politics
economics
Is the Fed To blame for inequality in America?
Federal Financial Analytics
Harvard University
0
0
Genesis
Response
Penultimate
Finale
August 3rd, 2021
No – the Fed isn't to blame for all of the economic inequality in America. However, it's demonstrably responsible for a lot of it since at least 2010 and thus must quickly alter course. No public or private entity moves money with the Fed's power and money since 2010 has moved inexorably into the hands of an ever-fewer number of increasingly plutocratic households.
The U.S. has been increasingly unequal since the early 1980s, but income and wealth inequality took off like a rocket in 2010. None of the usual inequality suspects – technology, demographics, globalization, tax policy, education – changed that much so fast. But in 2010, Fed policy sharply diverged into the truly unconventional backed by trillions never deployed before. As in the 2020 crash, this averted disaster. But, then and now, it also went on too long and thus did direct damage to both income and wealth inequality without meaningfully moving the growth needle or making finance any safer.
Why? The Fed's huge portfolio (quantitative easing) ultimately did more good for equity prices than output and ultra-low interest rates drove equity and other financial-asset prices even higher without reducing the cost of most credit to low-and-moderate income households.
And, every time it looked as if markets might correct for these distortions, the Fed took fright and propped them up. Now, moral hazard is the market's mantra even as low-, moderate-, and even middle-income households struggle to make ends meet.
Increased economic inequality since 2010 was not offset by improved macroeconomic growth measured as it should be with an eye firmly fixed on shared prosperity. The U.S. recovery was the weakest since the Second World War. Some central banks acknowledge the impact of unconventional policy on wealth inequality, but the Fed so far ignores this impact, drawing attention instead to the "record" employment it says it single-handedly achieved before COVID struck.
Employment did indeed improve, but even the Fed now acknowledges its prior measures missed Blacks and many others, and wage gains for all this putative employment were negligible. As a result, income inequality increased in tandem with wealth disparities.
Thus, much of the growth for which the Fed claims credit didn't happen in the 2010s and that which happened wasn't shared. COVID of course isn't the Fed's fault, but the extra-unconventional path the Fed seems unable to quit is making economic inequality far worse faster than ever.
Another Fed self-defense – greater financial stability – is also implausible, forcing still more bailouts, still less market discipline, and even more inequality.
The Fed thinks fiscal policy will clean up its inequality impact, but inequality also exacerbates political disfunction. The Fed can't fix all of the forces accelerating income and wealth inequality, but it can and must reduce the inequality it has wrought and reduce the magnitude of this structural threat to stability and shared prosperity.
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