Davos Finds Inequality Its Business as Backlash Seen

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Morgan Stanley CEO James Gorman said, “This is a moral and society issue. Businesses work on behalf of their shareholders with proper governance, regulated by a regulator. This is a broader society issue.” Close

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Japanese Prime Minister Shinzo Abe, seen here, and U.K. Prime Minister David Cameron, both Davos delegates, are advocating higher wages as a means to drive economic expansion. Close

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“I don’t sense yet a deep transformation on their part,” said Jeffrey Sachs, an economist at Columbia University. “They should be worried,” he said. “Unequal societies perform worse on many measures.” Close

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Reducing inequality is usually the business of protesters at the World Economic Forum in Davos. This year, it’s the buzzword for the business elite worried about their bottom lines.

As widening income disparity becomes a dominant theme at the annual meeting in the Swiss ski resort, business and financial leaders are making the case that a reversal of that multi-decade trend is needed as much for business and economic interests as for social and moral reasons.

Failure to narrow the gap risks robbing economies of demand and threatens banks and big businesses with political and regulatory backlashes if voters rebel at squeezed wages. A poll of Bloomberg subscribers released this week found 58 percent view income disparity as a brake on economic growth, with 68 percent urging governments to confront the problem.

Special Report: 2014 World Economic Forum in Davos, Switzerland

“There’s a growing recognition that it isn’t just an issue you care about because it’s an issue you should care about,” John Veihmeyer, chairman and chief executive officer of accounting firm KPMG LLP, said in Davos. “It has a very big impact on economic recovery around the world.”

Others aren’t persuaded that the talk of Davos Man and Woman amounts to more than that.

“I don’t sense yet a deep transformation on their part,” said Jeffrey Sachs, an economist at Columbia University. “They should be worried,” he said. “Unequal societies perform worse on many measures.”

Undermining Demand?

Failure to mitigate the income gap risks undermining economic demand and brewing more populist pressures on governments to protect voters, said Tim Adams, president of the Institute of International Finance, which represents more than 400 financial firms including Goldman Sachs Group Inc., Barclays Plc and Deutsche Bank AG.

“The more wages become stagnant, the more pressure there is to find solutions to growth,” said Adams, a former U.S. Treasury official. “If workers don’t have sufficient income they cannot be consumers.”

Inequality is emerging as a key topic of debate in Davos as signs advanced economies are accelerating help to ease the concerns of past meetings. The discussion is refocusing on who may be left behind in the recovery as globalization raises competition and technology makes some jobs obsolete.

“There’s been a sigh of relief on the economy, which is looking a little better, but one now needs to watch the politics,” said David Rhodes, a senior partner at The Boston Consulting Group. “With wages not keeping up with inflation, there’s a politicization of the economic recovery which is leading to business unfriendly policies.”

Income Share

The richest 10 percent of Americans earned a larger share of income in 2012 than at any time since 1917, according to Emmanuel Saez, an economist at the University of California at Berkeley. Those in the top one-tenth of income distribution earned at least $146,000 in 2012, almost 12 times what those in the bottom tenth made, Census Bureau data show.

The U.S. isn’t alone among rich nations. A study by UBS AG, Switzerland’s biggest bank, found last month that Gini coefficients, a popular measure of inequality, had also increased in the U.K., Japan and France since 2005.

The Geneva-based World Economic Forum set up the debate last week by identifying income inequality as the most likely of 31 potential risks to threaten global prosperity in the coming decade. The disparity risks fomenting poverty and social disorder, it said.

‘Moral’ Issue

“It’s not a business issue,” Morgan Stanley CEO James Gorman told Bloomberg Television. “This is a moral and society issue. Businesses work on behalf of their shareholders with proper governance, regulated by a regulator. This is a broader society issue.”

Gorman added his voice to calls for the minimum wage to be raised in the U.S. President Barack Obama has sought an increase only for legislation to languish in Congress. Elsewhere, Japanese Prime Minister Shinzo Abe and U.K. Prime Minister David Cameron, both Davos delegates, are advocating higher wages as a means to drive economic expansion.

“I’m not trying to understate the inequality, but my first desire, given the choice, is to take people out of poverty,” Sergio Ermotti, UBS AG chief executive officer, said in the interview. “Inequality, as long as you have growth, may be a secondary effect.”

Speaking at a panel sponsored by HSBC Holdings Plc, John Lipsky, a former first deputy managing director of the International Monetary Fund, noted labor’s share of gross domestic product is now at historic lows while the share of corporations is at the highest.

To contact the reporters on this story: Simon Kennedy in Davos, Switzerland at skennedy4@bloomberg.net; Elisa Martinuzzi in Davos, Switzerland at emartinuzzi@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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