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.  

Continue reading “Fiscal Policy’s Futile Equality Expectation on Its Own”

How Inequality, Not Polling, Predicted the 2020 Election

By Karen Petrou

Perhaps nothing is as startling about the 2020 election as the bad calls pollsters made up to the minute votes were counted.  One might have thought all the mistakes that led to similar 2016 gaffes were corrected – pollsters certainly said so – but they weren’t and the reason why is sad, but simple.  The political-science models on which polling is premised are, like monetary-policy models and so much conventional wisdom, predicated on the vibrant U.S. middle class that once was but is no more.  As we showed early on the economic inequality blog, economic inequality breeds not just acute political polarization, but also a strongly right-leaning shift in voter sentiment.  No wonder – American voters denied the iconic promise of modest economic security and inter-generational mobility are angry.  The more they see prosperity enjoyed by only a few and often a progressive few at that, the angrier they get.  Add in COVID, and this is a witch’s brew of economic despair, social anger, political polarization, and national instability.

Continue reading “How Inequality, Not Polling, Predicted the 2020 Election”

Inequality Rising

By Karen Petrou

As the COVID crisis continues, some have speculated that wealth inequality will drop because it did in the 1400s during the Black Death.  However, this cure is not only of course considerably worse than the disease, but it’s also no cure.  Economic inequality is a cumulative process – the worse off you are, the worse off you get unless something positive reverses this compound effect.  Conversely, the better off, the still more comfortable unless something comes along to redistribute your gains, however well or ill gotten.  Given how unequal the U.S. was before COVID, it will surely get only more so now, especially if the Fed stays the course with trillions for financial markets and pennies for everyone else. Continue reading “Inequality Rising”

The Low-Income High-Risk Myth

By Karen Petrou

In the wake of the great financial crisis, an axiom of consumer finance is that high-risk borrowers are disproportionately lower-income people.  Indeed, the term “subprime” has become a virtual synonym for the lower-income households generally designated with low credit scores and, thus, the subprime sobriquet.  However, a growing body of research demonstrates conclusively that subprime borrowers were not the villains of the mortgage debacle at the heart of the 2008 cataclysm:  it turns out that prime borrowers behaving in subpar ways defaulted far more often than low-income households trying to become homeowners. Continue reading “The Low-Income High-Risk Myth”

It Wasn’t the Butler

By Karen and Basil Petrou

Summary

In the raft of crisis retrospectives released during the ten-year anniversary of the Great Financial Crisis, general consensus continues the conventional wisdom that subprime mortgages were the spark of the subsequent conflagration.  A new study from the Federal Reserve Banks of Atlanta and New York mobilizes formidable data to show that hapless subprime purchase-money borrowers were victims, not perpetrators.  The borrowers who did the damage that precipitated the debacle were, they find, prime borrowers whipped into a speculative frenzy by the combination of low rates and flagrantly-unwise mortgage lending.  Theoretically, post-crisis reforms have solved for this.  Actually, maybe not given the exodus of mortgage securitization from regulated entities, sharp rise in cash-out refis, and investment-focused borrowing with house prices well above affordability thresholds in many major markets.  Continue reading “It Wasn’t the Butler”