1. Inequality and Instability A Study of the World Economy Just Before the Great Crisis By James K. Galbraith The University of Texas at Austin For the Institute for New Economic Thinking Berlin April 14, 2012

2. “Kepler undertook to draw a curve through the places of Mars, and his greatest service to science was in impressing on men's minds that this was the thing to be done if they wished to improve astronomy; that they were not to content themselves with inquiring whether one system of epicycles was better than another, but that they were to sit down to the figures and find out what the curve, in truth was.” -- Charles Sanders Peirce (1877)

3. Inequality as Global Macroeconomics At the national level, inequality is in part a curvilinear function of income level – a matter of macroeconomics. The Kuznets Curve remains a good starting point, though with modifications for high-income countries. Changes in inequality are driven by changing economic structure and economic geography, and changing inter-sectoral terms of trade. Global factors dominate movements in global pay inequality. Changing financial regimes dominate this picture.

4. A Stylized “Augmented Kuznets Curve”

5. This broad picture of the world economy from the standpoint of inequality measure suggests that the “super-bubble” was also, for most of the world’s population, a “super-crisis.” The super-bubble came to a peak in 2000-20001. The period since then was marked in the United States by efforts to keep the bubble going, in part through aggressive efforts to relax standards, which may be described as the growth of a “predator state.” This led to the corruption of the financial markets whose collapse produced the great crisis.

6. Debt Crisis End of Bretton Woods 9/11 “Concept 4” Inequality: The Common Movement of Inequality Measured within Countries, Across Time Note: The vertical axis represents the time element in a two-way fixed effects panel regression, across the panel of country-year observations. Vertical scale is log(T) units. Source: Kum 2008. Milanovic Concept 1 Profit Share in OECD The Super Bubble

7. United States Income inequality and the Stock Market

8. The US: Income Inequality and the NASDAQ, 1969-2006 Income inequality measured between counties, from tax data Tax Reform Act Super Bubble Inequality Log of NASDAQ

9. U.S. Income Inequality Between Counties 1969 – 2005 Plotted Against the NASDAQ Composite, with Three Counterfactual Scenarios of Inequality Growth from 1994 – 2000 Without Manhattan Without Silicon Valley Without Top 15

10. Income Inequality in the United States, 1969-2009 Measured Between Counties Calculation by Amin Shams

11. Contribution of Each County to Income Inequality, Late 2000s Contribution to inequality is presented as shading and as height above or below the zero plane. Calculation and map by Amin Shams.

12. Oxford University Press, 2012 For more information: