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Sobering IMF report on U.S. economy cites dwindling middle class, growing income equality

A new outlook issued Wednesday by the International Monetary Fund drew some startling conclusions about the U.S. economy. The report asserts that the American middle class is gradually shrinking, the seven-year economic recovery is starting to slow and the pronounced income equality divide may become worse without intervention. Judy Woodruff talks to Christine Lagarde of the IMF for more.

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    The American middle class is shrinking and struggling. The six-year-long economic recovery is showing some signs of slowing. And the pronounced wealth divide in the U.S. may get worse without bigger steps.

    That warning was part of a new report issued today about the U.S. economy by the International Monetary Fund.

    I sat down with its managing director, Christine Lagarde, at IMF headquarters here in Washington earlier today to hear more of her concerns about what's happening to the middle class and the poor, and what could be done about it.

    Managing Director Christine Lagarde, thank you for talking with us.

  • CHRISTINE LAGARDE, Managing Director, International Monetary Fund:



    So, this latest report from the IMF looks at the American economy, says it is in good shape overall, shows resiliency, but then it goes on to point out a number of factors that provide concern for the future.

    And one of them has to do with the shrinkage of the American middle class. What do you and your colleagues see, and what concerns you?


    We are seeing a shrinking of the middle class.

    If you look at the size of the middle class in 1975, it was roughly 60 percent of total population. If you look at the middle class today, it is about 50 percent. So, that's a significant decline of the middle class. And it is an economic issue, because the middle class has always been the consumption force of this nation.

    The upper class doesn't spend as much. The lower class doesn't have as much to spend. So, the maximum impact in terms of consumption is generated by the middle class.


    What's happening here? You also write in the report your concern about the so-called labor force participation rate, the number of people who are actually working.

    And we know that there is concern about the number of men and women who are able to find a job. What do you see there?


    What we are seeing is something that affects us all, which is aging.

    The U.S. population is aging, like in other economies of the world, and, as a result, the participation of active workers in the economy is declining. Now, we cannot stop the course of time, but what policies can do is encourage people who are not joining the workplace, the job market, to actually do so.

    And I would point to a couple of policies. One is support given to women. And, by that, I mean maternity leave policy that would help them face the decision of, do I stay or do I go? Second, child care support, and not just child actually, but the kind of support that would help families look after a child or look after an elderly, because, with aging, we will have to support more parents or grandparents.


    And you're describing a real squeeze on the middle class in this country.


    Yes, there is that squeeze. And that's where you head in the directions of people feeling insecure, people not wanting to move from one job to the other, people not spending as much as they would otherwise do.

    Those behaviors, those decisions have an economic impact on our growth.


    Help us understand, what's the connection with the overall economy?


    Well, the major engine for growth in this country and in quite a few advanced economies as well is typically consumption.

    When the U.S. consumer consumes, there is demand, more demand, and, therefore, the U.S. manufacturers must manufacture more. If they have to manufacture more, they have to create more jobs. It's a fairly simple virtuous circle that is generally initiated by consumption.


    A number of remedies you lay out would cost money. They would require action by the Congress at a time when this country is very politically polarized. How realistic do you think your recommendations are at a time like this?


    I see one area where there is some agreement.

    And that's on the Earned Income Tax Credit, which, if combined with the minimum wage increase, would certainly bring people up and would boost consumption. So, on the Earned Income Tax Credit, there seems to be common ground.

    I hope we can find many of those small-ticket items which will push the envelope further and increase growth in the U.S.


    And if these remedies that you lay out are not enacted, what's your concern for the future of the economy?


    You know, if those issues such as low participation in the labor force, increased poverty, reduced productivity and polarization in terms of income are not addressed, then the U.S. economy will face what I have called this new mediocre, where potential growth is lower, there is growth, there is a degree of recovery, but not sufficiently to bring people out of those poverty levels that we talked about, not enough to increase the middle class, and not enough to address the unemployment of those who are still looking for jobs.

    But those forces, poverty, participation, productivity, and polarization of income, are there to stay unless they are addressed.


    Finally, a different question.

    Voters go to the polls tomorrow in Great Britain to say one way or another whether their country should leave the European Union. You have been clear. You have made public statements about how you think this, if it happens, would be harmful to Great Britain, to other parts of the world.

    How do you see the effect on the United States if there is a vote to leave, Brexit, to leave the European Union?


    Well, if the U.K. decided to leave the European Union, there would be some effect on the U.S. economy. How big that effect would be, difficult to say.

    There are two channels of communication of uncertainty and lack of demand. One is through trade, less trade between the U.S. and the U.K. most likely. But it's not a huge volume. So that impact would be relatively low.

    However, on the financial front, because of the role played by London as a financial center, because of the potential impact on volatility, on the anxiety of people who then sort of fly to — fly their money to safe havens, then there could be a significant impact on the U.S. economy.


    So, Americans should be watching closely?


    I think we should all be watching closely, yes. And I hope the right decision is made, but it's for the U.K. people to decide.


    Christine Lagarde, the managing director of the IMF, thank you very much.


    Thank you, Judy.

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