Minding the Gap


A version of this story ran in the July 2012 issue.

You’ve heard the argument. What’s needed for American workers to advance is more education and job training. If workers’ wages have fallen and inequality has risen in the United States, it’s because too many workers have not kept abreast of technological advances in industrial processes.

The theory that “skill-biased technological change” is a major agent of rising inequality, first advanced in the early 1990s, resonated deeply with free-market economists and political conservatives. The idea suggested that individual workers—not concerted government action and public policy—were responsible for their position in society.

The only problem with this now-entrenched view, economist James K. Galbraith writes in Inequality and Instability: A Study of the World Just Before the Great Crisis, is that the evidence undergirding the theory has proved to be “almost unbelievably thin.” To fill that void, Galbraith and teams of graduate students constructed a vast database tracking trends in income inequality and unemployment by occupation, gender, age, race and educational level in the United States from 1969 to 2007. Fifteen years in the making and laden with charts, graphs and tables, the book provides a definitive picture of income and unemployment over the past four decades in the 3,150 counties in the U.S.

In addition, it ambitiously tracks the same trends in Europe, China, Cuba, Argentina and Brazil through the tectonic shifts occasioned by globalization, the fall of communism, integration of world economies and economic development.

“This is not a polemical book,” Galbraith said in an interview, surrounded by crammed bookshelves and stacked papers at the University of Texas’ LBJ School of Public Affairs, where he holds the Lloyd M. Bentsen Jr. Chair in Government/Business Relations. “It’s not intended to be a book that spells out policy solutions,” he said. “It’s a book about measurement and about finding patterns.”

Among his findings: Major shifts in wages are due to the changing composition of the job market, including the loss of manufacturing jobs and an “enormous rise in jobs in the low-wage services sector.” At the same time, citing U.S. Census reports, Galbraith reports that income inequality has hit record levels largely as a result of a striking change in compensation structures between the top-most classes, the middle class and the poor. “People at the very top of the income structure hold a large share of corporate stocks, pay themselves with stock options, and finance their companies with venture capital in a rising equities market,” he writes.

“In the late 1990s,” he adds, “it was the boom in technology markets that drove the capital wealth and the incomes of these individuals up, which also drove the inequality in (manufacturing) wage structures down.”

The dramatic rise of the finance industry and its hegemony over the global economy played a defining role in widening the chasm between the rich and the poor and weakening the middle classes, Galbraith reports in Inequality and Instability. The finance industry has also emerged as the key agent of market instability and the major culprit behind modern economic crises through the rising indebtedness of those with few resources.

The financial sector’s role in creating inequality and instability is so obvious and compelling—yet so neglected by the economics profession at large—that Galbraith fairly takes his colleagues to task for malpractice. “Not only was there no recognition of inequality, and not only was there no study of the link of inequality to financial instability” by most establishment and academic economists, he writes, “there was practically no study of credit and therefore no study of financial instability at all … [T]he leading line of argument was that no such problems could exist. The leading line of argument was, in fact, that the system would manage itself, and the effort [by government, a human and therefore flawed institution] to ‘intervene’ was practically certain to do more harm than good.”

Galbraith said that his latest book is in sharp contrast to the more political 2008 bestseller The Predator State, in which he argues that the U.S. regime has been transformed over the past 30 years from an economic and political system operating largely in the public interest to one serving corporate interests. “Everywhere you look,” Galbraith wrote in that book, “the public decision is made by the agent of a private party for the purpose of delivering private gain. This is not an accident: it is a system.”

Inequality and Instability provides support to the Occupy Wall Street movement’s declaration that society has been divided between the top one percent and the bottom 99 percent. If the Democrats opt to embrace that message, Galbraith’s treatise provides solid ammunition for the 2012 presidential and congressional elections, and beyond.

Both books extend the tradition of the great economist John Maynard Keynes, whose legacy Galbraith and his late father, John Kenneth Galbraith, have championed. James Galbraith was the honored speaker last year at the 75th anniversary of the publication of Keynes’ magisterial The General Theory of Employment, Interest and Money. Economists from around the world gathered at Roskilde University in Denmark to mark the anniversary.

