A monetary policy for the 1%
THE proper role of a central bank has been under much discussion lately. In its recentannual report, the Bank for International Settlements lamented central banks being forced into loosen monetary policy as politicians fail to take steps to restructure their economies for growth. In the developed world most central banks have had a clear target—to achieve price stability—and independence in how they hit it, with the aim of avoiding political entanglement. However, even such technocratic work can easily become political, as demonstrated by a new paper on monetary policy and inequality by a team of American academics.
Arguments abound for how loose money can benefit or harm different groups in society. The wealthy hold more assets, the value of which is eroded by high inflation; but the few assets held by the poor tend to be in cash rather than more inflation-resistant choices such as stocks or commodities. Low-wage labour income (which is almost all income for the less wealthy) is more affected by economic boom and bust, although not as much as the business and financial income that fills the coffers of the super-rich. Unemployment in busts also tends to fall more heavily on low-income jobs, but during booms, support for those on low incomes through benefits dries up. The authors used US Consumer Expenditure Survey data from 1980 to 2008 to try and tease out which effects are the most important.
In terms of labour income, tighter monetary policy boosts inequality, mostly through further increases in already-high incomes. The total incomes of poorer groups (the bottom 20%) are cushioned as around half their income comes from various government programs, allowing them to keep pace with median earners even as their labour income falls. Changes in monetary policy can account for up to 20% of fluctuations in American inequality since 1980, although changes in monetary policy regimes can be much more important; in Ireland changes in inflation targets explain almost all the rise in inequality during the 1980s.
As expected “rich, old” households suffered more from looser policy (and the resulting higher inflation) than their younger indebted counterparts. This argues against previous studies, which have found that inflation hurts the cash-holding poor at the expense of the asset-rich, although the authors point out that this may be unique to America and its sophisticated financial system where even low net-worth households tend not to hold all their assets in cash. Given the intensely political nature of the debate over inequality, the research reveals just one more way in which the central bank ideal—to avoid political entanglements entirely—is increasingly unattainable.