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James K. Galbraith presents his study of the world economy just before the great crisis

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington.

Inequality is not just unfair. It’s closely associated with the financialization of the global economy, and high inequality is closely linked with instability and crisis in the economy. Well, that’s sort of been known, but no one’s really looked at the data, and it’s been a subject of great debate.

Now joining us is someone who has looked at the data and has a new book out about it, and that’s James K. Galbraith. James is a professor who teaches economics at the LBJ School of Public affairs at the University of Texas, Austin. And today we’re going to talk about his latest book, Inequality and Instability. That book is based on a lot of research based on—from a project, the University of Texas Inequality Project, which James directs. Thanks for joining us again, James.


JAY: So what’s the basic thesis of the book, and why is it important?

GALBRAITH: The book is built on a new body of information or a body of information from which we were able to measure the movement of inequality in the United States and broadly around the world over a period of about 40 years. And by doing that, we were able to make a much closer, I think, more careful comparison than had previously been possible between economic inequality as we measure it and the other things that are known to go on in the economy.

And the most basic finding, which is the one you already mentioned, is that the movement of inequality has been very closely associated in the U.S. and everywhere else with the financialization of the world’s economies and with the rising share of income in the financial sector and in sectors favored by the financial sector, that is to say, in sectors financed by venture capital and credit flows. And so what you see is a phenomenon where inequality becomes a measure of the dependence of economic growth on finance, and therefore on the instability of finance.

JAY: So if we define inequality, we’re talking about the gap or ratio between the amount of income at the top tier as opposed to the majority?

GALBRAITH: No. The definition of inequality here is a very general one. It’s a measure of the dispersion of income, so broadly measuring the difference between those toward the bottom and those toward the top. But the object here is to capture the movement of the whole distribution of incomes. So those who are in the middle also play an important role in the measure, and it’s basically the balance between the middle and the extremes that the measure is picking up.

JAY: And in your book you point out that one of the indicators, if not driving forces, of inequality is very connected to the stock market. Explain that.

GALBRAITH: In the United States, the measurement of inequality, the measures of inequality, both in the traditional and official data that are produced by the Commerce Department, this very well known measure of income inequality, and in measures that we calculated that measure inequality between the average incomes of the counties in the country—very, very closely associated with the movement of the stock market, especially the NASDAQ, especially through the period of 2000—in the 1990s through 2000, and then down again until 2003, 2004. And what that is reflecting is the very high importance of the incomes earned from capital gains, stock options, realizations, and salaries paid out of IPOs to a very small number of people in the strategic sectors—in the information technology sector, in the software sector, and in finance. And it turns out that when you remove those sectors from the sample and estimate what things would have been like if they hadn’t been there, the rise in inequality is very much less than was actually observed.

JAY: And the defenders of the finance sector, if you will, essentially their argument from 1980s on, and even before, but particularly during Reagan and such, was that a rising tide raises all boats, and this income inequality, even though the top tier’s doing so well, the rest of people do better as well. And you point out there may be some truth to it, but there’s a but. So what’s that?

GALBRAITH: Yeah. So there is a great deal of truth to it. After 1980, what happened was that growth in the economy became dependent upon the rapid expansion of credit, which had not been so true before. And that rapid expansion of credit was associated with this great rise in inequality of incomes. But at the same time, it was economic growth as we understand it. It did produce increasing employment, reduced unemployment, and it produced poverty, so that when you look at what’s happening to the working population, the period obviously in the late 1990s and up till 2000 was a prosperous time. It was a time when poverty rates fell and unemployment rates fell, which is, again, not surprising. The problem here is that this was growth and prosperity built on a foundation which could not endure and which did not endure. It came to an end in 2000 and has never been restored on the same basis that had existed before.

JAY: I mean, I guess part of the problem is a rising tide may raise all boats to some extent, but when the storm comes, they don’t sink equally.

GALBRAITH: That is absolutely correct. That’s a nice way of putting it.

JAY: So let’s go back, then. And how did we get here? And let’s go back to—in your book you point out that in 1969 it was sort of the lowest, if we want, inequality in postwar America. So talk a bit about that period, and then take us forward from there.

GALBRAITH: Okay. The period from 1945 to 1969, which is now looked back upon as a kind of a golden age both in the United States and in Europe, was a period of reasonably stable growth, largely supported by the growth of wages, and fairly widely distributed, so that income distribution became gradually more compressed over this period. The inequalities as you measure them fall through about 1970.

