The pandemic has widened the wealth gap. Should we blame the central banks?
TIT WORLD The 2007-09 financial crisis was both socially destructive and economically destructive. This inspired a backlash of resentment, exemplified by the America’s Tea Party. This crisis at least had the tact of spreading financial pain on the rich and the poor alike. The share of the world’s wealth held by the richest “1%” actually declined in 2008. The pandemic was different. Amid all the misery and death, the number of millionaires increased last year from 5.2 million to over 56 million, according to the Global Wealth Report published by Credit Suisse, a bank. The 1% increased their share of wealth to 45%, a percentage point higher than in 2019.
The rich largely have central banks to thank for their good fortune last year. By cutting interest rates and accumulating assets, central banks have helped stock, real estate and bond prices rebound. Their economic rescue effort was, in many ways, a triumph. Yet central banks are not entirely comfortable with the role they have played in comforting the well-to-do. In October, Mary Daly of the Federal Reserve Bank of San Francisco pitted America’s full financial rebound against an incomplete economic recovery. “It seems unfair,” she admitted. “Another example of Wall Street winning and Main Street defeating.” His speech corresponds to a trend; central bankers more often speak of inequalities (see graph). The latest annual economic report from the Bank for International Settlements (BIS), the bank of central banks, devotes an entire chapter to the distributive effects of monetary policy.
In the past, central banks have argued that inequality is primarily the result of structural forces (say automation or globalization) that are beyond their mandate or power. They have only one political instrument, they stress. They cannot set different benchmark interest rates for the rich and the poor. And their workaholic business models often featured a single “representative” household meant to replace everyone. A model will find it difficult to assess the impact of a policy on income distribution if there is indeed only one household to distribute.
Faithful to this tradition, the BIS warns its members not to go too far. Central banks best serve the cause of the fight against inequality by sticking to their traditional goals of fighting inflation, downturns and financial excesses. Tackling inequalities as another goal could undermine the achievement of these goals. Monetary policy will have a harder time fighting cyclical forces if it is too busy fighting structural forces such as technology and trade.
Moreover, the secular struggle against inflation, recession and speculation is not necessarily unequal. High inflation is often a regressive tax, hurting those who depend most on cash. “[I have] saw first-hand the devastation that high inflation can wreak on the poorest segments of society when I grew up in Argentina, ”said Claudio Borio of BIS in a recent speech. Fighting recessions is also an egalitarian endeavor. Recessions worsen inequalities and inequalities worsen recessions, in a cycle of “perverse amplification,” as Borio puts it. Deeply divided societies experience larger production cuts in difficult times and respond more slowly to monetary easing. The effect of policy on the economy is compromised in part because the very poor do not have access to credit and therefore cannot borrow (and spend) more when interest rates are reduced. Meanwhile, the very rich are not spending much more either, even though a more flexible policy pushes up the prices of their assets.
There is therefore no need to give central banks a new set of more egalitarian objectives. But that leaves open the question of how central banks should achieve these goals. Some approaches and tools may be better than others for social cohesion. And central banks could reasonably favor those which, other things being equal, fulfill their mandate more equitably than others.
The Fed, for example, adopted a less favorable interpretation last year for triggering its inflation target. A side effect of this approach should be the reduction of income inequalities. This will let the Fed know if people on the fringes of the economy can become employable if hiring stays strong enough for long enough. To guide their thinking, central banks are turning to economic models that include “heterogeneous” households, a step beyond the “neo-Keynesian agent-representative” model (otherwise called RANK). They also now have a bewildering variety of tools to choose from. Some buy stocks, which are largely owned by the rich. Others provide cheap finance to banks that lend to small businesses. (The Bank of Japan does both.) Each tool will make a different contribution to both the level of spending and the distribution of income.
One tool among many
Yet there are limits to what monetary policy alone can achieve. Even a central bank that sticks to its usual role, the BIS notes, can face difficult tradeoffs, pitting income inequality against wealth inequality and inequality now versus inequality later. Bold monetary easing can lead to a more even distribution of income while preserving jobs. But it will raise asset prices, increasing wealth inequalities, at least in the short run. In addition, these expansionary monetary policies may, BIS argues, contribute to financial excesses that could lead to a deeper and more prolonged recession in the future. And that would ultimately be bad, even for income equality.
the BISS response is to apply a wider range of policies, including better financial regulation to curb speculative excesses and more responsive fiscal policy, when public finances allow. By spending more, governments allow central banks to buy less. Ben Bernanke, a former Fed chairman much criticized by populist critics, put it this way: “If fiscal policy makers took more responsibility for promoting economic recovery and job creation, monetary policy could be less aggressive. .
If central banks have worsened inequalities in their efforts to save the economy, it is in part because they have borne an unequal share of the work. With more help from fiscal policy, central banks will have an easier time removing the punch bowl before the snack begins. ■
This article appeared in the Finance & economics section of the print edition under the title “Stabilty, liberality, equality”