Income inequality has been in the public consciousness recently, causing policymakers to redouble our efforts to remediate poverty and preserve what is left of the middle class. But aside from a small group of contrarian economists, few people, and most certainly few policymakers, have been willing to discuss the primary cause of income inequality in the last generation.
When Congress created our central bank, the Federal Reserve, its missions were to be a “banker’s bank,” a lender of last resort for banks whose deposits were overextended or loans oversubscribed, and to hold enough gold in reserve to meet the needs of the nation during economic panics. Those functions are how it got its now somewhat deceptive name, which implies that the Federal Reserve is a place where money is stored “in reserve.
In modern times the Federal Reserve’s primary undertaking has been tinkering with interest rates, to fulfill its modernized mandates of controlling inflation and assuring full employment. It hasn’t done a great job at either, and has created a damaging wealth disparity that will affect our nation for generations.
American wealth disparity now exceeds the vast chasm of the Gilded Age, immediately before the Great Depression. Income inequality in the U.S. is so extensive that our own CIA compares us to such kleptocracies as Cameroon and Russia. A short, 10-minute drive through Los Angeles exposes this disparity, in our own backyard. California of the future runs the risk of devolving into Marie Antoinette’s France, where the oblivious rich ostentatiously display their fortunes, while scores of commoners look on with a mix of envy and rage.
The Federal Reserve plays the predominant role in this condition. In the last decade, it has created trillions of dollars and kept interest rates epochally low. “Printing” money invariably leads to inflation somewhere, and for a long time, the Fed’s actions drove up the cost of everything from food to gasoline. To avoid runaway inflation, our nation had to change. The last domino before runaway inflation is wage inflation. To keep up with the rising cost of goods, wages must increase too. But this has not happened. The average family today makes about as much as they did in 1980.
This is because the system — Congress, corporations, and covetous world leaders — instead reacted with globalization, i.e., free-trade agreements and a complete liberalization of trade and tariff policies that took jobs like manufacturing, previously done by well-paid Americans, to sweatshops overseas. Many American families can no longer afford the things we want, from air conditioners to iPhones, unless they are made overseas with $5-a-day labor.
But the Federal Reserve’s biggest contribution to wealth disparity, and the one that will take generations to change, is the effect of its money-printing policies on asset prices. The newly created money cascading down Wall Street must be invested somewhere.
The property and stock-market bubbles, which the Federal Reserve now acknowledges it created, have benefited the gentry, because the rich own far more property and stocks than the poor. When those assets geometrically expand in value but wages stagnate, the result is tremendous wealth disparity. Yet when the Fed-created bubbles contract, the middle-class wage earners foot the bailout bill.
Are there small-scale solutions available to policymakers? Sure. For example, I support raising the minimum wage. But many of these efforts amount to using a squirt bottle to extinguish a three-alarm fire. They are not enough. Raising someone’s pay from $25,000 a year to $29,000 every 10 years will not foster a more egalitarian society if easy-money policies continue to expand geometrically the vast fortunes of the fantastically rich.
The people who created our nation explicitly prohibited royalty, and warned that vast concentrations of wealth could make our nation like the tumultuous societies many Americans tried to escape. Lawmakers at every level of government — and citizens, alike — should question the monetary policies of the unelected Fed bureaucrats. I fear that their far-reaching decisions are enshrining an inequality in our society that no legislation at the federal, state or local level can ameliorate.
Originally published in the Los Angeles Daily News.