James Galbraith Reviews His Research On The Causes Of Global Inequality

James Galbraith gets a chance to tell readers what his extensive global research on inequality suggests about its causes. He also presented his findings at the recent INET conference in Berlin. The video is available online. His research indicates that rising inequality in not a microeconomics problem. Inequality is a global problem and it is better understood from a macroeconomic perspective. For example, many argue that inequality is due to growth in the technology sector. Unemployment is due to the lack of technical skills in the labor force. Some also argue that there is a rising premium that businesses are willing to pay for rare skills. That is the argument for rising CEO compensation. He did not find any evidence to support these micro arguments in his research. He found that rising inequality, and economic instability, were both related to the macroeconomic problem of interest rates and the use of debt. Inequality has risen in response to asset based booms financed by debt. Economic booms and busts increase inequality, and are also the cause of economic instability. Inequality and economic instability are two sides of the same coin.

One of his most interesting findings, in the US, is that 50% of the increase in inequality is explained by examining the data from 5 counties in the US. Inequality in these counties is related to booms in technology and the use of debt. Manhattan, Silicon Valley, and areas around Seattle are among the top 5 counties. If his analysis is extended to 20 counties, all of the increase in inequality is explained by the growth in inequality in those counties.

Since the credit boom was a global phenomenon, rising inequality in Europe is also related to the booms and busts that have occurred. Social policies in Northern Europe has mitigated the impact of economic instability. The Scandinavian countries, in particular, have less inequality than most other countries in Europe. The countries in Europe most affected by the credit driven boom in real estate, and the rise of their financial sectors, are also the countries that have the most serious economic problems. The increase in unemployment during the busts also increase inequality. Most of those affected by recession and unemployment are low wage workers who lose their primary source of income. Europe also has few good ways of redistributing income from stronger regions to the weaker regions in the South. The US has numerous ways to transfer income from prosperous regions to its poorer regions.

Galbraith also reviews data from South America that helps to explain the decline in inequality in many countries. Their economic booms were driven by government policies that directed resources toward the exportation of commodities. They were not driven by the rise of the finance sector and the use of debt. His conclusion is that government policies in many advanced economies led to the increased use of debt that increased the influence of the financial industries. That led to the booms and busts that increase instability and inequality. He does not mention this in his article, but the Washington DC area is one of areas that is among the top 20 that account for all of the increase in US inequality. That is due to the rapid growth of the lobbying industry in the DC area. The lobby industry in DC pays high wages to those who have connections that can assist these firms in their efforts to influence policies in Congress.  One could argue that the rapid growth of the lobby industry is highly correlated with the rise in inequality.  They change the rules of the game in ways that enable their wealthy clients to increase their wealth.