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

IMF News, June 14, 2012

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

Publication date: June 14, 2012
Central claim: "The rise of inequality is at the center of the current economic and financial crisis," according to economist Robin Wells.
Level of inequality described as "as high now as before Great Depression."
Wells and Paul Krugman argue increasing inequality has produced a "destructive, self-perpetrating spiral of social polarization" and that policy responses have been inadequate because they ignore "America's yawning inequality."
Wells: inequality has "pervaded all aspects of life" and has "frozen the political apparatus."

Political and institutional effects:
- "The increasing inequality in the United States has frozen the political apparatus."
- The economics profession has been "woefully inadequate" and "papered over the differences" before the crisis.
- Post-crisis debates have revisited Keynesian fiscal stimulus and Irving Fisher's concept of "debt overhang."
Financial and household effects:
- "Debt overhang is what is keeping this economy stuck. Households have enormous amounts of debt."
- Wells argues a direct principal writedown would help but was blocked by banks and political unwillingness.

Multiple mechanisms proposed:
- Decline in unions, which "tends to level out wages."
- Higher skill premiums ("bigger premium for skills in the economy")—though these do not fully explain top-end gains.
Concentration at the very top:
- The explosion at the top is characterized not as "the 1 percent pulling away from the 99 percent" but as "the .01 pulling away from the rest."
- Reference to "0.1 per cent" dynamics: part entrepreneurs (e.g., "Steve Jobs and entrepreneurs in Silicon Valley") and "a lot of them are Wall Street."
- Deregulation and "increasing pressure from moneyed interests" are cited as a channel tying to income inequality.

Inequality rising in multiple countries:
- Wells notes income inequality has "gone up in the U.K., Brazil, China, and India."
- She emphasizes an "explosion of income inequality" in those countries.
U.S. distinctiveness:
- The United States is singled out as a historically long-term advanced country that "can’t deal with it."

Immediate relief and stimulus:
- Implement "an economic stimulus" to alleviate present-day suffering concentrated among the working class.
- Use "virtually very low-cost money" and invest in "school teachers, school buildings, and infrastructure."
- Ensure health care implementation to lower anxiety and suffering—described as "win-win things."
Fiscal and tax policy:
- "Refuse to renew the Bush tax cuts for the upper income" to avoid worsening income inequality and providing resources to the top to "continue fighting."
Social and normative responses:
- Counteract the societal belief that "greed is good" and that "Money is the just reward to work and effort," noting in financial markets this is often not true.
- Recognize the need to "counterbalance the effect that it has on our society."

Wells cautions these are "long-standing forces" existing before the Great Depression and re-activated.
She advises preparing for long-term engagement and possibly "hand it off to younger people at some point" to sustain efforts.

IMF Survey interview with economist Robin Wells, June 14, 2012.