Chrystia Freeland

Managing Director of the IMF Christine Lagarde sat down for an interview with Chrystia Freeland yesterday, January 17th, following the IMF’s New Year Press Briefing.

CHRYSTIA FREELAND:

Thank you for joining me, Madame Lagarde.

CHRISTINE LAGARDE:

My pleasure.

CHRYSTIA FREELAND:

One of your themes as we enter 2013 is that financial reform must continue.  And you have just said that you’re concerned, you see a waning commitment to financial reform.  What do you see going on?

CHRISTINE LAGARDE:

I see a lot of pressure coming out of the industry.  Which is clearly part of their job.  They will naturally lobby to support more flexible, more accommodating regulations.  I think, you know, the financial sector is so particular and so special because of the confidence factor associated with it and the role played by the authorities sometimes in order to support that sector, that it warrants stronger regulations.

And, you know, stronger buffers against potential risks and regular tests of their capacity to resist shocks.  So my– our take is that the financial regulation has to proceed, has to be completed.  And that the appropriate buffers, whether it’s by way of liquidity ratio, whether it’s by way of capital ratio for banks, or whether it’s by way of appropriate scope of regulations, for instance the shadow banking, has to proceed.

CHRYSTIA FREELAND:

Something that we are hearing a lot from the banks is that actually now is the wrong time to be tightening finan–

Among the losers in the United States this week are the super-rich, who spent unprecedented millions to evict President Barack Obama from the White House. The investing class turned sharply and vociferously against the president many of them had supported in 2008. On Tuesday night, the plutocrats lost their shirts.

“Boy, they threw away a lot of money,” Theda Skocpol, a Harvard professor, told me. “It was very interesting to hear on Tuesday night about all the corporate jets packed in Logan Airport” for Mitt Romney’s party in Boston.

One of the important questions in the United States today – and, eventually, in all democracies where income inequality has risen sharply, which is to say in pretty much all democracies – is what impact the political ineffectiveness of the super-rich at the ballot box will have on how the country is actually governed.

America used to be Sweden: According to new research, the America of the Founding Fathers was ‘‘more egalitarian than anywhere else in the measurable world.’’

That’s an important finding, and one that will surprise most Americans today. Both inequality and American exceptionalism are high on the national political agenda. One idea that brings those issues together is the belief that Americans have an exceptional cultural tolerance for income inequality. Unlike Europeans, the thinking goes, most Americans are confident that they are ‘‘soon to be rich.’’ As a result, the conventional wisdom has it, Americans in the middle look up to their 1 percent and are loath to tax them.

But historical research by the economists Peter H. Lindert and Jeffrey G. Williamson shows that when it comes to inequality, this American exceptionalism is an inversion of the conditions that prevailed at the time of American Revolution. In that era, which is so often invoked in today’s political and social battles, America was the world’s most egalitarian society – and proud to be so.

Behavioral economist Dan Ariely of Duke University came into Reuters today to talk to Chrystia about his new book and some of his recent research on income inequality.

Ariely, along with Michael Norton of Harvard Business School, conducted a survey to determine what level of inequality Americans tolerate if their incomes were randomly assigned, an equilibrium that philosopher John Rawls called the “just society.” The duo asked nearly 6,000 Americans to guess what percent of wealth they thought was owned by each of the five quintiles of income levels in the United States and what their ideal level of income distribution would be. Then, Ariely and Norton presented the respondents with three unlabeled charts showing–unbeknownst to them–the distribution of income in a perfectly equal society, the United States, and Sweden, respectively, and asked which society they would choose to live in.

The results were quite shocking:

First, respondents vastly underestimated the actual level of wealth inequality in the United States, believing that the wealthiest quintile held about 59% of the wealth when the actual number is closer to 84%. More interesting, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution, reporting a desire for the top quintile to own just 32% of the wealth

They call economics the dismal science, but Larry Summers, one of its pre-eminent public practitioners, is anything but dull. That penchant for intellectual controversy means he hasn’t always won popularity contests, but he is unfailingly stimulating, as he proved in a speech in India last week, when he hit on one of the biggest issues in the world economy today, and coined a snappy catch-phrase to describe it: the “Mumbai Consensus”.

The Mumbai Consensus, Summers said, is “people-centric.” He contrasted it both with the Washington Consensus, the U.S.-led, free-markets-and-democracy formula that seemed to have conquered the world after 1989, and with the Beijing Consensus, China’s state capitalist approach that today is winning fans in emerging markets and in some developed ones.

Summers thinks the real model to watch is India’s, the world’s largest democracy. Partly because of its political system, India’s economic rise has been powered as much by the voracity of its domestic consumers as it has by the country’s push into foreign markets. That’s a sharp contrast with China, where the focus has been on working for the rest of the world, while the Chinese people, who are poorer on average than those of Albania or Jamaica, nonetheless save more than half of their GDP.