Federal Reserve Chair Janet Yellen. (Shawn Thew/European Pressphoto Agency)
On October 20, 2014, Jared Bernstein writes in The Washington Post:
It was my privilege to attend a recent conference at the Boston Federal Reserve on the topic of inequality — specifically, the growing inequality of opportunity in America. The presentations, including one by Fed Chair Janet Yellen, made a solid case that our high levels of inequality are eroding opportunity for many on the wrong side of the wealth divide. But there was a big question hanging over the proceedings: Can the Federal Reserve actually do much to reduce inequality or raise opportunity?
For at least three reasons, the answer is “yes.” Moreover, the Fed can also worsen inequality if it gets these wrong.
First, while it’s not the case that the Fed sets the unemployment rate wherever it wants, its macro-management function plays a substantial role in both the levels and changes in the jobless rate. By using its interest-rate tools to keep the cost of borrowing down and signaling to the investor community that it is committed to keeping rates low, it can help to trigger job-creating activity — from building a factory to renovating your bathroom.
To be clear, it can’t do this alone. Increasing the supply of low-cost credit doesn’t by itself create the demand to take advantage of it. But there’s little question that it helps. For example, analysis by Fed economists finds that its asset-buying program “…may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”
Granted, this is a bit like asking your barber how your new haircut looks, but the Fed analysts use pretty standard methods to get these results.
Still, how do such improvements help with inequality and opportunity? By disproportionately increasing the pay of the least advantaged workers. The figure below shows the impact of a 10 percent decline in the unemployment rate on real wages for low-, middle-, high-wage workers. (BTW, that’s 10 percent, not 10 percentage points, so it means going from, for example, 6 percent to 5.4 percent.)
A good example of these dynamics came in the latter half of the 1990s, when Alan Greenspan, to his great credit, allowed the unemployment rate to fall well below the rate that was thought at the time to be consistent with stable inflation. For the first time in decades, real low- and middle-wages grew at the rate of productivity, over 2 percent per year, poverty fell sharply, and real median family income grew by 13 percent between 1994 and 1999, its fastest five-year growth rate since inequality started rising in the mid-1970s.
To be sure, once you include financial assets that were appreciating quickly as the dot-com bubble inflated, the incomes of the wealthy were still rising faster than those of the middle class, so I’m not saying low unemployment wipes out inequality. But I am saying it helps to deactivate one of its most pernicious impacts: the channeling of income and wage growth away from the middle and bottom of the income distribution.
Speaking of financial bubbles, the second way the Fed can reduce inequality is through what it calls its “macro-prudential” function, i.e., financial market oversight. Over the Greenspan era, this function was largely assumed away under the ideological assumption that rational markets would self-monitor and self-correct. Whoops.
Bubbles and busts worsen inequality in two ways. First, the recession that follows the bust is disproportionately felt by the least advantaged. Look back at the figure above. The top-earning group may not get help from lower unemployment, but that means the group doesn’t get hurt much by it either. True, its assets take a hit when the bubble bursts, but the pattern in recent decades has been for the group to recover its losses well ahead of the rest.
Second, while lower unemployment pushes against inequality, American workers’ bargaining power is so low that it takes truly full employment to force employers to bid up pay to get and keep the workers they need. The current expansion is exhibit A of this dynamic: Unemployment has actually been falling pretty sharply, but real wages haven’t moved much yet.
Doesn’t this contradict the bars in the figure? To some extent it does, showing just how weak bargaining power is in the current labor market. But if you dig a little deeper into the dynamics behind that analysis, you find that it’s not enough for unemployment to be falling. It’s got to be low and stay low for a while.
In other words, for the least advantaged to benefit from an economic expansion, that expansion has to last long enough to reach and stay at full employment. The Fed’s oversight function is thus indispensable: it must become much more vigilant in breaking what I call the “shampoo cycle”: bubble, bust, repeat.
Finally, while much of what the Fed does is excessively scrutinized by the media and the markets, some of what it does in the inequality space is not known at all. For example, Eric Rosengren, the president of the Boston Fed, presented some really compelling work on a Fed-initiated project called the Working Cities Challenge, where Fed research and expertise combines with stakeholders in troubled communities to build human and investment capital targeted at low-income households.
The program is designed to diagnose and remove the barriers blocking upward mobility in communities where opportunity has been fading for years. As such, it pretty directly targets inequality. Taking myself as an example, I can assure you that even avid Fed watchers don’t know about initiatives such as this one.
Especially in the first two examples — macro-management and financial oversight — the Fed’s impact on inequality is symmetrical. The central bank can reduce it, as Greenspan did by allowing us to get to full employment, or exacerbate it (as Greenspan also did) by ignoring bubbles.
Right now, for example, there are many voices pushing Chair Yellen and Co. to tighten preemptively to stave off any future wage or price pressures. And as you can imagine, the finance sector isn’t exactly anxious to see the Fed ratchet up its oversight.
In both cases, it must resist. While lowering inequality is not directly part of the Fed’s mandate, it is in fact an outcome of its work, at least when it gets it right.
This article exposes more short-sighted analysis by Jared Bernstein, whose primary focus is on job creation rather than OWNERSHIP creation.
How about instead of the Federal Reserve showing that it is “committed to keeping rates low, it can help to trigger job-creating activity — from building a factory to renovating your bathroom,” it can provide capital credit loan at zero “0” percent interest to local banks who would in turn lend this interest-free money for for the specific purpose to finance the creation of new wealth-creating, income-producing capital assets to grow the economy. Who should benefit from such interest-free capital credit should be EVERY child, woman and man, who would then be empowered to acquire over time significant portfolios of self-liquidating capital asset investments in the American economy with the capital credit loans repaid out of the FUTURE earnings of the investments.
