tv Bloombergs Studio 1.0 Bloomberg January 29, 2017 12:00pm-12:31pm EST
francine: hello and welcome to the annual davos debate where we bring together leading figures in the world of politics and finance. our topic has many names, the rise of populism, the crisis of the middle class, the politics of rage. it's the movement that has been sweeping across the developed world. this was the biggest surprise in 2016. this year, will the establishment brace for what's next? allow me to interest the panel,
central to the issue is the new normal. my first panelist has called it the new mediocre. she is christine lagarde. these days, it's only constant seems to be a man name pier carlo padoan. if you watch bloomberg tv, and we hope you do, you will have heard him talk about secular stagnation. you know larry summers from the world bank and harvard university. bridgewater associate, the world's largest hedge fund, it has $150 billion across the globe spanning virtually every sector. it was founded by ray dalio. the road ahead for brazil at the moment is unclear, but enrique marias is going to close a huge wealth gap in latin america's largest economy.
i am looking forward to the conversation. let's kick it off with you. is the middle class in crisis? christine lagarde: yes and no, the economist would say. first of all, i would like to identify the middle class. i would say the middle classes both growing and shrinking. the middle class is growing on a local basis. over the last 40 years, it has gone up. it has gone up by about 13% today on a world basis. it is defined as somebody between $10 and $20 a day. it is also shrinking if you look at the u.s. numbers. the middle class in the united states has shrunk from the 60-ish to the 50th. that is a result of more wealth accumulating at the top and
people moving down below as well as a result. if you combine that, i think we are focusing more on the advanced economies where the middle class has shrunk and there have been a lack of trust and hope and disenchantment with many of the principles and visions that people had for the future. there is lower growth, more inequality, much more transparency. i think you have good ingredients for what is identified now as a crisis of the middle class in the advanced economies. i think we need to distinguish between what is the emerging market economy and the advanced economy where there is clearly crisis. francine: can we really say that the world is in a crisis?
pier carlo padoan: there are many ways you can define a crisis. i would say it's politics. i am thinking about advanced countries, but also about europe where you can hardly find a country where according to the polls or recent election results there is dissatisfaction with what is going on for some time. i think christine made it very clear, it's about objective change in wealth and income distribution. increasingly so, it's about expectations. the middle classes disillusioned about the future. it is disappointed about the job prospects for their kids and the security they can get out of the welfare system that may become unsustainable. it is expressing this disillusionment in terms of saying no to whatever the policy leaders suggest. we all know very well it's much
more difficult to hold up a solution that is to say no. no is dominating the political landscape. it calls for a rethinking of what leadership means and what it means to have a credible long-term project can bring back the middle class, back into reforms that are badly needed. francine: how do you change that? how do you get them back? larry summers: i don't think there's any single olid. there are elements of the middle class looking up and seen how well an elite is lived and seen all the benefits of gone to people at the top of the income distribution.
i think it's a mistake not to recognize that the middle class in my country and in others is also very concerned that people do not feel that the government is fighting for it. the government is fighting for people who live in developing countries, that the government is fighting for people who have recently come into the country from other countries, that the government is fighting for various minority groups that have legitimate concerns about past discrimination. the sense of the people at the central of a country as being looked out for by the government, they feel everybody is being looked out for. the wealthy can look out for themselves, others who are poor, they feel they are not eating heard and they have expressed it in the brexit vote and the italian referendum and in the u.s. presidential election.
there are important economic elements, it's a mistake to neglect that there are social elements as well. francine: do you believe a lot of people feel that they have then left out? when did politicians start having that disconnect with their voters? were they really not looked after? ray dalio: i think you were talking about the phenomena and of populism. there is a middle class and there is the whole phenomena and of populism, which is part of that. if you look at history, the 1930's, there was a wealth gap. populism is not just the belief that there is a wealth gap, although the wealth gap today is the highest since the 30's.
it's also a sense that they don't represent me. it's a matter of nationalism. it's a matter of getting greater control. it's a matter of increased told polarity. that dynamic, this is the first year where populism is the most important issue globally. protectionism is part of that mix. i would say before it used to be central banks, central banks don't matter is much. now the number one issue economically as a market participant is how populism manifests itself over the next year or two. francine: is that the same thing as anti-globalization? ray dalio: yes.
by definition it, in the 30's, every government that existed practically was populist. particularly, populism by definition is nationalistic. and protectionist. it's also a matter of values. there is a sense of a threat that my country is losing its values to internationalism. it's the combination of those things that makes populism. ♪
how do you get them on board? henrique meirelles: i think in economies like the one i come from which is brazil, the dynamic is different. there is no history of a growing middle class or a large share of the population in part of the middle class. that is a recent phenomenon. we had during the last 15 years actually the middle class doubling as a percentage of the population. that happened throughout the last decade and as a result of a deep recession which took place during the last years that dynamic has reversed. that is the problem. that is a much short term problem. my vision is related to a specific situation of the brazil
economy. the brazil economy is in recession and that is affecting everyone, particularly the middle class. also the lower level income, particularly the lower level income classes as well. the way out for an economy like brazil, creating jobs again, to modernize the economy and open up is a way to become more efficient. i would gather at the end of the day we are not on a different cycle. we are establishing the middle class and we are opening up the economy.
