The Real Reason for Income Inequality? The Fed
Federal Reserve Chairman Jerome Powell. The Fed's quantitative easing over the last decade is responsible for income inequality, not low taxes.
Income inequality in America has worsened in recent decades. Many on the left, buttressed by a not-insignificant number of those on the right, have argued for an increasingly progressive income tax code to tackle this problem.
But they’re focusing on the wrong solution—instead, the target ought to be the Federal Reserve. While the central bank chose to not change interest rates this week, the Fed’s ceaseless quantitative easing programs and obstinate commitment to unnaturally low interest rates in the years following the 2008 financial crisis have had the unintended effects of both incentivizing reckless deficit-driven spending from Congress and exacerbating income and wealth inequality in the private sector.
Simply raising taxes on individuals is not going to fix the underlying issue. A tax hike would only continue the status quo in exchange for a higher “toll” from the well-connected. In addition, it would disincentivize the entrepreneurship and innovation that drives the American economy.
Fixating on taxes ignores this fundamental truth: The totality of the Fed’s post-2008 actions has resulted in a historic regressive wealth transfer from the less well-off to the well-off.
Low rates and quantitative easing programs help the ultra-wealthy because they artificially boost asset values, especially for riskier investments, and allow for cheap leverage. The ultra-wealthy can take advantage of record highs in the stock market while the asset-poor working class gets by on relatively stagnant hourly wages. Even risk-averse middle-class retirees are forced to buy bonds with artificially low interest rates just to make ends meet.
The Fed should learn from its post-2008 trigger-happiness in order to better respond to future crises. While it is true that former Fed chairman Ben Bernanke once cited Milton Friedman’s scholarship on the Fed’s insufficiently robust reaction to the onset of the Great Depression, it is also true that one round of quantitative easing after 2008 would have been more than enough. The recession was over by summer 2009 and, if anything, subsequent rounds of quantitative easing not only further metastasized income inequality, but also misallocated capital and abetted reckless politicians via excessive deficit spending.
In the first half of the fiscal year 2019, interest on the national debt rose 13%over the same period the previous year—the single fastest-growing expenditure in the federal budget. Artificially low interest rates masked the effect of much of Congress’s profligacy for years; now that rates are slowly rising, our bill will be coming due.
Politicians from across the ideological spectrum ought to rein in the Fed and seek greater transparency of its deliberations, methodologies, and decision-making processes. After all, the Fed is presently structured as an independent agency and receives its operational funding outside the constraints of the normal congressional appropriation process. Furthermore, the Fed’s inherent structure—wherein a purportedly enlightened coterie of bankers sets rates for the entire economy—necessarily values central planning over letting market forces determine proper interest rates.
At minimum, our lawmakers can seek to audit the Fed’s internal workings and to legislatively modify its traditional dual mandate of price stability and maximum employment to a less hubristic, more modest single mandate of mere price stability. The pursuit of maximum employment has pushed rates down and punished savers; it’s an outdated goal that has only led to more booms and busts.
If we seek to earnestly push back against rising income inequality in America, constraining our central bank would be a natural place to start.
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