Fed Chairman Ben S. Bernanke has seized the reins of the U.S. economy, announcing that the Federal Reserve will keep interest rates near zero percent for almost three more years while also buying bonds until there is “substantial” improvement in unemployment. And he is set to hold the reins at least until his term expires on Jan. 31, 2014. With control comes responsibility — for the good results Bernanke intends, and for the not-so-good ones he doesn’t.
Inflation, of course, is the most talked-about risk of all this money-printing. But with so much slack still left in the U.S. economy and those of its major trading partners, Bernanke is probably right to discount inflation as a short-run danger. Meanwhile, there’s been much less discussion about what might be a more plausible worry: the impact of the Fed’s sustained easy-money policy on economic inequality.
As is, by now, well-known, the United States has the least even income distribution of any advanced industrial democracy, according to the Organization for Economic Cooperation and Development, an umbrella organization for wealthy nations. Income inequality has increased steadily in this country since 1975, to the point where the top 10 percent of our population earns 14 times more than the bottom decile; the OECD average ratio is 9 to 1.
The causes of this long-term trend include many factors beyond the Fed’s direct control: global trade and investment patterns, education, technological change. You could argue that, to the extent cheap-money policies are designed to reduce stubbornly high unemployment, they won’t worsen inequality over the long run; workers’ ability to command higher pay may eventually increase as the labor market tightens. In the current situation, where so many workers have been idle for extended periods, it’s crucial to get them back to the labor force before their skills atrophy and their earning power shrinks permanently.
Still, what’s noteworthy is the way in which the Fed’s policies are supposed to kick-start this virtuous cycle. As Bernanke explained in his Sept. 13 news conference, he is trying to push down interest rates across the board so as to increase the value of assets such as stocks and residential real estate. If it works, he argued, the owners of these assets “will feel wealthier; they’ll feel more disposed to spend.” And rising demand will prompt more business to expand and hire.
Now, if that isn’t a trickle-down theory of economic growth, I don’t know what is. Institutional investors — pension funds, investment banks, hedge funds and the like — dominate equity ownership. Individual stock ownership is concentrated in the upper-income strata of the working-age population; the same is true for home ownership, with the wealthiest people owning the most valuable houses.
In addition, easy money may encourage commodity speculation, thus contributing to higher prices for consumer staples such as food and gasoline — which do not count toward the measure of “core” inflation that the Fed seeks to minimize.
Families in the lowest 20 percent of the income distribution scale spend more than a third of their income on food, according to the Agriculture Department, five times as much as those in the top 20 percent. As for gasoline, former Bush administration economist Diana Furchtgott-Roth estimates that households in the bottom fifth spend 10.1 percent of their annual income on gas, vs. 2.2 percent for the top quintile.
These potential effects are deeply ironic, considering that the loudest calls for easier monetary policy have come from the political left, while the right keeps warning about unintended consequences.
In a recent paper published by the Dallas Federal Reserve, economist William R. White floats the hypothesis that central banks have exacerbated the rise of inequality over time in all advanced market economies. By supporting the financial sector with accommodative monetary policy and bailing out “too big to fail” institutions, White argues, central banks may have made the rich richer and the poor poorer.
White admits that his notion remains to be fleshed out with further research. But it’s worth adding distributional effects to the list of concerns raised by the Fed’s strategy. In the name of a laudable goal — full employment — Bernanke is taking U.S. monetary policy to places it has never been before, beyond the frontiers of economic knowledge. We all hope that the benefits will exceed the costs, as the Fed chairman believes. No one can really be sure.