Inequality and Instability: A Study of the World Economy

Just 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 wakeup 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)
Im 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: 978-0-19985565-0 (hardback).
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

Presentation (of the publisher)

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 Kings 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 todays 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
2

placebos instead. They are always surprised when something untoward (like a recession)
actually occurs.
And when finally they sense that some position cannot be sustained, they do not reexamine 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 Affairs
http://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 Galbraith
http://www.speakersassociates.de/James-K-Galbraith.aspx
World Wide Speakers Group: James K. GALBRAITH
http://wwsg.com/galbraith-james-k
James K. GALBRAITH, TOPWONKS
http://www.topwonks.org/experts/james-galbraith/
James K. GALBRAITH, BABELIO (Franais)
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: (Franais)
http://fr.wikipedia.org/wiki/James_K._Galbraith
James K. GALBRAITH, Wikipedia: (Espaol)
http://es.wikipedia.org/wiki/James_K._Galbraith
--------------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
--------------3

Table of Contents
Acknowledgements

XIII

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

3
9
13
14

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

152
155

3. Inequality and the Income Paradox in Voting

20
20
29
36
43
47
47
50
62
69
73
74

81
82
87
91
96
100
101
105
107
113
113
118

124
128
140
146
148

158
162

4. Conclusion
References

164

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

165
167
170
179
181

Chapter 12. Inequality in Cuba After the Soviet Collapse

269

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

271
272
279
285
286

183

198
201
203
206
213
214
224
225

235
236
240
244
247
249
252
253
254
256
256
261
265

Chapter 13: Economic Inequality and the World Crisis

289

References

295

Index

309

Excerpts from Inequality and Instability

5

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,
and African American Studies, Duke University
6

Galbraiths 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. 1, 2012 , pp. 195-197.
http://www.aeaweb.org/articles.php?doi=10.1257/jel.51.1.190.r4
--------------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 9780199855650. Cf.:
http://weboeconomia.org/bro_stockhammer_galbraith.pdf

--------------7

ZCALO PUBLIC SQUARE, Dont 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-fordiscussion/
--------------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

--------------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. 216, 2013, pp. 213-214.
http://www.vjf.cnrs.fr/clt/php/vf/Page_sommaire.php?
ValCodeSom=2013_TIERS_VN216&ValCodeRev=TIERS

--------------MARTIN, Lisa L., Polanyis 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
---------------

PROGRESSIVE ECONOMY: ***

www.progressiveeconomy.eu
A Call for Change, April 2014
http://www.progressiveeconomy.eu/sites/default/files/PROGRESSIVE_ECONOMY_ACallfo
rChangesEN.pdf
Appel au Changement, Avril 2014
http ://www.progressiveeconomy.eu/sites/default/files/PROGRESSIVE_ECONOMY_ACallfo
rChangesFR.pdf
-----------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]
http://www.levyinstitute.org/publications/james-k-galbraith
8

--------------YoutubeRepeat.org, ETUI Confrence Dcembre 2012: James K. Galbraith on the crisis and
inequality in Europe. [Franais-Anglais]. Cf.:
http://youtuberepeat.org/?videoId=9Tv_7DgncbA

--------------James K. Galbraith in YoutubeRepeat.org:

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

--------------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-20102
-----------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
--------------Galbraith, James K.: Inequalities: a few comments from the front lines, EPS Quarterly. The
Newsletter of Economist for Peace & Security, Vol. 24, n. 3, September 2012, pp. 7-9. Cf.:
http://www.epsusa.org/publications/newsletter/2012/sept2012/sept2012.pdf
--------------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 Smith
http://www.nakedcapitalism.com/2012/04/jamie-galbraith-on-inequality-and-instability.html
--------------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/
-----------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-nextcrisis
---------------

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
9

-----------Dr. Arne HOLMES (Economics), Some economic effects of inequality, Parliament of Australia
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/Br
iefingBook44p/EconEffects
---------------

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-awarning-sign-of-instability/
--------------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
---------------

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
---------------

ZCALO PUBLIC SQUARE, Dont 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-fordiscussion/
---------------

Oxford USA. Critical reviews on Inequality and Instability,

http://global.oup.com/academic/product/inequality-and-instability9780199855650;jsessionid=C2AD39B93EE87140F491D67D65C29A3B?cc=fr&lang=en&#
---------------

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