Inequality and Instability: A Study of the World Economy Just Before the Great Crisis [Englisch] [Gebundene Ausgabe]

James Galbraith deserves the Nobel Prize in Economics for his several decades of work on economic inequality. _Inequality and Instability_ attempts to summarize, synthesis, and further develop this phenomenal research. Galbraith has redefined the study of economic inequality; for Galbraith inequality is not merely an ethical issue, but inequality radically determines a society's level of unemployment, growth and development, and frequency and depth of economic crises.

Galbraith's research argues and convincingly demonstrates inequality largely determines (1) the relative stability of a macroeconomy, (2) market economies generate inequality, and inequality destabilizes the economic system, i.e. generates economic crises, (3) the primary industry responsible for inequality is finance and the institutional structure of finance within a society, this implies (4) technology is not the primary cause of inequality, nor even a significant cause of inequality at a national level, and (5) outsourcing and international competition has not been a significant cause of inequality, instead (6) macroeconomic policy (both monetary and fiscal, but more accurately especially monetary policy, but also fiscal policy determine the degree of inequality and inequality determines the level of stability or instability of an economy) and political ideology, i.e. political economy radically determine the degree of inequality.

Now for the less happy analysis.

In a three sentence evaluation of the book, Nobel Prize winner economist Joseph E. Stiglitz writes: "In _Inequality and Instability_, James K. Galbraith examines one 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 is a must-read, for anyone who wishes to understand our political and economic era."

I fully endorse the first and third sentences. Indeed, I fully endorse the second sentence, save one single word, i.e. accessible. If you are a Ph.D., or a Ph.D. student, this book is accessible. Moreover, if you have a mentor or you are in an upper division undergraduate college economic course with an instructor to explain regression equations, Theil statistics, Gini coefficients, etc. this book will be accessible. However, if you are unacquainted with these phenomena, this book will be less then accessible.

Nonetheless, this book is too important to be ignored by a popular audience, every engaged citizen should absorb the basic argument. I have a suggestion. First, pick up a copy of Galbraith's _Predator State_ (2006), and read chapter 7, titled "What the Rise of Inequality is Really About", as a preface to _Inequality and Instability_. Second, read an abridged version of _Inequality and Instability_, before attempting to tackle the entire book. My suggested abridged version (for an U.S. audience) is, chapter 1, pp. 47-50 of chapter 3, (and possibly pp. 50-62 of chapter 3), then chapters 6, 7 and 13.

What will be learned can be summarized as follows:

(1) Inequality generates unemployment, and unemployment generates inequality, this I dub `Galbraith's Law.' Unemployment was not much of a problem post-Reagan (post-1984-5), but inequality has been on the rise. What Galbraith's Law suggests is if inequality is on the rise, unemployment is to follow. This is what happened in 2007-8, inequality destabilized the economy, a crisis manifested, and generated unemployment. Since the Great Recession of 2007-8, the Obama administration has failed to address inequality; consequently Galbraith's Law suggests the "Jobless recovery" will continue until inequality is reduced.

(2) The financial industry, and its regulation or lack of regulation, is the primary determinant of the degree of inequality in an economy.

(3) The level of inequality radically determines the stability (low inequality) and instability (high inequality) of a macroeconomy.

(4) Economic policy can reduce or increase inequality in a society. Because of the importance of finance, monetary policy and interest rate changes can be argued to be the most important policy as both culprit and mediator of inequality.

(5) Although free-market labor market and wage policy does not necessarily cause severe income inequality, progressive labor market and wage policy is important policy to combat income inequality caused by the functioning (and dysfunction) of the financial industry which generates income inequality.

Research on income inequality has been plagued by a lack of good data on inequality within countries. The World Bank put together a data base in 1996 (updated and extended since), based on surveys in various countries, but the data are sparse and seldom really comparable. The University of Texas Inequality Program (UTIP) has built a new data base which they hope is better. This book is a description of that new data base (the first third of the book). As well it describes uses of the data base to explore voting patterns and other political impacts of inequality (most of the second third of the book) and some economic consequences of inequality (the rest of the book).

UTIP uses inequality in manufacturing wages (i.e. pay rates in the manufacturing sector) as a proxy for income inequality. If the proxy is good enough, that vastly improves the quality of the data, and so the range of questions that can be addressed. Galbraith spends Chapters 2 and 3 arguing that the proxy is good enough -- that manufacturing wage disparities do reflect income disparities closely enough for his analyses.

The rest of the book depends on whether the reader accepts these assertions or not. The problem, of course, is that the services sector is changing very rapidly, and any inferences from manufacturing to services may quickly be out of date. In any case, even the numerical analyses that Galbraith presents are not very convincing. For example, he uses the UTIP data to replicate the World Bank data. While the correspondence is good, it is not very good. (He fits a linear regression and gets R-square statistics of about 0.6, i.e. the UTIP data explains about 60% of the World Bank data.) While that is good enough to show that the two measures are related, I don't think that it is good enough for the applications later in the book. But then Galbraith says that the World Bank data are flawed anyway, so the point of the comparison is lost on me.

Anyway, if one accepts use of UTIP data, a few interesting conclusions followe. For example, while individual European countries show less income inequality than the U.S., Europe taken as a single entity shows more income inequality. Given Europe's higher unemployment rates (at least until recently) that suggests that greater income inequality correlates with greater unemployment, not the reverse. (I note that Galbraith isn't always careful to distinguish correlation and causation. His results fall far short of showing that inequality causes unemployment -- the causation could run the other way, or a third factor might be at play).

Another very interesting result is that global factors, including international financial credit, securities markets and so on, account for almost all the changes in inequality. Economic institutions also atre important. But that leaves very little scope for political interventions or indeed for a government role. Or at least that's how I read the last third of the book.

A comment on the book's accessibility: I found the book very readable. Yes, there are a few equations, but the reader can skip over those with no loss. Yes, there are some regression analyses, but their results are described in words in the text, so they can be skipped too. Galbraith is a good writer, and if you skip the tables, what he has to say flows nicely.

Galbraith's work here builds on much of his previous. It is a carefully argued and fully grounded quantative analysis that does what the title advertises. This is not a work for the general reader. Galbraith spends considerable time explaining the data sources he uses and the analyses he carries out. His general conclusions include: 1) recognition of inequality's rise in particular connection with financial bubbles, and 2) upward mobility is more characteristic of social democracies. Note: Reading Inequality and Instablility on a Kindle makes it difficult to see the many graphs and tables that illustrate Galbraith's presentation.