Inequality and InstabilityA Study of the World Economy Just Before

the Great Crisis

ByJames K. GalbraithThe University of Texas at AustinFor the Institute for New Economic ThinkingBerlinApril 14, 2012

“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)

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.

China

Brazil

Korea

Denmark

USA

Kuwait

Inequality

Income

A Stylized “Augmented Kuznets Curve”

This broad picture of the world economy from the standpoint of inequality measure suggests that the “super-bubble” was also, for most of the world’s 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.

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

Debt Crisis

End of BrettonWoods

9/11

“Concept 4” Inequality: The Common Movement of Inequality Measured within Countries, Across Time

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.

Milanovic Concept 1

Profit Share in OECD

The Super Bubble

United States

Income inequality and the Stock Market

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

0.015

0.02

0.025

0.03

0.035

0.04

0.045

1 9 6 9 1 9 7 0 1 9 7 1 1 9 7 2 1 9 7 3 1 9 7 4 1 9 7 5 1 9 7 6 1 9 7 7 1 9 7 8 1 9 7 9 1 9 8 0 1 9 8 1 1 9 8 2 1 9 8 3 1 9 8 4 1 9 8 5 1 9 8 6 1 9 8 7 1 9 8 8 1 9 8 9 1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5

N a t ur al L o g o f N a s d a q M on t hly C lo s e

B e t w ee n

- C o u nt y I n c om e I n eq u alit y

- T h eil's T S t a tis ti c ( 1y r la g )

The US: Income Inequality and the NASDAQ, 1969-2006

Income inequality measured between counties, from tax data

Tax Reform Act

Super Bubble

InequalityLog of NASDAQ

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

0.015

0.02

0.025

0.03

0.035

0.04

0.045

1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

Nat

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of N

asd

aq M

onth

ly C

lose

Bet

wee

n-C

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e In

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alit

y -T

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Sta

tist

ic (

1yr

lag)

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 ValleyWithoutTop 15

Income Inequality in the United States, 1969-2009Measured Between Counties

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

0.000

0.002

0.004

0.006

0.008

0.010

0.012

0.014

0.016

0.018

0.020

Calculation by Amin Shams

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.

Oxford University Press, 2012

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