IMF economist: Crisis begins with inequality

An interview with Michael Kumhof
Unless countries reduce income disparities the next financial collapse is inevitable, argues economist Michael Kumhof. Perhaps a surprising conclusion from a senior researcher at the IMF. In interview he argues that equality is the best recipe against crisis.


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, 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



Kumhof comes across as your typical theoretical economist. A former assistant professor at Stanford, he currently holds the position Deputy Division Chief of the IMF Modelling Unit, the department responsible for developing economic models. Consequently, he is cautious when commenting on issues that may be politically charged. Well aware that he is representing the IMF, he avoids discussion of developments in specific countries. Nor does he suggest concrete measures to lessen inequality. This is a task for tax experts, he says.

Nevertheless, he has arrived at a conclusion that contrasts with everything that the IMF has previously been associated with. His message is simple: if income gaps are not reduced, the next crisis will happen as surely as autumn follows summer... http://www.eurozine.com/articles/article_2012-03-09-kumhof-en.html

Popular posts from this blog

Third degree torture used on Maruti workers: Rights body

Haruki Murakami: On seeing the 100% perfect girl one beautiful April morning

The Almond Trees by Albert Camus (1940)

Satyagraha - An answer to modern nihilism

Rudyard Kipling: critical essay by George Orwell (1942)

Three Versions of Judas: Jorge Luis Borges

Goodbye Sadiq al-Azm, lone Syrian Marxist against the Assad regime