Central Bankers Can Do More Than Just Care about Economic Inequality

By Karen Petrou

New evidence reinforces monetary policy’s distributional impact.
Monetary policy can also be redesigned to ensure that its distributional impact enhances equality instead of – as now – making it worse.
More evidence also reinforces the link between unequal monetary policy and slow growth.

Big Fed or BigTech? The Force Behind U.S. Inequality

By Karen Petrou

An influential new Fed staff study asserts that increased market power is to blame for much of U.S. income inequality over the past forty years, discounting monetary policy’s impact after 2008 by looking only at inflation, not also at QE and ultra-low rates.
Incorporating these factors into its construct and reviewing other research suggests a large causal role also for post-crisis monetary policy.
Which is worse is yet to be told, but it seems clear that market concentration, monetary policy-fueled asset-valuation hikes, and ultra-low rates exacerbate the structural factors on which the Fed continues to blame economic inequality. Indeed, concentration and post-crisis policy are likely to be considerably more causal than the prolonged decline in educational quality, demographic shifts, increased innovation, and perhaps even regressive fiscal policy.

By Karen Petrou

New data show that the COVID pandemic is creating even more income inequality than the great financial crisis, which is saying something.
Wealth inequality is already climbing to unprecedented heights due to Fed intervention and resulting market gains.
Absent fiscal policy that reduces income inequality and a change in financial policy benefiting wealth equality, post-pandemic inequality could be still more toxic, exacerbating longstanding challenges to macroeconomic growth and increasing financial-crisis risk.

By Karen Petrou

CBDC advocates tout its inclusiveness, but the digital divide is a profoundly exclusionary impediment to CBDC access for LMI, disabled, older, and rural households.
Centralized deposit-taking and payments via the Post Office and/or Fed pose challenges to personal privacy and even freedom of expression that, if not averted in initial design, could come to pose significant political and governance risk. Lack of private competition also presents discrimination risk based on pricing or other terms not subject to outside scrutiny.
If CBDC succeeds as some envision it, then lending will come either from the federal government – Big Brother problems of still more concern – or capital-markets sources outside the perimeter of safety-and-soundness and often also consumer-protection regulation and enforcement.
A CBDC in which the Fed acts as an open-source utility corrects for many current inclusion, governance, and intermediation obstacles to payment-system speed and efficiency.

By Karen Petrou

African-Americans were better off before the civil-rights era began than they were in mid-2019.
Truly huge disparities lie between white and black Americans in terms of income, wealth, and inter-generational mobility.
And that was before COVID eviscerated low-income households of color from both a health and economic point of view.
It’s past time for equality-focused financial policy, starting first with Equality Banks.