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James K. Galbraith on link between inequality and instability: Societies that are more egalitarian are more stable

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. And welcome back to our series of interviews with James K. Galbraith about his new book, Inequality and Instability. Thanks for joining us again, James.


JAY: And just to remind everybody, James teaches at the LBJ School of Public Affairs at the University of Texas, where he teaches economics. So, James, let’s move on. And again I’ll remind everybody, you want to watch the earlier parts of this interview if you haven’t watched yet, and then you’ll get up to here, ’cause we’re kind of going at this chronologically. There are countries with less inequality, and they seem to have less instability. Where is that? And what’s the evidence?

GALBRAITH: It’s, I think, very well known that in Northern Europe in particular, very strong social institutions, very strong unions, have yielded over many decades societies that were substantially more egalitarian than was true in Southern Europe, than was true in the United States or, for that matter, in the rest of the world. There has been a prevailing doctrine, a dogma in Europe, which holds that Europe, which has suffered from relatively high unemployment since the early 1970s compared to the United States, was suffering that unemployment because it was holding on to strongly egalitarian policies, strongly social democratic or even socialist economic institutions.

And we looked at that problem from a couple of different perspectives. One was to look at the relationship between unemployment and inequality inside the European countries. And what we found is that in fact there’s just no basis for the claim that I just described. It is simply a fantasy drawn from textbook reasoning that is in contradiction with the facts on the ground. And the fact on the ground is that countries which are more unequal in Europe have higher unemployment, much higher unemployment than the more egalitarian countries.

And you have to ask, is there a sound reason, a sound economic reason why that’s the case? And the answer is: yes, there are some very sound reasons. If you look at the philosophical foundation of what’s called the Scandinavian model, you find that compression of wages was part of a fairly well understood strategy to improve the productivity, to advance the technological status of the industries of those countries, and to attract—ultimately, to attract higher-technology, more productive, higher-paying industries while excluding those which couldn’t compete except on the foundation of lower wages. And when you do that over time, your living standards rise, and your capacity to provide service employment to your population improves, your overall unemployment rate goes down. And that’s, I think, part of a very clear, let’s say, pattern of association between lower inequality and lower unemployment, contrary to the dogma that I just described.

And then the question was: well, what about the comparison between Europe as a whole and the United States? The Europeans have been lectured for decades by their orthodox economists that what they need is a more flexible labor market like the United States and then they will have lower unemployment. And what we found, in contrast, is that this overlooks the fact that Europe has been integrating and has been coming together as a single continental economy. And when you do that, when you take what had been isolated labor market situations and bring them into direct interaction with each other, you have to measure the inequality on the new basis, on the new foundation. And nobody had done that. And what we found was that in fact when you do that, European inequality, taking into account the differences that exist between, let’s say, Germany and Poland or between Norway and Portugal, is actually larger in wages than it is in the United States. And that was a very interesting, striking finding, which then basically said that the data between the United States and Europe further support the argument, the basic argument that I would make, the basic argument that we would come to, which is that the more egalitarian system measured at the right level will tend to have lower unemployment.

JAY: Periods of rising inequality, we said earlier in the interview, first of all have a lot to do with the stock market, because people at the top tier, so much of their revenue comes from stock options and various forms of Wall Street trading. And when that’s at a peak, the inequality raises. That also means they have a lot more money. What does that mean to American politics?

GALBRAITH: Well, of course, there is a direct effect. When you have concentration of wealth, you also have concentration of power. And that recognition goes back to one of my favorite economists, Adam Smith, who wrote a very short sentence in The Wealth of Nations that wealth is power, “as Mr. Hobbes says” (you know, there’s a lot of that “as Mr. Hobbes says”). So that’s, I think, a clear implication.

One of the things we did in the book as well was to look at the relationship between inequality and voting behavior at the level of American states, which are, of course, very important. That’s a very important level to examine, because it’s the states who through the electoral college decide the outcome of our presidential elections. And we looked at the relationship between economic inequality and turnout and between economic inequality and outcomes. And one of the things we found was that there is an apparent relationship between inequality and turnout, that states which have higher levels of economic inequality also have lower turnout in presidential elections. And that suggests to us—and since I live in the South, this is not an unfamiliar story—that where inequality is greater, there is a tendency to make it harder for poor people to vote. And I think that’s a well-established pattern in American politics.

