Larry Elliott in Davos
IMF head wins support from outgoing US vice-president Joe Biden as she uses American term for working people in demanding action over rising inequality
The head of the International Monetary Fund, Christine Lagarde, has called for urgent action to tackle a “middle-class crisis” hitting working people as she warned that inequality, distrust and a lack of hope were fuelling growing populism.
Speaking at the World Economic Forum in Davos, Lagarde said she had first highlighted the dangers of rising inequality four years ago but had been ignored. “I hope people will listen now,” she said.
Lagarde said the gulf between rich and poor was evident from an Oxfam report showing that eight billionaires own the same amount of wealth as the poorest half of the world’s population – 3.6 billion people.
“With lower growth, more inequality and much more transparency, you have the good ingredients for a crisis of the middle classes [a US term to describe working people] in the advanced economies,” she said.
Lagarde added that the answer was not for countries to turn their back on globalisation but a mix of policies designed to stimulate activity and ensure the fruits of growth were more evenly spread.
“Policymakers need to get the signal now, and really think about how to address the public discontent. It [the policy response] needs to be granular, it needs to be regional, it needs to be focused on what will people get out of it. It probably includes more redistribution than we have in place at the moment.”
Lagarde’s view that the middle class was in crisis was shared by the outgoing US vice-president.
Joe Biden said globalisation and new technology were in effect “hollowing out the middle class, the traditional engine of economic growth and social stability in western nations”.
He added: “We cannot undo the changes that technology has wrought in our world, nor should we try. But we can and we must take action to mitigate the economic trends that are stoking unrest in so many advanced economies and undermining people’s basic sense of dignity.”
Addressing his audience directly, Biden said the top 1% was not “pulling its weight” and urged that income tax be made more progressive.
Larry Summers, the Harvard professor and former US Treasury secretary under Bill Clinton, questioned whether concern over income inequality really explained the crisis in the middle classes. “The US has just elected the world’s biggest example of conspicuous consumption. That is a bizarre manifestation of a concern over inequality.”
This year’s Davos has been dominated so far by concerns that the results of referendums in the UK and Italy together with the election of Donald Trump as US president represent a retreat from globalisation into nationalism and protectionism.
Summers said many voters thought “too much is being done for the poor, rather than that too little is being done for the poor”, and suggested that the surge of populism was due to issues such as “national unity and strength”, not just envy over wealth.
Middle-class voters, he added, felt governments weren’t working for them. “They feel the governments are fighting for people in developing countries, for people who have recently come into their countries, for minority groups who used to suffer discrimination, but not the people “in the centre of the country”.
He added: “They feel they are not being heard, and they’ve expressed that in the Brexit vote, the Italian referendum and in the US election.”
Summers was dismissive of the policies proposed by Trump, saying that the lesson of history was that populism ended up harming the people it was supposed to help. He said tax cuts would benefit the already super-rich and the small number of jobs relocated to the US by presidential strong-arming of corporations would be dwarfed by the jobs losses caused by the rise in the value of the dollar.
“The people who will be the victims of populist policies are the lower-income and middle-class people in whose name the policy is offered,” Summers said.
The Italian finance minister, Pier Carlo Padoan, said there was no “silver bullet” that would solve the crisis but it was important to take populists seriously.
“Policymakers must deliver a vision of a better future – something that is lacking in Europe right now,” he said.
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