PAUL JAY: 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.
JAMES K. GALBRAITH: My pleasure.
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.