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.

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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.  

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Of Money and Madness

By Karen Petrou

  • 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.
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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.
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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.

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