And then what happened was that you had, initially, a series of policy interventions aimed at fighting the inflation of the late 1960s that produced recessions in 1970. And then you had a great deal of international disorder and new interventions that produced a deeper recession in 1974-75, another one in 1979, and 1981-82. After you’d had that series of disruptions, the industrial structure of the United States was fundamentally altered, very much damaged, and you embarked upon growth after the early 1980s on a very different basis, a basis that was going to be driven by financialization, by the extension of credit, to a substantial extent by extending credit to a very small number of high-level industries, high-technology exporters, for example, industries that supplied sophisticated products and services to the wider world but that did not create a great deal of employment, and it was very concentrated in small parts of the country. And so as a result of that, the foundation for overall economic expansion after 1980 was much less balanced and egalitarian than had been the case before.

JAY: Yeah, you point out in your book that the advantages of this period of growth—I can’t remember the exact number—was it something like 50 percent or some number to be found in the New York area and Silicon Valley area of California?

GALBRAITH: If you measure the inequality across counties, which is just one way of doing it, what you find is that if you take out just five counties from the mix in the late 1990s—and those five are Manhattan/New York, New York; King County, Washington; and three counties in Northern California, Silicon Valley counties San Mateo, Santa Clara, and San Francisco—then half of the rise in inequality goes away, half as measured as I just described it. So it’s a very significant effect, and it shows up very clearly when you do that little exercise in alternative history.

JAY: So talk a bit more about the process of financialization of the global economy going forward from ’69 and what that means in terms of inequality.

GALBRAITH: In the postwar period from 1945 till 1971, the world was governed financially by a set of international institutions, the so-called Bretton Woods institutions, whose purpose was to stabilize things and to provide individual countries with the leeway to conduct their own economic policies and in some sense to design their own futures. This was swept away in the 1970s.

In the 1980s, when growth in the United States resumed, what had happened was a very powerful assertion of the primacy of U.S. and European banks in the world economy and of monetary policymakers, especially in the U.S., over the conditions of global finance. And what shows up very clearly in the data is that you begin to have a vast co-movement across the world, rising inequality that’s highly contemporaneous, highly coordinated across the world, and appears to be quite clearly the consequence of the financial hurricanes that are sweeping through the world at this time—the debt crisis in the 1980s in Latin America, the financial crises which contributed to the collapse of the Soviet Union and its empire in the late 1980s, and then that affected East Asia in the 1990s. So you have [incompr.] kind of rolling waves of forces that drive up inequality around the world.

JAY: So in the 1990s under the Clinton administration, the power of finance capital is really expressed politically. You start to see an unraveling of some of the regulation that was—somewhat mitigated the role of finance. What happened during that period?

GALBRAITH: To digress into political economy for a second, one of the things that happens is that the financial policymaking is taken over—even greater degree than was true before—by bankers themselves. And so you have a kind of concentration of access to policymaking positions in circles that are very closely aligned with the industry. The power of lobbying in the Congress increases markedly over this period. It was much higher in the 1980s, let’s say, in the banking committees of the House and the Senate than was true in the 1970s when I started my career on the staff of the House Banking Committee. In the Clinton administration, I mean, you had very powerful figures dominating the Treasury and the White House who were very determined to reduce the regulation of the financial sector, both to eliminate the regulations that had been put in place to protect investors at the start of the New Deal and to broaden the access that American financial institutions had to overseas markets. And the Clinton administration pursued both of those agendas, producing in 1999 the repeal of Glass-Steagall, and in 2000 at the very end of his term the Commodity Futures Modernization Act, which opened the sluiceways to the spread, proliferation of credit default swaps, those derivatives that Mr. Buffett described as financial weapons of mass destruction.

JAY: So this growing euphoria around finance, and finance is going to make everybody rich—and as we started at the beginning of the interview, to some extent it did. Even a section of the working class benefits from this, these bubbles and the fact that there’s so much money being made. There is a certain stimulus effect in the economy. But as you point out, it ain’t sustainable. And then we get to the Bush administration. So in the next part of our interview with James Galbraith, we’re going to pick up the story with—in the year 2000. Thanks for joining us, James.

GALBRAITH: My pleasure.

JAY: And thank you for joining us on The Real News Network. And please join us for part two of this series of interviews with James Galbraith.


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James K. Galbraith teaches at the LBJ School of Public Affairs, The University of Texas at Austin. He is a Senior Scholar of the Levy Economics Institute and the Chair of the Board of Economists for Peace and Security. The son of a renowned economist, the late John Kenneth Galbraith, he writes occasional commentary for many publications, including Mother Jones, The Texas Observer, The American Prospect, and The Nation. He directs the University of Texas Inequality Project, an informal research group based at the LBJ School, and is President this year of the Association for Evolutionary Economics.