The Central-Bank Inequality Excuse and Why It’s No Exoneration

By Karen Petrou

  • Although a new BIS report finally takes seriously the proposition that central banks may inadvertently increase economic inequality, it goes on to dismiss it because any inequality impact is said to be short-lived thanks to fiscal policy. 
  • However, neither short-lived inequality nor effective fiscal clean-up is substantiated by data in the U.S.
  • But, while the BIS at least acknowledges some inequality impact, the Federal Reserve is obdurate that it doesn’t make economic inequality even a little bit worse.  This means prolonged policy with still more profound anti-equality impact.

It is the purpose of this blog and my new book to show not just that monetary and regulatory policy may increase economic inequality, but also that the Fed’s policies since at least 2010 in fact did so.  This isn’t an academic exercise – it’s an effort to show as analytically as possible how monetary policy exacerbates inequality so monetary policy alters course before inequality’s systemic, political, and human cost grow still higher.  However, disciplined analytics that power up effective advocacy must be open to correction.  This blog post thus looks first at a new, if halting, acknowledgement of at least some inequality impact from the Bank for International Settlements and then the Fed’s still-stout denial that it has any responsibility for the growing U.S. wealth and income divide.

The BIS Apologium

The BIS’s assessment of monetary policy’s inequality impact matters a lot because the BIS is the central bank for the world’s central banks, setting policy by dint of its formidable influence.  In very short, the BIS – in sharp contrast to the Federal Reserve – acknowledges that monetary policy has distributive impact that may well increase inequality, albeit still only over “shorter time spans.”  However, by controlling inflation and countering recessions – especially those caused by financial crises – central banks are said not only to ensure economic well-being, but also to enhance equality. 

Like most BIS analyses, the BIS’s inequality assessment provides some country-by-country data points, but then reaches sweeping conclusions across all advanced economies.  As I’ve said before, global conclusions are misleading – “advanced” though they are, the U.S. is structurally different than even Canada, let alone Japan, the U.K., or nations in the EU.

But, to the heart of why the BIS is wrong, especially about the U.S.:

  • Before we get to Keynes’ long, long-term inexorable end for all mortal souls, we’ll all also be irreparably unequal if the short-term inequality spikes the BIS attributes to monetary policy go uncorrected.  As Piketty’s now-classic makes clear, inequality unaddressed is inequality that only gets still worse – i.e., the rich get richer and the poor get poorer.  Stable macroeconomic conditions may prevent still greater increases due to inflation or recession, but underlying income and wealth disparities are at best only held constant until the next round of disequalizing monetary policy increases them all over again.
  • It’s of course possible that fiscal policy can keep sweeping up after monetary policy’s inequality impact, but this hasn’t happen in the U.S. for at least a decade and isn’t happening now despite huge fiscal support.  Even if fiscal policy really did counter monetary policy, it’s also unnecessarily expensive, crowding out private resources that would otherwise generate economic vitality.  The ultra-low rates that monetize higher and higher levels of sovereign debt also have risks all their own.    
  • Although employment especially benefits low-wage workers as the BIS reiterates, it’s not the inequality panacea the paper asserts.  To understand this, one has to undertake the more complex task of looking not only at income inequality – indisputably reduced by higher pay when there is any – but also wealth inequality.  As an important recent study released by the Federal Reserve Bank of New York lays out, ultra-low rates strongly and adversely affect the benefits of any real wage gains.  Another study shows that two percentage points in wealth share equals fourteen percentage points of total annual household income – i.e., it’s a lot harder to get equal earning your way to the top. 
  • Respecting the Fed’s determination to run “hot,” the BIS says that an “inflation tax” adversely affects lower-income households only if inflation goes over 5%.  It does not address how inflation is measured but, as I’ve shown elsewhere, this matters a lot.  If the cost of key middle-class goods and services – emphatically including housing, food, energy, and medical care – goes up even one or two percent but wages are flat or worse, then even inflation deemed negligible by central banks and the bond market is material to all but the wealthiest households. 

The Fed’s Stalwart Self-Defense

Even if the BIS were right in general, the U.S. experience from 2010-2020 is dispositive – employment quickly returned to what soon became “record” levels (at least as measured by the Fed), but income inequality still rose and wealth inequality went sky-high.  Real wages also barely budged before 2020 and, although U.S. fiscal policy is amazingly accommodative, one recent estimate suggests that the U.S. is still short 9 million jobs even as the pandemic seemed to ebb.  Wages are up 3% but adjusting these for inflation puts those who managed to find a job paying hourly wages still 2% behind the rising cost of living.

But no matter to the U.S. central bank.  Following my July 12 opinion piece in the New York Times, Chairman Powell was closely questioned about my wealth-inequality reasoning (at 1:15:34) at a Congressional hearing.  A subsequent note of mine walks through some of the questions Mr. Powell got and the way he turned questions about wealth inequality into a defense of the Fed’s income equality benefit.

The points above on the BIS’s failure to grasp the nexus between income and wealth inequality also apply to the Fed and thus do not need to be repeated in a more specific rebuttal.  What does merit attention is the Fed’s stubborn refusal to reconcile its view of its own far-reaching macroeconomic and financial-market impact with its tight-lipped refusal even to go as far as the BIS to acknowledge a bit of unintended inequality impact.  This is consistent with the Fed’s similarly stubborn refusal to step back from lower for longer, QE forever, and anything but “transitory” inflation even as the data on the economic outlook show an array of risks that lie all too clearly ahead even discounting those presented by accelerating income and wealth inequality.

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