Broadening capital ownership would “increase the pay of the least advantaged workers” (and non-workers) who would be contributing their productive capital to the expansion of the the economy.
But Bernstein’s focus is solely on job creation saying that “for the least advantaged to benefit from an economic expansion, that expansion has to last long enough to reach and stay at full employment.” He complete ignores the OWNERSHIP issue. People are going to OWN the non-human factor of any economic expansion, which as time progresses will continue to be the MAJOR input factor in ANY economic expansion. Just arguing for the opportunity to subsist on the crumbs of the expansion expressed as jobs is at the heart of the injustice and non-equal opportunity that pits workers (non-owners) against owners.
What Bernstein should be advocating is the passage of the Capital Homestead Act. That would enable every child, woman and man to gain equal access to capital credit for generating their own earned ownership income to engage in what Aristotle called “leisure work.” Bernstein and other academics and politicians should take the time to study seriously the Louis Kelso-Mortimer J. Adler paradigm as presented in the free down-loadable books and articles on the Center for Economic and Social Justice “virtual library” at http://www.cesj.org. Then hopefully Bernstein will come to understand that a growing percentage of every citizen’s income could conceptually result from the Just Third Way’s reforms to democratize personal opportunities to participate as an owner of future capital growth and non-coercive transfers of existing capital’s ownership opportunities. The Just Third Way strategy would enable a growing number of citizens to be educated, participate in and thus earn a sufficient and increasing capital income. As the market economy continues to become increasingly capital-intensive, more and more citizens would become economically liberated to engage voluntarily in the unpaid and unlimited work of civilization. This would also reduce the cost of education at all levels, and certainly, when implemented increase family choices over education and health benefits.
Bernstein should be aware that artificially raising the minimum wage is a strategy that necessarily results in higher costs of production, raising prices and thus hurting the poor more than the non-poor.
What is needed and necessary is a new policy direction specifically aimed at creating new capital owners simultaneously with the growth of the economy. The financial mechanisms used MUST NOT REQUIRE past savings and instead be available as a unique and exclusive opportunity for American citizens to access insured, interest-free capital loans for the specific purpose of acquiring newly issued full-dividend earnings payout stock in corporations growing our economy. In other words, we need to use a credit mechanism by which the loans are paid for with the future earnings generated by the creation of new capital assets, which result in products and services needed and wanted by Americans, which then further propels the economy’s growth. Such a policy program is what the Capital Homestead Act would achieve.
Jared Bernstein, Janet Yellen, other Federal Reserve Board members, influential economists and business leaders, as well as political leaders, should read Harold Moulton’s The Formation Of Capital, in which he argues that it makes no sense to finance new productive capital out of past savings. Instead, economic growth should be financed out of future earnings (savings), and provide that every citizen become an owner.
The Federal Reserve, which has been largely responsible for the powerlessness of most American citizens, should set an example for all the central banks in the world. Chairman Yellen and other members of the Federal Reserve need to wake-up and implement Section 13 paragraph 2, which directs the Federal Reserve to create credit for local banks to make loans where there isn’t enough savings in the system to finance economic growth. We should not destroy the Federal Reserve or make it a political extension of the Treasury Department, but instead reform it so that the American citizens in each of the 12 Federal Reserve Regions become the owners. The result will be that money power will flow from the bottom up, not from the top down––not for consumer credit, not for credit that doesn’t pay for itself or non-productive uses of credit, but for credit for productive uses to expand the economy’s rate of growth.
The Federal Reserve needs to stop monetizing unproductive debt, and begin creating an asset-backed currency that could enable every child, woman and man to establish a Capital Homestead Account or “CHA” at their local bank to acquire a growing dividend-bearing stock portfolio to supplement their incomes from work and all other sources of income. Steadily over time this will create a robust economy with millions of “customers with money” to purchase the products and services that are needed and wanted.
Our leaders need to put on the table for national discussion this SUPER-IRA idea and the necessary reform of our tax policies that would incentivize corporations to pay out fully their earnings in the form of dividend income and issue and sell new stock to grow. The CHA would process an equal allocation of productive credit to every citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets,
The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets with future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy.
Risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.
Essentially, the pressing need is for everyone in a position of influence to encourage President Obama to raise the consciousness of the American people by making his NUMBER ONE focus the introduction of a National Right To Capital Ownership Bill that restores the American dream of property ownership as a primary source of personal wealth.
This is the solution to America’s economic decline in wealth and income inequality, which will result in double-digit economic growth and simultaneously broaden private, individual ownership so that EVERY American’s income significantly grows, providing the means to support themselves and their families with an affluent lifestyle. The Just Third Way Master Plan for America’s future is published at http://foreconomicjustice.org/?p=5797 and the platform of the Unite America Party is published by The Huffington Post at http://www.huffingtonpost.com/gary-reber/platform-of-the-unite-ame_b_5474077.html as well as Nation Of Change at http://www.nationofchange.org/platform-unite-america-party-1402409962 and OpEd News at http://www.opednews.com/articles/Platform-of-the-Unite-Amer-by-Gary-Reber-Party-Leadership_Party-Platforms-DNC_Party-Platforms-GOP-RNC_Party-Politics-Democratic-140630-60.html.
The Capital Homestead Act (http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-a-plan-for-getting-ownership-income-and-power-to-every-citizen/ and http://www.cesj.org/learn/capital-homesteading/capital-homestead-act-summary/) would grow the U.S. economy faster in a non-inflationary way, create new private sector jobs, finance new productive capital and provide capital incomes for all Americans from the bottom-up by enabling them to own trillions annually in new capital formation and transfers in current assets . . . without taking private property rights away from billionaires and multi-millionaires over their existing assets.