Christine Lagarde took time off last week from grappling with the Greek debt crisis to make a speech about inequality. The managing director of the International Monetary Fund chose a nautical metaphor first used by John F Kennedy.

Back in the early 1960s, the then US president hailed economic growth as a rising tide that lifts all boats. That was no longer true, according to Lagarde.

“In too many countries, economic growth has failed to lift these small boats, while the gorgeous yachts have been riding the waves and enjoying the wind in their sails,” she said. “In too many cases, poor and middle-class households have come to realize that hard work and determination alone may not be enough to keep them afloat.”

This trend has been marked in the years since the Great Recession. In the late 1990s and early 2000s, there was some evidence that JFK’s dictum still held true. Real wages for the poor and middle classes in the US and UK rose during a period of sustained economic growth, but the years since 2008 have been a lot tougher for everyone apart from those at the very top.

This has accentuated the pattern in recent decades for the rich to get an ever bigger slice of the economic pie. Forty years ago, 8% of income went to the highest 1% of earners in the US. Today it is 20%. In the UK the figure has risen from 5% to 15%.

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IMF research released last week shows that there are economic downsides to inequality. Raising the income share of the poorest 20% of the population increases growth by as much as 0.38 percentage points over five years. By contrast, increasing the income share of the richest 20% by 1% decreases it by 0.08 percentage points. So much for trickle down.

The IMF sketches out some of the reasons why inequality is bad for growth. Poor people tend to spend rather than save any additional income. If they see their incomes stagnate or fall, they have a tendency to borrow more, which can lead to a dangerous build-up in debt and eventually a financial crisis.

The enhanced power of the elite could lead to under-investment in education, health and infrastructure, which boost productivity and disproportionately benefit the poor. Lagarde pointed to technological progress and globalisation as additional factors that were widening the earnings gap between higher and lower skilled workers, especially in the west.

She added that these disparities were becoming baked in, with social mobility on the decrease. To get on in life, you had to live on the right side of the tracks, and according to Lagarde, that “didn’t sound fair”.

The IMF’s study of inequality contained a helpful chart showing that the Nordic countries tend to have the highest levels of equality and social mobility, while the US and the UK have the lowest. There is no trade off between the two.

At this point, readers might be wondering whether this IMF has anything to do with the other IMF, the one that tells countries seeking financial help that they need to liberalise labour markets by cutting minimum wages and reducing the scope of collective bargaining; the one that demands cuts in public spending and insists that state assets should be privatised at every opportunity.

They are indeed one and the same. The IMF that warns of the perils of inequality is the IMF that is demanding measures of Greece that will add to poverty and make inequality worse. One half of the fund – the economics team that comes up with the big-picture analysis – says one thing. It supports investment in education, an enhanced role for trade unions and higher taxes on the rich. The other half – the part that draws up the structural adjustment programmes – says something entirely different.

But at least it has identified the problem. Its analysis is shared by the Organisation for Economic Cooperation and Development, the World Bank and the World Economic Forum. Analysis, however, is only a start. Tackling inequality requires policies that will make a difference and the power to implement them.

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A new book by the economist Tony Atkinson gives the lie to the argument that in a global economy nothing can be done about inequality. He lists 15 separate proposals for the UK, including guaranteed public employment; a minimum wage set at the level of a living wage; a minimum inheritance when a child reaches adulthood; the creation of a sovereign wealth fund that would increase the net worth of the state by taking stakes in companies and property; a universal basic income; the replacement of council tax with a regularly updated and progressive property tax; a wealth tax; and a 65% top rate of income tax.

Atkinson freely admits that his proposals are bold, but says boldness is required in order to return the UK to the levels of inequality that prevailed before 1980. It is not enough, he says, to tinker. “Major reforms are required, engaging all areas of economic and social policy”.

Labour’s manifesto at the 2015 election fell well short of the boldness Atkinson demands. There was a pledge to raise the top rate of tax to 50%, but no wealth tax, no basic income, no reform of council tax, no national endowment for 18-year-olds, no sovereign wealth fund.

Perhaps voters considered Ed Miliband to be tinkering, and would have looked more kindly on something stronger. Perhaps they liked the anti-inequality measures, but didn’t trust Labour to run the economy in a way that would make them achievable. Maybe it is only Scottish voters who are up for a bit of boldness.

Whatever the reason, Labour put inequality at the heart of its campaign and lost.

That said, Miliband was asking the right sort of questions. Later this week, the government will release the 2013-14 poverty figures, the first to be affected by the full effects of the coalition’s welfare reforms. They are unlikely to make pretty reading. Cuts to in-work benefits will form part of George Osborne’s summer budget on 8 July.

There is a vicious circle at work here. Inequality breeds instability, which leads to recession. Recession damages the public finances, which leads to government belt tightening. Austerity requires spending cuts that widen inequality, which in turn leads to slower growth and a greater reliance on debt.

If not now then at some point, this vicious circle will have to be broken.





