IMF Economist: Crisis Begins with Inequality

Kumhof_468wMikael Feldbaum interviews the IMF's Michael Kumhof over at Eurozine:

International Monetary Fund rescue packages are usually associated with “structural adjustment”, privatisation and liberalisation. But IMF economist Michael Kumhof's recipe for avoiding crunches is increased equality – a conclusion that has brought him worldwide attention.

Kumhof considers the cause of the financial crisis in 2008 and the debt crisis in 2011 to be increased inequality, especially in the United States. He has argued that in order to avert future crises, the negotiating position of the majority vis-à-vis the very rich needs to be strengthened. “I bet you've never heard an IMF economist call for increased salaries before. This is highly controversial”, he says. But for an economist with hands-on experience in corporate banking who is vexed by economists who fail to anchor their theories sufficiently in the way the world actually works, it makes perfect sense.

In a article co-written with Romain Rancière in 2010,[1] Kumhof argues that increased gaps in income have led to increased household debt ratios. Nations with major income disparities tend to have the highest debt quotas, the largest financial sectors and often the biggest trade deficits. The richest five per cent of the population lends parts of its wealth to the remaining 95 per cent via an inflated financial sector. The rich try to find ways to invest their surplus wealth, while the less well-off majority attempt to maintain the level of consumption they have grown used to but no longer can afford. The result is increased indebtedness and the gradual build-up of a debt crisis. The only way of sustainably minimising this debt is to reduce income inequality.