The Brattleboro (Vt.) Reformer, Oct. 24:
There’s been a lot of talk lately about income inequality, or the “wealth gap,” in this country. Some say the answer is to raise the minimum wage and increase taxes on the super rich, while the other side says the government needs to cut taxes and ease certain regulations to encourage more job growth.
All of those suggestions do have merit to some degree. There are some, however, who believe the answer to this problem lies in its root cause, which they say is the fiscal policies of the Federal Reserve Bank.
As Charles Lane from the Washington Post notes, the top 3 percent of households claimed 30.5 percent of all income in 2013, up from 27.7 percent in 2010, while the next 7 percent held steady at nearly 17 percent ”“ and the bottom 90 percent’s share declined to 52.7 percent. He said the recovery erased nearly all of the decline in the top-earners’ share that occurred during the Great Recession, while nine out of 10 families not only didn’t experience a similar comeback but fell further behind.
Furthermore, Lane notes that Mario Belotti of Santa Clara University has calculated that savings account holders lost nearly $1.2 trillion in interest income between August 2007 and September 2013, relative to what they would have realized absent the Fed’s policies, even though deposits grew from $3.8 trillion to $7 trillion.
This period coincides with the Fed’s own extended experiment in ultra-cheap money policies.
“Obviously the central bank did not intend to increase inequality; its goals, which it has largely accomplished, were to stop a historic financial panic and then jump-start growth,” Lane wrote. “Indeed, to the extent the Fed’s policies prevented truly massive joblessness, inequality might have been worse without them. That’s because a tighter labor market gives workers more leverage to bargain for higher wages.”
Lane concedes, however, that the Fed’s effect on the wealth gap may go back further than the Great Recession. He notes that economist William R. White of the Dallas Federal Reserve has written that central banks may have exacerbated inequality over several decades, because their persistent bias in favor of pouring cheap money on a crisis-prone financial sector artificially inflated that sector’s profits and the incomes of those who operate it.
Some economists are quite harsh in their assessment of the Fed’s policies and motives.
“The academic name for the Fed’s current policy is financial repression. But a more apt name would be ”˜Throw granny under the bus,’ because the program boils down to taking from savers and fixed-income recipients and transferring that purchasing power to other entities,” Chris Martenson, an economic researcher and co-founder of PeakProsperity.com, wrote for Marketwatch.com.
He said that lost income and purchasing power “magically appeared again in record Wall Street banking bonuses, in shrinking government deficits (due to lower than normal interest rates), in rising corporate profits (mainly benefiting the already rich), in record stock buybacks (ditto), and in rising wealth inequality.”
Federal Reserve Bank Chairman Janet Yellen, during a recent speech in Boston, expressed both concern and puzzlement over the rising wealth inequality in America. She questioned “whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality and opportunity.”
However, Martenson said he found her speech to be “disingenuous and disturbing” because it is the Fed’s very own policies that are driving the expansion of the wealth gap.
“Once we accept that the Fed is openly and specifically creating the wealth gap as a matter of active and ongoing policy, which it is, then it’s actually more appropriate to ask if the Federal Reserve is compatible with values rooted in our nation’s history. The answer, if you believe in a level economic playing field, is ”˜no.’”
Martenson was even more critical of Yellen’s comment that four factors can influence economic opportunity: investing in education for young children, making college more affordable, encouraging entrepreneurship and building inheritance.
“She just blamed the victims,” Martenson wrote. “According to Yellen, if people are finding themselves getting poorer what they need to do is stop scrimping on their kids, become an entrepreneur and go back in time and have rich parents somehow. Without a shred of decency, she has shifted all blame from the Fed to the victims. How corrupt or morally adrift does someone have to be to blame the victim?”
That seems a little harsh to us, especially because there’s nothing wrong with those four factors that Yellen lists. Investing in our children’s future may not help with our own income inequality, but it will help with theirs. That’s the point Yellen was trying to make.
Still, Martenson is right when he concludes, “What we need is a return to the level playing field that originally made this country great.”
A good place to start would be more transparency from the central bank. Pierre Monnin of the Council on Economic Policies proposes that central banks commit to regular analysis and public reporting on the distributional impact of their policies, explains Lane from the Post.
As Lane summarized, “A little more exactitude about monetary policy’s winners and losers doesn’t seem like too much to ask.”
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