francine: i imagine the emerging markets don't want to be left out. why did we not see this coming. you are here in 2013. you talked about inequality. it did not get much traction. christine lagarde: i hope people will listen now. not only did it not get much traction and at the time we were producing research focusing particularly on the inequality and the relationship to sustainable growth. our point was if there is inequality, it is counterproductive for the sustainable growth that the g-20 members and many people aspire to. if we want larger share of the pie for all, we need a larger pie altogether. for that pie to be sustainable, we are demonstrating that excessive inequality is putting a break on that.
why did people not listen? i don't know. i got strong backlash from economists in particular saying it was not their business to worry about these things. my institution is very much converted to the importance of any quality and study it and dividing policies in response. i would say we now probably and i hope we have an opportune time to put in place the policy we know will help. i would agree with larry. there is no silver bullet. there is clearly a sense in my view and you just indicated that, when you have a real crisis or when you have strong signals as we have received from the voters and people who say no, it's time to say what policies do we have in place?
what more can we do? what measures can we do to reduce inequality? what safety net to we have for people? what education and training do we have in place to respond not necessarily to localization but the technology that is going to disrupt and change the working place for a long time? if policymakers do not get the signal now, i don't know -- they did not listen to my opening speech, and that's ok. if they receive the feedback from the voters who say no, they have to think it through and see what can be done. there are things that can be done. structural reforms in the monetary policy that was alluded
to, it needs to be regional and it needs to be focused on what could people get out of it and it probably means more redistributions than we have in place at the moment. francine: larry? larry summers: i am half in agreement with christine. christine has made a huge contribution to the global dialogue in the way that she has given the imf a face of concern about human issues in a way it didn't before, of which he quality is one and that has been a huge contribution. i think it is important to distinguish between redistributionism and populism. the united states has just elected the world's most visible symbol of conspicuous consumption.
that is a bizarre manifestation of a concern about inequality. i think you have to think about that in analyzing what it is. i think the answer lies in some of the things rate talked about in his remarks and that i tried to touch on, having to do with the middle class. when you say inequality, the first thing you think about and it's a very important issue is the poor and what you were going to do to support the poor. a lot of people who voted against brexit and people who voted for donald trump think too much is being done to help the poor. i think the sense of what i call responsible nationalism, a way of ringing rater cohesion two
countries and having more of a sense of government standing up for the broad center of the population is very much at the heart of it. i think framing this in terms of any quality captures some of what's going on. i don't think there is as much an element of and the and i think there is more of a desire for national unity and strength than the emphasis on inequality suggests. that would be the nuance of difference between -- that i would highlight. francine: do you agree with that?
was it just taking control back? ray dalio: i think it's happen through history that we have seen repeatedly. it is most obvious in the 30's. it is his larry says partially a matter of differences in income. part of it is a fedupness. it is a lack of what davos represents, the inclusiveness of speaking, but it's a group of elites. it's an anti-davos way of thinking. in the 1930's, every country in the 30's became more extreme. bernie sanders was huey long. if you look at the repeat, they have repeated over time. i think you have to have an iconic vision of what that is. i think it's living itself out now globally. it's not just income. ♪
♪ francine: was the referendum a warning sign? what can italian politicians do to reconnect with voters? pier carlo padoan: the problem in europe is europe. a specific manifestation of populism and disaffection with the state of things is europe. there is a strong saying that are problems are generated in brussels. we're sometimes in frankfurt, depending on where you live. this is a problem because europe used to be the solution to many of the problems of the laggards in the integration project. this has been turned around completely.
europeans have a duty when they set up a policy which is hopefully convincingly dealing with the issues raised by populism. they are raising the right issues. they are not giving answers, but they are raising the right issues. the other aspect is anyone who is involved in policymaking knows that we can design beautiful strategies and solutions and bring in all the tools, but before they generate visible benefits to the population and we have the hope to raise consensus on those policies, time goes by. maybe we don't have enough time today. we need to respond to immediate crisis and pressures. as far as italy is concerned, we are continuing our reform a strategy in spite of what i
often read it here. one of the nice things about reform is there is a public affair aspect where it gets the headlines, but the next way the hard work begins. you have to implement the reform. the media are not interested in implementation, which makes the difference. it will hopefully be recognized in terms of political support. francine: were central banks part of the problem? henrique meirelles: it different ways and in different times, after the crisis of 2007 and 2008, we had a credit crisis. as a result of that, we had a central road in the recovery. that is over now.
it is much less important than it was during that time after the crisis and today we don't also have the kind of problem we had before the crisis when we had some risk of inflation because the economy was moving well. now it's different. we don't have a liquidity crisis. we don't have a crisis of credit anymore. inflation is low. that is a moment for the central banks to be quieter. it i would like to add something about the question of populism versus inequality. i think there is a local phenomenon and global. the local is indeed europe created that welfare state. it took care of the lower level
income and created a society. it was a solution. the problem is very specific, the immigrant community. in a similar way, the center as we call it says maybe government is taking too much care of the newcomers. that is a specific phenomenon that is not the same, but it comes together with globalization. there are winners and losers in the globalization process. those two things come together. ♪