Speeding toward inequality

If you were a passenger in a car speeding toward a cliff, you would scream at the lunatic driver to steer away or slow down. The car is our economy. The cliff is inequality. Inequality is a disaster for society.

Who is driving the car? A combination of government policies and business institutions are steering the car toward inequality. We see low taxes on the rich and norms for higher and higher CEO pay. We see the real wage struggling behind productivity. Changing these policies would steer us away from inequality.

What has been making the economy go so fast toward inequality in these last 2 years? … Monetary policy is the engine of the economy. When you push down on the gas pedal (interest rates), the car (the economy) goes faster. The speed at which we are generating inequality is largely based on monetary policy. And our long run aggressive monetary policy is speeding toward inequality.

Monetary policy mostly depends upon the wealth effect to boost demand. Yes, the Federal Reserve has programs to direct liquidity into communities, but the larger impact of monetary policy is still the wealth effect through QE and the zero lower bound Fed rate. Productive investment is muted due to low labor consumption power. The wealth effect is a fast track to inequality when the economy is being steered toward inequality. If the economy was being steered toward a healthy balance between labor and capital, monetary policy would be benefiting broader society.

Words from Jeffrey Snider at Alhambra Investment Partners.

“That is because the “wealth” effect has nothing to do with wealth at all, rather it is properly defined as an inflation/credit system. Thus any relationship between asset inflation and consumer spending is indirect.”

“… we need to stop focusing on monetarism and credit, and instead allow direct economic expansion through the wages of actual capitalism. This convoluted monetarist system is simply too inefficient to sustain and nurture long-term economic success.”

If the government is unable to tax the rich.. if businesses are unable to raise labor’s real wages faster than productivity growth… if business is unable to lower CEO pay… if off-shore tax havens are not controlled… in essence, if the economy cannot steer away from inequality, can central banks at least slow down the speed at which we head toward inequality?

Society needs time to form a proper response to growing inequality.