Is the Fed guilty of raising Inequality?
The Fed is an accomplice to the increase in inequality. An accomplice is an entity that helps another entity commit a crime.
The real change that led to increased inequality is the conspicuous drop in labor share after the crisis. Record profits by firms were not being transmitted to labor. That was not the fault of the Fed. However, the Fed fed the situation by putting excessive liquidity into the capital income stream. The transmission mechanism to direct that liquidity to labor had broken down. The Fed knew that, but the Fed kept supporting the guilty ones who soaked up the excessive liquidity into capital income. In the end, capital income grew tremendously, while labor income didn’t. Inequality increased.
So the Fed is an accomplice to the rise in inequality.
The growth of inequality has been going on for a very long time, and was a concern even to Alan Greenspan when he testified before Congress in 2005, three years before the crash. We didn’t hear much about inequality during the Clinton administration because wages and bottom quintile incomes were increasing more rapidly than they had been, and a major source of fast income growth at the top was the windfall of extraordinary capital gains that could not happen on a continuing basis.
But the inequality spread began growing again after 2000, with after-tax inequality driven by the Bush tax cuts and pre-tax by the failure to get back to the level of employment demand seen (and felt) at the end of the Clinton presidency. The unemployment rate may have looked low, but it masked very slow growth in full-time work, devastation of manufacturing employment, and wage stagnation.
You make some great points about inequality increasing way before the crisis. The thing is that the Fed is not pushing the issue of reversing inequality… while their actions keep feeding capital income.
They have to be stronger against capitalists and discipline them more.
It seems to me the only possible game in town politically is to pursue “full employment” as an expressed policy. Other forms of re-allocation of incomes simply have no chance without complete control of Congress, but a clear, stated policy that if we are going to get out of the stagnation we have suffered for the last 14 years, the objective needs to be following policies that will allow everyone who wants a job being able to find a job. This seems to be the best way to raise labor’s share by (1) turning millions of safety net recipients into wage-earning taxpayers, and (2) making labor more scarce and pushing wages higher. That seems to have the potential for getting political traction, and even making the Fed realize — for whatever it can still do outside the political paralysis — that the very first objective stated in its statutory mission is full employment.
This doesn’t mean there won’t be political resistance, especially based on the deficit and national debt, but confident assertion a la FDR that we have successfully dealt with higher debt before and the best way to bring it under control is a strong economy. I think Joe Sixpack — and that’s me to some extent — would be thrilled to hear someone who says the chicken littles don’t know what their talking about and the first priority must be getting people back to work and helping incomes to grow — and yes, helping the middle class claim its rightful share of the revenue it creates.
These are simple statements of few words that make intuitive good sense without a lot of explanation. A strategy will be needed to shut up the WaPo pundits who will scornfully shout “populism,” but that should be feasible.
We are almost at full employment as far as effective demand will allow it. And we are still not seeing wage growth.
My research shows that we bumped up against the effective demand limit in 4th Q 2013, then inflation started up in January-February. My sense is that we are bumping up against the effective demand limit again now. So we will see inflation and some wage growth within a few months… but there is not much time left in this biz cycle.