By Karen Shaw Petrou
On November 30, the New York Times ran an op-ed arguing that the Fed could make a big economic-equality difference by becoming, in essence, a giant equity holder on behalf of the nation’s least wealthy. This concept takes Milton Friedman’s idea of “helicopter money” one step farther, creating “helicopter equity” in hopes of improving long-term wealth accumulation instead of the consumption for which Mr. Friedman wanted his dollars dropped from the sky. From a progressive-policy perspective, turning the Fed into a giant, redistributive mutual fund has considerable appeal.
As Andrew Haldane has said, monetary policy is “overtly distributional,” and helicopter equity acknowledges this reality in hopes of turning it to equality’s benefit. There are, though, far better ways than making the Fed both a central bank and central stock picker to put the Federal Reserve’s formidable power to work on behalf of economic equality.
How a Social-Wealth Fed is Supposed to Work
The idea comes by way of Matt Bruenig, the founder of the “People’s Policy Project.” Rightly recognizing how unequal U.S. wealth has become and how much of this derives from concentrated holdings of financial assets (stocks and bonds) at the high end of the wealth-distribution curve, he argues for a new-style public bank called a “social wealth fund” that would ideally be housed in and run by the Fed.
The social-wealth fund is not a sovereign wealth fund – it would hold a portfolio of stocks, bonds, and even real estate from which to distribute dividends directly to all its citizens, not use the proceeds of state-owned companies for infrastructure or other investments. As Bruenig says, this is analogous to Alaska’s use of energy revenue (although he doesn’t point out how hard-pressed that fund has become and the problems this has raised for Alaskan fiscal policy).
The tricky bit for a social-wealth fund is from where to get its assets. Bruenig solves for this by bringing in the Fed, which would stop buying Treasuries and instead buy financial assets and use these to manage the macroeconomy. During recessions, the Fed would buy these assets on the cheap and, so it is said, stabilize the market and stimulate the economy much as the Fed sought to do by purchasing Treasury and agency obligations in QE. The Fed would presumably also sell its assets to tighten market conditions – in short, QE on steroids with a goal not only of conducting monetary policy, but also of equalizing wealth distribution.
Would It Work?
I’ll leave aside the question of whether the Fed should be a social-wealth fund – normative questions of this sort quickly devolve into ideological battles over whether one should, as this op-ed seeks, socialize financial assets, an effort that has so far not fared well when tried by any number of regimes since Russia’s 1917 experiment. Let’s for the moment give Bruenig his due and say that maybe this time it would be different, especially if so well-managed an institution as the Fed stepped into the market with nothing but the best of equalizing intentions and no aspirations to credit allocation.
The irony of this proposal is that it tries to take QE, a monetary policy with demonstrable inequality effects and then expand it. Assume for the moment the Fed in a recession bought financial assets. As a result, the value of the assets remaining in private hands would rise, perhaps in concert with larger amounts of Fed-printed cash floating around in the hands of wealthy former asset-holders. A social-welfare Fed might reverse recessions – might, that is – but at the cost of still more wealth inequality.
As we and many others have shown, here and here, holders of financial assets are disproportionately wealthy individuals and an array of financial institutions acting on their behalf. Although there would be some benefit also to pension funds for less-affluent employees through Fed financial-asset purchases, the helicopter money spread by the Fed through the financial system by asset purchases would almost surely not go to new lending or consumption.
QE has so far failed to spur new lending, and it’s far from clear why QE on steroids would fare any better. The inequality impact evident so far is the result not only of broader macroeconomic circumstances but also all the post-crisis rules that constrain equality-generating financing. Instead, the combination of QE and ultra-low rates has driven financial-asset prices to unprecedented levels, widening the wealth-distribution curve without stimulating consumption because wealthy people mostly have all the stuff they want.
Further, QE’s assets were purchased from banks in hopes of stimulating lending, but a social-welfare Fed’s asset purchases would have to come from across the financial system and thus would be far less likely to stimulate intermediation unless – as may well be the case – intermediation breaks down and non-bank asset holders outside the scope of post-crisis rules become the nation’s lenders. Maybe, but not yet.
As a result, it is no more likely that accommodative QE through financial assets would work any better than QE has even with the huge Fed $4.5 trillion book of Treasury and agency obligations. Employment is up, although wages aren’t and employment gains do not speak to “full” employment – far from it. Yield-chasing, not investment, characterizes financial markets and the mortgage refinancing intended to spark housing markets has left all but the wealthy behind.
One possibly equalizing effect of a big Fed book of financial assets would be higher earnings for the central bank than its ultraconservative position in low-interest government obligations affords. The Bruenig op-ed posits a good deal of its distributional benefit on Fed redistribution of its earnings on asset holdings back to each and every American. However, the Fed already does this by remitting the proceeds of its balance sheet (less operational expenditures) to the U.S. Treasury. Fiscal policy then determines how these funds are used. The latest tax bill suggests that U.S. fiscal policy has significant distributional problems, but a direct line from the Fed to “the people” is not the way to solve for them and still ensure the politically-independent central bank that is even more crucial if the Fed picks and chooses among all the assets in the land for its own delectation.
A Real Social-Wealth Solution
The best thing the Fed could do for U.S. economic equality is to recognize how important monetary and regulatory policy is to the distribution of U.S. income and wealth. The Fed should make economic equality a prime consideration along with maximum employment, price stability, and financial-market resilience as core policy goals, modifying existing policy quickly. If a new approach to monetary policy is to succeed the faltering model now in place – as it should – then equality should be carefully factored into the new equation. And, if the post-crisis framework of bank and “shadow-bank” rules gets a fresh look – as it also should – then again taking equality fully into account will make meaningful improvements in wealth and income equality despite all the other challenges still confronting this critical social-welfare problem.