In a dangerous double-whammy, monetary policy not only makes America even less economically equal, but economic inequality also frustrates monetary-policy transmission.
Thus, recessions are deeper and longer, reversing the good-times income gains central banks take as proof that their policies are not dis-equalizing even as the wealth divide grows ever wider.
Because monetary policy when rightly judged in terms of both income and wealth adversely affects economic equality and inequality stymies monetary policy, we won’t have macroeconomic-effective monetary policy until we have equality-focused monetary policy.
In 1975, the rewards of national economic growth were evenly distributed regardless of income. By 2018, most Americans lost their fair share based on per capita GDP.
The cost of lost income due to increased inequality to the bottom 90% over this period amounts to $2.5 trillion compared to what it would have been if GDP had remained as equitably distributed as it was before 1975.
Looked at another way, the majority of U.S. workers never shared in the economic growth from 1975 to 2018.
It may seem that racial disparities in U.S. income improved over this period, but this wasn’t the result of a society become more fair, if not also economically more equal. In fact, racial disparity dropped not because Black male workers with below-median income held their own, but because white men did worse than before. The same phenomenon erases what appears to be a drop in the gender gap for working women who did a bit better – largely due to more working hours – than men.
Fed policy premised on aggregates and averages as well as the benefits of GDP growth without regard to distributional realities is not only doomed to fail, but sure to continue to exacerbate inequality.
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.
The lack of racial equity in U.S. monetary and regulatory policy is only part of the problem. Inclusive policy must reach all groups – including persons with disabilities – now overlooked by the Fed and thus left behind by the U.S. economy.
The Fed’s monetary policy mandate in current law is already inclusive, but unmet and unenforced. Fixing that by legislation may focus the Fed’s attention with better data, but data aren’t enough.
Inclusive financial policy effectively reaches all under-served groups via equality-focused financial regulation and ground-up – not trickle-down monetary policy. The Fed is already a fiscal agent via its huge asset purchases, but this is the opposite of inclusive policy due to its direct and unequal wealth impact. Inclusive policy realigns monetary and regulatory accountability, but does not replace it with a still greater fiscal presence.
