Even at the IMF....

Even at the IMF the penny is beginning to drop. Decreasing workers bargaining power leads to financial crisis and the best way out of crisis is increasing wages. Those are the findings of a working paper put together by two of their economists. Michael Kumhof and Romain Rancière
http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf

“The crisis is the ultimate result, after a period of decades, of a shock to the relative bargaining powers over income of two groups of households, investors who account for 5% of the population, and whose bargaining power increases, and workers who account for 95% of the population… The key mechanism is that investors use part of their increased income to purchase additional financial assets backed by loans to workers.

By doing so, they allow workers to limit their drop in consumption following their loss of income, but the large and highly persistent rise of workers’ debt-to-income ratios generates financial fragility which eventually can lead to a financial crisis. Prior to the crisis, increased saving at the top and increased borrowing at the bottom results in consumption inequality increasing significantly less than income inequality.”

The best response?

“Any success in reducing income inequality could therefore be very useful in order to reduce the likelihood of future crises. …as far as strengthening the bargaining
powers to workers is concerned, the difficulties of doing so have to be weighed against the potentially disastrous consequences of further deep financial and real crises if current trends continue.”

Quite.

But it does beg the question. If even IMF economists (not a bunch known for being wild eyed ultra leftists) can argue that improved workers rights and higher wages are the way to prevent crises, why are Labour so hesitant about defending public services against cuts?