Fiscal Policy’s Futile Equality Expectation on Its Own

By Karen Petrou

  • Distributional data show clearly that, fiscal stimulus notwithstanding, the U.S. was still more economically unequal in 2020.
  • Only fiscal policy once combined also with progressive financial policy will put the inequality engine into reverse.

As we have noted before, the Fed’s new Distributional Financial Accounts of the United States (DFA) is a definitive source of economic-equality data we hope the Fed will not just compile, but also use for policy-making purposes.  The latest edition of the DFA demonstrates yet again why distributional data are so compelling, showing now the profound challenge even unprecedented fiscal policy on its own faces slowing down the inexorable engine of inequality.  Still more fiscal stimulus in 2021 will boost absolute income and wealth numbers a bit at some benefit to low-, moderate-, and even middle-income households.  Still, the upward march of financial markets powered in large part by Fed policy inexorably widens the inequality gap.  No matter the “crust of bread and such” from fiscal programs, inequality still increases the slow pace of economic growth, the risk of financial crises, and the odds that the electorate will be even angrier in 2024 than 2020.  

A few key data points show why fiscal policy cannot on its own power up economic equality:

  • Although it may seem that the top one percent’s wealth share didn’t go up much in 2020 compared to year-end 2019 (31.4% versus 31%), the amount of wealth gained by the top ten percent – $8 trillion – is 133% greater than that gained by the rest of the nation.  The bottom fifty percent’s wealth share did go up about 10%, but that’s from 1.8% at the end of 2019 to 2% at the end of last year. 
  • The top one percent’s equity holdings grew by $2.7 trillion over one year to almost $18 trillion or 53% of all equities owned in the U.S.  Together with the next nine percent, the top ten percent now owns 88.5% of U.S. equities.  See above for what this does to wealth inequality. 
  • Fiscal stimulus did, though, make an important difference in debt burden, at least in the “as compared to what” department.  At the end of 2019, the bottom fifty percent’s non-mortgage debt as a percentage of durable assets was 195%; at the end of last year, it was 180%.  Cold comfort, perhaps, but at least an indication that the savings that show up in wealth data do make a difference in reducing a bit of crippling indebtedness. 
  • Now, if only we could get the rate of interest paid on these savings into positive territory after taking inflation into account.  Even with greater debt-service capacity, a family that tries to save its way to wealth falls farther and farther behind the hope of long-term financial security and inter-generational mobility.   

New data – thankfully distributional – from the Federal Reserve Bank of New York provide important insight into the roots of this debt-burden relief, such as it is.  Looking at how households have used fiscal support such as direct federal payments, the data show that most households – even including the poorest in terms of income – are using funds to reduce debt and increase savings – for whatever good that may do them.  Lower-income households are using funds disproportionately for reducing debt compared to essential-good purchases, using 44 percent of stimulus checks to pay down debt versus 20 percent for spending on essentials.  Those with high incomes as measured by these data used only 12 percent of stimulus payments for essential purchases.  Low-income families also deployed 29 percent of their checks to savings, impressive given their debt burden, but well below the 44 percent saved by high earners.

Of course, all fiscal stimuli are not equal when it comes to their economic impact.  Clearly, emergency checks have had some beneficial impact but none to speak of on lasting equality.  The new infrastructure plan could do better since it will last longer and aims at providing lasting higher-wage employment opportunities for lower-education, lower-skilled workers. 

This might well over-power all the incentives monetary and regulatory policy have created since at least 2010 for private-sector financialization rather than capital formation.  Still, for as long as financial policy exacerbates economic inequality, fiscal policy swims upstream against a fierce current.

Leave a comment