How Economists have Misunderstood Inequality

2011-11-28T105101Z_01_LUC01_RTRIDSP_3_USA-PROTESTSBrad Plumer interviews James Galbraith, in the Washington Post:

Brad Plumer: You bring together a lot of new data on inequality in the book across a variety of countries, from the United States to Europe to China to Latin America. What’s different about what your book discovers?

James Galbraith: One thing we found is that there are common global patterns in economic inequality across different countries that appear to be very strongly related to major events affecting the world economy as a whole. The most important have been changes in financial regimes and changes in systems of financial governance. It made a big difference when the Bretton Woods system ended in 1971. The debt crisis of the 1980s made a big difference. The debt crisis of the 1980s made a big difference. It made a big difference in 2000 when the NASDAQ crashed and interest rates were reduced These things all had global repercussions, and they affected inequality around the entire world in different ways.

BP: And this isn’t how many economists have looked at inequality, correct?

JG: No. The most unconventional thing in this book is about how inequality relates to macroeconomic performance and financial factors. The discussion of inequality tends to be heavily dominated by a marketplace perspective that stresses individual-level characteristics like the demand for skill. Economists have always classified this as a microeconomic problem. … But when something’s happening at the same time around the world, in different countries that are widely separated, that’s a macro issue. There was a global movement toward higher inequality as a result of the financial stresses that the world is under.