Economy Watch: IMF Decries Accelerated Income Inequality

Lifting the incomes of the lower and middle classes will boost economic growth.

By Dees Stribling, Contributing Editor

The International Monetary Fund took a shot at income inequality recently in the form of a new report, “Causes and Consequences of Income Inequality: A Global Perspective,” whose release was followed by IMF managing director Christine Lagarde speaking at a conference in Brussels about the matter. The main takeaways: lifting the incomes of the lower and middle classes will boost economic growth; and to achieve that nations need to undertake astute fiscal policy and major reforms in education, health care, and labor markets, among other things. As Lagarde put it: “You do not have to be an altruist to support policies that lift the incomes of the poor and the middle class. Everybody will benefit from these policies, because they are essential to generate higher, more inclusive and more sustainable growth.”

The report highlighted the contrast between a steady, decades-long fall in inequality between countries—driven by rapidly rising average incomes in emerging economies, especially as the nations of Asia become wealthier—and growing income inequality within countries, which has been documented in a good many places, including the well-known example of the United States. The two main factors driving the widening earnings gap between higher- and lower-skilled individuals, the IMF posited, especially in advanced economies, are technological progress and financial globalization. Other factors include overreliance on credit finance; low social mobility; and inequality of access to education, health care and financial services, especially in developing economies.

“With these kinds of disadvantages—with this kind of inequality of opportunity—millions of people have little or no chance of earning higher incomes and building up wealth,” Lagarde said. But the organization is happy to make suggestions to deal with this set of problems: basic good governance, since corruption can be a strong indicator of deep social and economic inequality; policies that strike a balance between promoting greater equality and preserving  incentives to innovate and invest (a tricky balance, as many places have discovered); “clamping down on tax evasion, removing unfair tax relief, reducing high labor taxes,” and freeing up resources by reducing energy subsidies; and “smart” reforms in healthcare, labor markets, infrastructure and more.

If the IMF is correct in its assessment as it applies to the United States, or even partly correct, future economic growth here would be hampered by wealth skewing overly much to the very top of the income pyramid, and both residential and commercial real estate would also face a long-term slog to growth. Without a healthy middle class, in other words, fewer people will buy houses or items to put in them, they will occupy less office space, and require less of the services that keep the logistics industry healthy.

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