the Soros Super-bubble as a Pattern in the Data
5. Conclusion
References
Appendix: On a Presumed Link from Inequality to Growth
Chapter 4. Estimating the Inequality of Household Incomes
1. Estimating the Relationship Between Inequalities of Pay and Income
2. Finding the Problem Cases: A Study of Residuals
3. Building a Deep and Balanced Income Inequality Data Set
4. Conclusion
References
Chapter 5. Economic Inequality and Political Regimes
1. Democracy and Inequality in Political Science
2. A Different Approach to Political Regime Types
3. Analysis and Results
4. Conclusion
References
Appendix I: Political Regime Data Description
Appendix II: Results Using Other Political Classification Schemes
Chapter 6. The Geography of Inequality in America, 1969 to 2007
1. Between-Industry Earnings Inequality in the United States
2. The Changing Geography of American Income Inequality
3. Interpreting Inequality in the United States
4. Conclusion
References
Chapter 7: State-Level Income Inequality and American Elections
1. Some Initial Models Using Off-the-Shelf Data for the 2000 Election.
2. New Estimates of State-Level Inequality and an Analysis of the Inequality-Elections Relationship over Time
3. Inequality and the Income Paradox in Voting
4. Conclusion
References
Chapter 8. Inequality and Unemployment in Europe: A Question of Levels
1. An Inequality-based Theory of Unemployment
2. Region-based Evidence on Inequality and Unemployment
3. Inequality and Unemployment in Europe and America
4. Implications for Unemployment Policy in Europe
References
Appendix. Detailed Results and Sensitivity Analyses
Chapter 9. European Wages and the Flexibility Thesis
1. The Problem of Unemployment in Europe: A reprise
2. Assessing Wage Flexibility Across Europe
3. Clustering and Discriminating to Simplify the Picture
4. Conclusion
References
Appendix A: Cluster Details
Appendix B: Eigenvalues and Canonical Correlations
Appendix C: Correlations between Canonical Scores and Pseudoscores
Chapter 10: Globalization and Inequality in China
1. The Evolution of Inequality in China through 2007
2. Finance and the export boom, 2002 to 2006
3. Trade and capital inflow in post-WTO China
4. Profit and Capital Flows into Speculative Sectors
5. Conclusion
References
Chapter 11. Finance and Power in Argentina and Brazil
1. The Modern Political Economy of Argentina and Brazil
2. Measuring Inequality in Argentina and Brazil
3. Sources of Data
4. Pay Inequality in Argentina 1994-2007
5. Pay Inequality in Brazil 1996-2007
6. Conclusion
References
Chapter 12. Inequality in Cuba After the Soviet Collapse
1. Data on Pay in Cuba
2. Evolution of the Cuban Economy 1991 - 2005
3. Cuban Pay Inequality by Sector
4. Cuban Pay Inequality by Region
5. Conclusion
References
Chapter 13: Economic Inequality and the World Crisis
Bibliography

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  • Posted June 27, 2012

    Superb analysis, clearly written -- but technical.

    Here, cogently presented, is the underlying data demonstrating how financial inequality drives economic instability. Not a partisan screed, but sufficient factual ammunition to discredit nostrums of the left or right, if you're up for the journey. Implications for the political institutions are sobering, if only because regulatory reforms to govern speculative and unproductive 'innovation' are generally debated in terms of catch phrases rather than this sort of perceptive analysis.

    1 out of 1 people found this review helpful.

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  • Posted October 12, 2012

    Excellent book but heavy reading.

    If you are interested in why and how inequality of wealth and income happens and its consequences, this is the book to read. However it is a book for people who know something of economics and math. It is not a casual read. For the USA the book refutes many social myths about inequality. The poor get richer in the USA. They just do not get richer as fast as the rich. The gap in the USA can decline as much of the wealth of the rich is in assets such as stock whose values can decline rather sharply as in the recent Great Recession.

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