How Inequality Stymies Monetary Policy and What to Do About It

By Karen Petrou

  • 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.
Continue reading “How Inequality Stymies Monetary Policy and What to Do About It”

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.
Continue reading “Central Bankers Can Do More Than Just Care about Economic Inequality”

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”

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.
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Bad Things about the Good Place and How to Pretty It Back Up

By Karen Petrou

  • Pre-COVID inequality evidenced itself instantly in post-COVID consumer-finance extremis.
  • A unique construct of ground-up recovery policies is an essential, urgent response.
  • Regulatory revisions would help and long-overdue equitable liquidity facilities would do still more.
  • New public guarantees are critical.

Ever since the U.S. economy crept out of recession, the Fed has represented its slow, inequitable recovery as a “good place.”  Its own 2018 economic well-being survey contradicted this and the latest data released on May 14 are no better before COVID came and a lot worse thereafter.  These data make it still more clear that the Fed must quickly reorient its trickle-down rescues to move money starting at ground level, but even that won’t be sufficient given the magnitude of COVID’s economic impact.  The combination of macroeconomic harm and financial-system hurt also requires a reset in which new public guarantees for prudent private financing fully recognized by new rules play a major part. Continue reading “Bad Things about the Good Place and How to Pretty It Back Up”