Economics 101

Can Monetary Policy be Unjust?

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We recently discussed some of the most commonly cited potential causes of the recent rise in income and wealth inequality. I concluded that article with the comment that there is one contributing factor that has only recently been validated by substantial research.

It is the idea that central bank monetary policies have disproportionately enriched the already wealthy while hurting the poor and middle class. How could something as arcane as monetary policy have an effect on the distribution of people’s real income and wealth?

The Recent Role of the Central Bank

The first thing to understand is that different groups benefit from higher and lower interest rates. Higher interest rates mostly benefit the lower and middle classes—those who tend to stash extra money in a savings account or certificate of deposit, or retirees who are living off the income from bonds. Low interest rates, on the other hand, mostly benefit wealthier people who borrow money to invest in businesses or other income-generating assets such as stocks and rental properties (real estate).

With this in mind, it’s enlightening to compare a chart of the top 1% of income earners’ total share of US income with a chart showing the Federal Funds rate (the ultra-short term interest rate set by the Federal Reserve which affects all other interest rates in the market). Top income earners’ share of total US income—a convenient measure of inequality—fell from the stock market crash of 1929 to around 1980 or 1981, then the trend abruptly reversed and began its upward march again until arriving today at roughly the same level as the Gilded Age of the late 1920s (another time of historically low interest rates).

What happened to the Fed Funds rate during this time? It rose steadily from ultra-low rates in the middle of the century to peak in 1981, then fell steadily until hitting close to zero in December of 2008. Is it a coincidence that the share of income garnered by top earners fell and rose in exactly the opposite pattern as that of interest rates? An increasing number of experts think not.

Banking policy researcher Karen Petrou is one of these experts. Noting that inequality has spiked even further since the Great Recession, she explains that…

The Fed’s low-interest policy gave rise to yield-chasing. And what has the stock market done since 2010? Everybody who has money has seen their financial assets appreciate dramatically. Everybody who doesn’t have money, which is the bottom 90%, what is their principal source of wealth? Houses? House-price appreciation for expensive houses is way up since 2012. But overall, real U.S. house prices are down 10%.

She adds that Fed monetary policies have dropped “interest rates to very low levels, making savings a losing game even as the wealthy are motivated to buy more financial assets to maximize yield wherever they can.” Moreover, ultra-low interest rates also incentivize corporations to take on short-term debt in order to buy back their own shares, further lifting equity prices and benefiting equity holders (and corporate executives).

The Purpose of Quantitative Easing

But dropping interest rates has only been one of the Fed’s engines of inequality acceleration. The other has been quantitative easing (QE)—the practice of creating money out of thin air in order to purchase Treasuries and mortgage-backed securities from banks. The purpose of QE was to stimulate economic activity by injecting liquidity and the ability to continue lending to American banks. But QE did not accomplish that goal, as banks mostly kept the proceeds rather than reinvesting them.

What QE did accomplish was exacerbating wealth inequality. Prior to the coronavirus pandemic in 2020, this portfolio of debt assets purchased with fiat-created money stood at $4.5 trillion at its largest. That $4.5 trillion of debt assets, having been effectively removed from the market, lowered interest rates even more, further punishing savers and pushing investment capital into riskier assets such as stocks and real estate—assets already held by the wealthy. This pushed up the values of desirable housing, leading to a fall in home affordability and a rise in the percentage of renters, “creating what is now referred to in Britain as ‘generation rent.’”

Data bears out this theory. First, the idea that the wealthy disproportionately own financial assets such as stocks and real estate is not just conjecture. NYU economist Edward N. Wolff shows that, as of 2016, the richest 10% of American households owned 84% of US stocks. This is up from the 77% owned by the top 10% in 2001. While only 27% of the middle class have “significant stock holdings” ($10,000 or more), 94% of the rich do. And stocks have performed phenomenally well since the early 1980s.

A study sponsored by the Federal Reserve Bank of Minneapolis offers concurring data, concluding:

Middle class portfolios are dominated by housing [primary residences], while rich households predominantly own equity. An important consequence is that the top and middle of the distribution are affected differentially by changes in equity and house prices. Housing booms lead to substantial wealth gains for leveraged middle-class households and tend to decrease wealth inequality, all else equal. Stock market booms primarily boost the wealth of households at the top of the distribution.

When the housing market collapsed in 2007-2009, the middle class collapsed with it. While median household net worth stood at $102,200 in 2004 and $120,300 in 2007, it had slumped to only $97,300 by 2016. But due to Fed monetary policy, the wealthy soared out of the ashes of the crisis like the phoenix. An even more recent study published in the Journal of International Money and Finance uses a century of data to demonstrate that low interest rates have increased returns of stocks and real estate and thus have exacerbated income inequality.

Researchers from the Brussels-based Bruegel Policy Contribution arrive at the same conclusion based on their study of European countries, giving the following summary:

Low interest rates, asset purchases and other accommodative monetary policy measures tend to increase asset prices and thereby benefit the wealthier segments of society, at least in the short-term, given that asset holdings are mainly concentrated among the richest households.

The Wrong Kind of Inequality

This commonsense explanation of the rise in inequality has been embraced to some degree or another by economists on both the political left and the political right. This brings me back around to the moral and biblical discussion of inequality.

How else can Christians interpret these actions besides a form of favoritism toward the rich and prejudice against the poor? As Dr. Anne Bradley has said, “When we show partiality to the rich and affluent, we violate God’s rules on economic and relational levels. We are called to encourage flourishing, not stifle creativity.”

While there’s nothing unbiblical about inequality per se, there is something unjust about inequality that has been caused and compounded by purposeful government policy decisions.

Editor’s Note: This article is adapted from the new book The Third Temptation: Rethinking the Role of the Church in Politics by Austin Rogers, available now on Amazon.

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