John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column
There is an intriguing sub-plot to the Republican takeover of the U.S. House of Representatives. Self-proclaimed Libertarian, Representative Ron Paul of Texas, has assumed the Chairmanship of the Domestic Monetary Policy Subcommittee.
This is the same Ron Paul who while running for President, and in his book titled End the Fed, made it clear he really does want to abolish the Federal Reserve. That is not going to happen. However, Rep. Paul now has a vantage point from which he can push for reform. Now would be a good time to consider how best to bend the Fed.
Eric Rosengren, President of the Federal Reserve Bank of Boston, came to UMass Lowell this past October. His agenda was to give an insider’s report on the health of the economy and to offer testimony in support of Fed policy.
The economy, of course, is not very healthy. The recovery from the financial crisis is weak and the economy is still fragile. Mr. Rosengren offered strong support for low interest rates and other forms of “quantitative easing.”
During the question and answer period, I posed a question about inequality. In his latest book, former Secretary of Labor Robert Reich makes a strong case that inequality was the root cause of the “great recession.” Further, unless we address the problem, there will be more economic crises to come.
Mr. Rosengren wanted to talk about Fed policy, not inequality. He immediately responded by noting that it was not his job — the Federal Reserve Bank is not responsible for alleviating inequality. He recognized that income inequality has reached all-time highs in the United States. However, he was not willing to agree that excessive inequality was to blame for the recession.
What if it was? Perhaps it is time to bend the Fed.
When Congress created the Federal Reserve Bank a little less than a century ago, they gave it a charter to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” The Fed’s power and authority has expanded over the years. They took extraordinary action during the recent financial crisis. However, their core mission remains unchanged – healthy increases in Gross Domestic Product while avoiding unhealthy rates of inflation.
In the last thirty years, the economy has grown by 2.6 percent per year. Inflation has not been out of control since the early 1980s.
Inequality increased dramatically during the same time span. Thirty years ago, the top 1 percent of income earners were making about one-tenth of the money. Now they get almost one-fourth. The top 0.01 percent were making one percent, now about 6 percent. The very wealthy are now outrageously wealthy, with many celebrities making millions per year and much less celebrated hedge fund managers making billions. Little is left behind for those who are falling behind – way behind.
Robert Reich is not the only one worried about inequality. Federal Reserve Chairman Ben Bernanke said income and wealth inequality is “a very bad development” that “leads to an unequal society and a society which doesn’t have the cohesion that we’d like to see.” Before becoming the Fed Chair, Mr. Bernanke studied the Great Depression extensively and is quite aware that inequality is often cited as a cause.
It really does come down to supply and demand. When low-income earners are losing ground, eventually it results in low demand for goods and services.
In the meantime, low and middle-income earners are overreaching in a vain attempt to keep up with the well to do. All too often the result is an excessive debt burden, foreclosure, or bankruptcy.
While some view unrestrained wealth as an incentive for hard work and risk taking, others may fall so far behind that inequality becomes a disincentive. Why work hard when falling wages have held up your progress and it is your job that is most at risk when a financial crisis hits.
When conditions of inequality become severe, social unrest is just around the corner. Inequality, and lack of cohesion, is a significant factor in what is going on right now in Egypt.
In his condemnation of the Federal Reserve, Ron Paul accuses the Fed of exacerbating inequality, saying their policies favor the powerful and wealthy. There are actions the Fed could pursue in an effort to lessen or contain inequality.
The obvious step would be to do a better job acting as a watchdog over the financial system. Blame for the financial crisis falls primarily on people in the top 1 percent of income earners. Those in the bottom half are feeling the damage most harshly.
Most banks have tiered accounts. These days, if you have little to save, the interest on a savings account is close to zero. Come up with a $100,000 or more and your get a much better rate. For low-income earners looking to borrow instead of save, rates on loans are going to be higher, if you can get a bank to lend to you at all.
From the bank’s perspective, these practices make a certain amount of sense. From the perspective of inequality, it is just another example of benefits accruing to the haves. There are many other examples in the financial world. The Fed can and should do something about it.
Ron Paul criticizes the Fed for concentrating too much on growth and being “soft” on inflation. I would argue the opposite. Inflation has been under control. Moderate rates of inflation are far less harmful than low growth and unemployment. A study conducted at the University of Texas Inequality Project concluded: “monetary policy has significant causal impact on pay inequality – a domain where the Federal Reserve refuses responsibility.”
It is said the Fed’s role is to take away the spiked punch bowl just when the party gets started. Perhaps they should wait a little longer until more people join the party. They must intercede though — studies show that high rates of inflation makes inequality worse.
Most importantly, we as a nation need to develop strategies that will allow more people to enjoy the benefits of economic growth. Growth for the few is neither a catchy slogan nor a sustainable course. The Federal Reserve is an extremely well respected source of economic analysis. They should put some of their analytical expertise to bear on devising solutions to the inequality problem.
Alan Greenspan and Ben Bernanke have not hesitated to venture beyond monetary policy to offer advice on fiscal policy, tax policy, social security, and the budget. If the Federal Reserve Chairman really is the second most powerful person in Washington, we need to hear what Mr. Bernanke has to say about addressing this “very bad development.” Better we bend the Fed before it breaks in the face of Great Depression 2.0 (as Bernanke labeled what almost happened in 2008).