Rise of Inequality at Center of Global Economic Crisis

Level of inequality as high now as before Great Depression

Inequality has frozen U.S. economic, political institutions

Investments in education, health, infrastructure can help cut inequality

Since the onset of the global crisis, there has been much agonizing about the growing inequality found in many parts of the world.

Wells and economist Paul Krugman blame this increasing inequality for destructive, self-perpetrating spiral of social polarization, growing divisions in crisis. In their essay published in the newly released The Occupy Handbook, which analyzes the grassroots Occupy movement, the two authors argue that the response to the crisis continues to be inadequate because it ignores its root cause: America's yawning inequality.

In an interview with IMF Survey, Wells explains how growing inequality has pervaded all aspects of life.

Wells: The increasing inequality in the United States has frozen the political apparatus. The economics profession has been woefully inadequate. What appears to lie at the root of the lack in the economics profession is that up until the time of the crisis, we papered over the differences in the profession.

We did not really address income inequality. I would not say it was a taboo topic, but we did not know what to do with it so we did not bring it up.

Once the crisis hit, once income inequality became so great that we could not ignore it, the cracks in the profession became pronounced and we saw ourselves refighting the old economic questions that had been solved by Keynes back in the 1930s.

We have been fighting about concepts such as the fact that the economy needs fiscal stimulus but also concepts resolved by Irving Fisher who taught us about debt overhang.

Debt overhang is what is keeping this economy stuck. Households have enormous amounts of debt. The way to solve that would be a direct principal writedown but we could not do that with the banks fighting that tooth and nail and the administration being unwilling to take that on.

IMF Survey: Can you explain by which channel of transmission inequality has pervaded all aspects of society?

Wells: There are two questions there. The first question is: How did we get such an extreme level of inequality so that we are now back to what we call in the United States "The Great Gatsby" days right after World War I?

That is a bit of a puzzle. There are various mechanisms by which it could happen, one being the decline in unions, which tends to level...