The relationship between inequality and presidential election outcomes is a little bit more subtle. But one of the things that we found is—we did some work that helps to explain why it is that while rich people tend to vote Republican, richer states tended to vote Democratic, which is an interesting paradox in the political literature to which we made some contribution.

JAY: I was looking at a graph of the power—size of finance as a percentage of American GDP. And if you look at the graph I was looking at from early 20th century, like, 1900 on, you’ve got, like, this straight line up to about 1932, 1933, where finance keeps growing and becomes a much more significant part of the economy, and then you have this—you know, the crash and it—and you sort of comes down a bit, and then, World War II, drops, I suppose because there’s so much government spending during the war. But at the time of that peak is when you start getting legislation. You have Roosevelt, you have, you know, legislation to mitigate the power of finance and speculation. And we don’t reach again, based on the graph I saw, that same percentage of finance as the size of the GDP till 1980—it gets back to where it was in 1932, except that line keeps going from 1980—if anything, at an even sharper incline. And there’s no—and instead of legislation to mitigate it, by the ’90s it’s actually the opposite. You get—you undo the legislation from the ’30s. What’s your take on why? Why aren’t we seeing—. I mean, let me back up, because in the ’30s you have voices saying, you know, if you’re going to save capitalism, you have to put some breakers on this. And the voices that are saying that now seem completely marginalized.

GALBRAITH: Well, we were very fortunate historically in 1933 to elect a president who was independent of the banks and prepared to act decisively in a banking crisis. And what Roosevelt did was to close the banks, audit them, and only allow those to be reopened which were sound. And that act restored confidence in the banking system as a whole. And then there were deposit insurance and the Securities and Exchange Commission and other—and Glass-Steagall, all of which moved toward a more tightly regulated and much sounder banking system that played a much smaller role in determining the fate of the country for the next 40 years.

This time we didn’t get that. We got an administration, the Obama administration, which on banking pursued a policy that was essentially the same as the late Bush administration and used essentially the same people. The Treasury secretary was promoted from being president of the New York Federal Reserve Bank, and the chairman of the Federal Reserve board was reappointed. And whether those are good people or not good people, what that means when you do that is that you lose the liberty to make a fundamental change of policy, because people are not going to reverse themselves simply because they’re serving a new president. And that, I think, is a—it’s just a huge difference between the Hoover-Roosevelt transition in 1933 and the Bush-Obama transition in 2009.

JAY: And is this a reflection that finance is just qualitatively more powerful than it was and that the voices from other sectors of the economy simply don’t have any power anymore, finance is so much in control of things?

GALBRAITH: I think what has to be faced is the fact that finance is dominant in the Democratic Party. That fact has to be faced.

JAY: And the Republicans would be any different?

GALBRAITH: Finance has always been a powerful part of Republican coalitions, but the dominance of finance over, for example, trade unions, over, for example, industrial interests, over agriculture in the Democratic Party is a development of the last 30 or 40 years.

JAY: It’s an interesting thing, the way you phrase the last part, ’cause I had a conversation with a trade unionist a few months ago. You know. You know, I asked him, why don’t you contend for control of the Democratic Party? Why do you wind up just being like cheerleaders for whoever’s running? And the answer was—. And I also said, why don’t you contend with Wall Street for control of the Democratic Party? And the answer was: well, they’ve got the cash to fight the Republicans in the elections. So they actually kind of acknowledge their alliance with Wall Street in order to fight, you know, what they think is the bigger enemy.

GALBRAITH: Yes, of course.

JAY: Okay. In the next segment of our interview, we’re going to talk about so what should people be demanding, what public policy conclusions come from this work based on James’ book Inequality and Instability. So please join us for the next part of our interview with James K. Galbraith on The Real News Network.


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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.