As the New York Times yesterday reports, Chairman Powell is following his immediate predecessors’ lead and reaching out to low-and-moderate income communities. In the wake of the midterm, the Federal Reserve System is also posting studies on who’s left behind in the “strong” or even halcyon economy the Fed officials otherwise tout. Nice thoughts and good research, but where’s the action? Our acutely unequal economy is not some artifact of demographics, globalization, fiscal policy, or the gods. The sharp spike in economic inequality since 2010 shows clearly that, while inequality has many causes, the Fed is father to some of them. If it doesn’t quickly own up to paternity, U.S. inequality will get even worse when the economy turns down.
In much on our Economic Equality blog and recent speeches, I’ve shown how the combined force of post-crisis monetary and regulatory policy has had a powerful – if also wholly unintended – impact on U.S. income and wealth inequality. I’ve based all this work and more to come on a lot of authoritative research that shows clearly how powerfully unconventional monetary policy destroys wealth equality and how new rules in concert with ultra-low rates eviscerate income equality and inter-generational mobility. The data from 2010 to 2018 also show financial policy’s inequality impact all too clearly. Looking ahead, the combined impact of a decade’s worth of far worse inequality will combine with an economic downturn, a hamstrung Fed, and a restructured financial system to make an already bad problem far, far worse.
This memo is too short to say why even a slight downturn could be equality-toxic – see forthcoming blog posts and a speech or two later this month. In all of these writings, I’ve urged a focus on financial policy not only because it plays such a demonstrably disequalizing role, but also because it’s one of the few inequality drivers that can be easily reversed. As I’ve repeatedly said, all the Fed need do is to understand its role and change course – how much easier to do this than solve for an increasingly older America or a dearth of manufacturing jobs.
Or, I thought it would be easier. Of all of the actions the Fed has taken since the crisis, its huge portfolio is the one that’s done the most to make American far more unequal than it otherwise might be. As a result, the most dispiriting aspect of recent Fed actions is ongoing confusion about “normalizing” the huge central-bank portfolio and deep uncertainty that it could now be done.
If the Fed chooses to stick with a portfolio of $3 trillion or even more – as many in it believe it should – then structural imbalances due to post-crisis financial policy will grow worse. Combine this with an economic slowdown that destroys what little wage growth we’ve seen, and we’ve a recipe for inequality on a scale far beyond even that of the Gilded Age.
Talking about the under-served is nice, but only concrete action by the Fed to understand its true impact on inequality will change what soon could prove a powerfully destructive course. Earlier this week, the Fed announced outreach in 2019 to reconsider how it achieves its maximum-employment and price-stability mandates. The Fed must include economic equality in this overdue assessment, but I fear it will come too late.