In an interview, Galbraith and I discussed his books and the Keynesian tradition, which informed the New Deal, post-World War II prosperity and the Great Society.

Texas Observer: Describe The Predator State.

James Galbraith: The book had to do with a certain strand of conservative thought. In the early Reagan period, the ascendant conservatives were people with powerful and genuine economic convictions. By the early 2000s that element had disappeared. A second piece had to do with the way liberals and progressives approached economic policy. If you went to the Barack Obama campaign site in the summer/fall of 2008, you found a statement glorifying the so-called free market. The function [of that] was to place anybody to the left of center in a defensive crouch. It means that you’re not really thinking for yourself. You’re not trying to articulate your own vision.

TO: Given your background, you probably had a sense that if we remove the Glass–Steagall Act (enacted after the failure of banks during the Great Depression and significantly eroded in the late 1990s), if we don’t manage financial regulation, we could have a replay of the 1920s.

JG: Deregulation and then the de-supervision of the financial sector were carried out under direct pressure. This is the work of lobbies responding to their competitive environment. This is true of the deregulation that led to the savings and loan debacle, and it’s true of the deregulation and de-supervision, including Glass-Steagall and the Commodities Futures Modernization Act and including the so-called JOBS Act (Jumpstart Our Business Startups) signed by President Obama. You’re looking at the exercise of raw political power. It’s very clear as things unravel that these are going to create a system which is fragile, increasingly corrupted from inside. When that is exposed, the untrustworthiness of the institutions becomes your major problem.

TO: Let’s talk about Inequality and Instability. Is there a connection between The Predator State and the widening gap between the rich and the poor?

JG: I should draw a contrast between the two books. … Inequality and Instability explores information that extends not only through the U.S., but also through the global economy. There are common patterns in economic inequality worldwide that coincide very closely to the rising influence of the financial sector. You find that credit cycles drive inequality. Credit busts, debt crises, are extremely important. And you find that there are turning points that coincide with the major changes in the governance of the world financial system. You can delve into scores of papers that deal with topics like technology, trade and immigration. The view we offer is that it’s really a simpler story.

TO: For a long time when you heard about class warfare, the Right seemed to be winning the argument. Occupy Wall Street seemed to change the debate to a certain extent.

JG: It’s important to recognize that in asking for reforms, one is not asking for a fundamental overthrow of basic American institutions but for a better sense of proportion. It was not true 25 years ago that the financial sector extracted 40 percent of corporate profitability from the system. If you reduced the bloated financial sector to something functional and created, as we did in the 1930s, parallel institutions that did things that the private financial sector is unwilling to do, we might be able to address some of our current problems.

TO: What are those parallel institutions?

JG: Well in the 1930s we had the Reconstruction Finance Corporation, which kept American corporations alive during the Depression, which was run of course by Texas businessman Jesse Jones. We had the Homeowners Loan Corporation, which refinanced mortgages and basically kept people in their homes. We had the creation of Fannie Mae and Freddie Mac, which provided the beginnings of the secondary market for home loans and created, for a long time, a stable market in long-term mortgages. So we created institutions that dealt with the gaps in the credit markets and the private sector.

TO: Do you see some hope coming from the 99 percent movement? I saw your picture [on a book jacket] taken standing near a demonstration.

JG: My daughter helped with the library at Zuccotti Park, and she took that photograph. I would say it’s too early to tell. I think the Occupy movements have had a strong resonance with the larger American public. Which was not true, by the way, of the large part of the [Vietnam] anti-war movement. I think the attention of the press is going to be with the presidential election. Let’s hope the broader American public recognizes that fundamental problems are not being addressed.

Paul Sweeney, a freelance writer living in Austin, is a longtime Observer contributor. He has worked at Texas newspapers in Corpus Christi and El Paso and has written for The Boston Globe, The New York Times and Business Week.