Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Rise of Inequality at Center of Global Economic Crisis

June 14, 2012

  • Level of inequality as high now as before Great Depression
  • Inequality has frozen U.S. economic, political institutions
  • Investments in education, health, infrastructure can help cut inequality

The rise of inequality is at the center of the current economic and financial crisis, says economist Robin Wells.

Rise of Inequality at Center of Global Economic Crisis

Occupy Wall Street protest in New York, United States. ‘Occupiers’ have denounced rise in inequality over recent years (photo: Houston/Newscom)


Since the onset of the global crisis, there has been much agonizing about the growing inequality found in many parts of the world.

Wells and economist Paul Krugman blame this increasing inequality for destructive, self-perpetrating spiral of social polarization, growing divisions in crisis. In their essay published in the newly released The Occupy Handbook, which analyzes the grassroots Occupy movement, the two authors argue that the response to the crisis continues to be inadequate because it ignores its root cause: America's yawning inequality.

In an interview with IMF Survey, Wells explains how growing inequality has pervaded all aspects of life.

Wells: The increasing inequality in the United States has frozen the political apparatus. The economics profession has been woefully inadequate. What appears to lie at the root of the lack in the economics profession is that up until the time of the crisis, we papered over the differences in the profession.

We did not really address income inequality. I would not say it was a taboo topic, but we did not know what to do with it so we did not bring it up.

Once the crisis hit, once income inequality became so great that we could not ignore it, the cracks in the profession became pronounced and we saw ourselves refighting the old economic questions that had been solved by Keynes back in the 1930s.

We have been fighting about concepts such as the fact that the economy needs fiscal stimulus but also concepts resolved by Irving Fisher who taught us about debt overhang.

Debt overhang is what is keeping this economy stuck. Households have enormous amounts of debt. The way to solve that would be a direct principal writedown but we could not do that with the banks fighting that tooth and nail and the administration being unwilling to take that on.

IMF Survey: Can you explain by which channel of transmission inequality has pervaded all aspects of society?

Wells: There are two questions there. The first question is: How did we get such an extreme level of inequality so that we are now back to what we call in the United States "The Great Gatsby" days right after World War I?

That is a bit of a puzzle. There are various mechanisms by which it could happen, one being the decline in unions, which tends to level out wages. Some also think that it is due to skills, meaning that there is a bigger premium for skills in the economy.

But what those arguments really cannot explain is this explosion at the very top. The explosion at the top is not the 1 percent pulling away from the 99 percent, it is the .01 pulling away from the rest.

Some of this 0.1 per cent is Steve Jobs and entrepreneurs in Silicon Valley, but a lot of them are Wall Street. We can argue that it is a function of deregulation, which in many ways looks like it was the result of increasing pressure from moneyed interests.

I think that one can begin to tie, at least through that channel, income inequality. But it is certainly not the only thing.

IMF Survey: Is this issue specific to the United States, or do the same dynamics apply in other countries?

Wells: We definitely see income inequality going up in other countries. We have certainly seen it go up in the U.K., Brazil, China, and India. In fact, what we can see there is an explosion of income inequality.

What singles out the United States though is that, even as a historically long-term advanced country, we can’t deal with it.

IMF Survey: What policies can be adopted to ease inequality and its distorting effects on economic recovery?

Wells: First of all, I think we need to do something to help alleviate the present-day suffering which is overwhelmingly concentrated among the working class. An economic stimulus would do that. You could do that with virtually very low-cost money. You could also do it in a way which helps our future growth by investing in school teachers, school buildings, and infrastructure that is needed very, very badly.

We can also make sure that health care gets implemented. These are very basic things to lower the extreme amount of anxiety and suffering that people are experiencing in the future. These are win-win things.

We can refuse to renew the Bush tax cuts for the upper income. These policies not only worsen the existing level of income inequality, but they exacerbate it because they make forever increasing income at the top. They also give resources to the top to continue fighting.

One of the reasons that some people attribute to the rise of income inequality is that we as a society and particularly in the economics profession thought that greed is good. Money is the just reward to work and effort.

Sometimes that is definitely true, but many times, as we see particularly in financial markets, it is not. On the other hand, even if it is, we have to counterbalance the effect that it has on our society.

IMF Survey: Is there any hope that this situation will change?

Wells: In order to not be demoralized, one has to understand that these are long-standing forces that we are engaged with. These forces existed before the Great Depression and they were provoked into action again. One has to gird oneself for the longer term and maybe hand it off to younger people at some point.