IMF economist: medicine against next financial collapse – income equality!

“Unless countries reduce income disparities the next financial collapse is inevitable.” This is the main message of the interview with the IMF economist Michael Kumhof, published by Eurozine few weeks ago.

I am surprised, to say the least. I am surprised not about what was said, but said by whom. This is the first time, as far as i am aware of, when the IMF staff would come in public with such conclusions. I bet, though, it does not reflect the position of IMF in general; however, having somebody inside the organization and be courageous enough to challenge the traditional IMF position, is something new (is it Christine Lagarde’s effect?). Muddying the waters inside the IMF in terms of what policies to apply when addressing global financial problems may help to critically review success (or lack of it!) in dealing with financial crisis so far and eventually start looking beyond just management of crisis and think more about root causes and necessary preventive actions to avoid crisis constantly repeating.

Kumhof argues that the increased income gap leads to increased debt and thus also eventual debt crisis. The richer the rich become, the more they need to spend. After buying all they can possibly buy + a bit more and investing in all possible good-enough profit-making enterprises, there is still money left, which they then lend to the poorer people via banks. The poorer are borrowing to maintain the consumption level they have been used to (or in some cases, just willing to have some sort of normality) meanwhile believing that the stage of ‘cant afford’ is only temporary. This results then in this vicious circle of supply of money from the rich and demand for money from the poor which due to dependency on each other contains a risk of crisis whenever one of the sides either cant supply or dont demand enough.

As the causes of inequality economist mentions weakening labor unions, global competitiveness, global trade imbalances, deregulated financial market, tax havens (!!!).

He is less talkative when it comes to solutions, but suggests that it is either about increasing the income of the poor or taxing (intelligently) more the rich. Education works in long term, but possibly due to increasing global workforce mobility, this actually may not be the sole answer to the problem nationally.

He is clearly unique IMF staff as among other things he is also agreeing that a) in order to stimulate economy you have to bring in more money in public treasury instead of cutting costs, b) there is no point developing theories after theories and keep defending them without relation to real life.

this is sensational.

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