Inequality and the Fed

October 20th, 2014 at 8:10 am

There’s lots of interesting press following the Boston Fed conference on inequality of opportunity that I posted on last week.

This AM, I’ve added something on a big question that hovers above this conversation: can the Fed do anything about inequality? My answer is a firm “yes!” over at PostEverything.

BTW, in part due to space constraints I did not deal with the argument that the Fed’s near-zero Fed funds rate and asset-buying programs are contributing to inequality by boosting asset prices and the stock market. In short, there’s something to that point but in order to do the required analysis, one would have to quantify both this effect and the one in which I focus on in the piece: the positive impact on growth and jobs. Then you’d have to net out the difference relative to a counterfactual–what would have happened absent the Fed’s actions.

I haven’t seen that (i.e., the inequality bit; my WaPo piece cites some Fed research on the latter bit) but my hunch is that the positive economic effects strongly dominate. One piece of circumstantial evidence is that the pattern of inequality’s growth in this recovery looks similar to that of the last one, when Fed policy wasn’t nearly as aggressive. Even though the 2001 recession was a lot less deep, it too was followed by an initial jobless, low-wage-gain recovery, yet those at the top recovered well ahead of anyone else.  

In other words, it’s cyclical and structural factors, from the absence of full employment to globalization to long-term bargaining power deficits that are driving inequality’s growth, not Fed policy.

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