Correction: An earlier version of this column incorrectly said that Pierre Monnin is an economist at the Swiss National Bank. Monnin left the bank last year and is now with the Council on Economic Policies. The following version has been updated.
The latest meeting of the People Who Influence Everything from Auto Loans to 401(k) Plans — a.k.a. the Federal Reserve Board’s Open Market Committee — has just concluded. The Fed confirmed Wednesday that, as expected, it will stop buying bonds with freshly printed money in October but did not say when, exactly, it will end its recession-fighting zero-interest-rate policy.
Under former chair Ben S. Bernanke, the Fed said it might abandon that policy when the official unemployment rate hit 6.5 percent. That milestone is now in the rearview mirror — unemployment was 6.1 percent in August — but the Fed hasn’t yet acted.
Bernanke’s successor, Janet Yellen, worries justifiably that the jobless rate has lost validity as a measure of overall economic weakness; much of the recent improvement seems to reflect not hiring but a shrinking labor force. Pending better data, she’s keeping her options open.
Not to add to the chair’s worries, but she needs to take another issue into account: inequality. This month, the Fed released the latest edition of its triennial Survey of Consumer Finances, which showed that “only families at the very top of the income distribution saw widespread income gains” between 2010 and 2013.
The top 3 percent of households claimed 30.5 percent of all income in 2013, up from 27.7 percent in 2010, while the next 7 percent held steady at nearly 17 percent — and the bottom 90 percent’s share declined to 52.7 percent.
In short, the recovery erased nearly all of the decline in the top-earners’ share that occurred during the “Great Recession,” while nine out of 10 families not only didn’t experience a similar comeback but fell further behind. Family net worth, a measure of accumulated wealth, showed a similar skewing upward.
Since this three-year period coincides with the Fed’s own extended experiment in ultra-cheap-money policies, the question arises: How much, if at all, is the Fed to blame?
Obviously the central bank did not intend to increase inequality; its goals, which it has largely accomplished, were to stop a historic financial panic and then jump-start growth.
Indeed, to the extent the Fed’s policies prevented truly massive joblessness, inequality might have been worse without them. That’s because a tighter labor market gives workers more leverage to bargain for higher wages.
The question is whether, and how much, that effect is offset by others. Rock-bottom interest rates hurt small savers, who generally can’t diversify into higher-yielding but riskier investments.
Economist Mario Belotti of Santa Clara University has calculated that savings-account holders lost nearly $1.2 trillion in interest income between August 2007 and September 2013, relative to what they would have realized absent the Fed’s policies, even though deposits grew from $3.8 trillion to $7 trillion.
Meanwhile, Wall Street bathed in free money from the Fed. Owners of stocks and other assets, such as farmland, who are disproportionately high-income, profited from the bull market.
That effect was foreseeable and not entirely unintended, as Bernanke acknowledged in his Sept. 13, 2012, news conference. He predicted that higher asset prices will make people “feel wealthier; they’ll feel more disposed to spend,” thus boosting demand and broader economic activity.
Any regressive impact of Fed policy is especially awkward for monetary doves, since they tend to favor both a level distribution of income and vigorous Fed action against lingering slack in the labor market.
But what if the longer you pursue extra employment increments via cheap money, the more you risk skewing income distribution upward? That’s been the result of Japan’s years-long experiment in ultra-loose monetary policy, according to economists at the Dutch central bank.
It’s a surprisingly little-studied area, and central banking experts don’t necessarily agree on a theoretical framework. Economist William R. White of the Dallas Federal Reserve has written that central banks may have exacerbated inequality over several decades, because their persistent bias in favor of pouring cheap money on a crisis-prone financial sector artificially inflated that sector’s profits and the incomes of those who operate it.
James Bullard, president of the St. Louis Fed, by contrast, has argued that central bank policy probably just smoothed out the ups and downs of a long-standing trend toward inequality that’s driven by technology and social factors beyond the Fed’s control.
Perhaps the best idea comes from economist Pierre Monnin of the Council on Economic Policies. He proposes that central banks commit to regular analysis and public reporting on the distributional impact of their policies.
Greater transparency has been the Fed’s response to concerns about how it uses its vast power. Given that, a little more exactitude about monetary policy’s winners and losers doesn’t seem like too much to ask.
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