Opinion | Only the Rich Could Love This Economic Recovery - The New York Times

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Conventional wisdom has it that the lower a central bank sets interest rates, the faster the economy grows. But the longer rates stay ultra-low, it’s not the economy that grows — it’s inequality.

There are signs of worsening inequality across the U.S. economy. But recent surges trace back to a major change after 2008, which transformed how America fights economic recessions.

Source: Board of Governors of the Federal Reserve System

The Fed, which controls America’s monetary policy, is mired in conventional thinking, even though its policy since 2008 has been unconventional in scale, scope and omnipotence. Adhering to its “lower rates are better” axiom, the Fed has kept “real” U.S. short-term interest rates at — or even below — zero, after taking inflation into account. The Fed now plans to keep rates ultra, ultra low until about 2023, even if inflation ticks up.

This results in even wider wealth inequalities as the gap between rich and everyone else grows.

Is the stunning growth in U.S. inequality all the Fed’s fault? Of course not. Tax policy has favored the wealthy and corporations for decades, to name one other cause. But income and wealth inequality result from who gets the money. And the Fed has unrivaled power over who gets the money across markets, communities and even families.

The Fed controls the flow of money, and it flows to the wealthy

The Fed’s main tools for fighting recessions are twofold: those ultra-low interest rates and a policy known as quantitative easing, or Q.E. Q.E is what happens when the Fed buys up assets, like bonds, which keeps money flowing and gives banks lots of liquidity that is supposed to make lending easier.

To get an idea of the magnitude of the Fed’s role, take a look at its portfolio. Assets the Fed has taken out of the economy as part of Q.E. now stand at $8.1 trillion, or about one-third of gross domestic product.

A growing portfolio

To stimulate the economy after 2008, the Federal Reserve increased its balance sheet and slashed interest rates. The current coronavirus pandemic sent that strategy into overdrive, creating the largest balance sheet on record and the lowest interest rates in modern U.S. history.

Periods of

quantitatve

easing

Federal Reserve balance

sheet as a share of GDP

Start of post-2008

monetary policy

Interest rate

Effective federal funds rate

Periods of

quantitatve

easing

Federal Reserve balance

sheet as a share of GDP

Interest rate

Effective federal funds rate

Start of post-2008

monetary policy

Periods of

quantitatve easing

Federal Reserve balance sheet

as a share of GDP

Interest rate

Effective federal funds rate

Start of post-2008

monetary policy

Source: FRED

No one else could own that much, meaning no one but the Fed has so much power over the economy’s winners and losers.

The Fed’s approach is premised on trickle-down expectations, adopted in the early 2000s. U.S. central bankers believe the higher that markets fly and the more that the wealthy spend, the better that everyone else will be.

In truth, this policy works only for the wealthy.

Although the Fed’s huge Q.E.-based portfolio initially prevented still worse economic mayhem when the 2008 and 2020 financial crises struck, its benefits over time were 10 times greater for stock-market prices than for overall economic prosperity.

Who’s helped by stimulus?

Using a model, researchers estimated the impact of an increase in quantitative easing on the economy. They found stocks saw 10 times the growth of G.D.P.

Size of impact

Stock prices

Months since increase in quantitative easing

Size of impact

Stock prices

Months since increase in quantitative easing

Source: Bank for International Settlements

Ultra-low interest rates are meant to spur growth. But they stop having a beneficial effect when they dip so low that they distort savings incentives and instead drive speculative investing, like in Bitcoin or GameStop, to cite two current examples.

Savings, home values and stocks are up — but these also favor the rich

Many Americans own stock, but most stocks – 54 percent – are owned by the 1 percent and much of the rest by the next 9 percent.

The same can be said of real estate. Low interest rates set by the Fed spur lending, creating more demand to purchase homes and forcing prices higher. Rising equity is great for existing homeowners, but richer Americans who own property are the ones who benefit most.

Periods of

quantitatve

easing

Stocks have soared ...

S&P 500 (log scale)

Start of post-2008

monetary policy

... benefiting the rich.

Change in corporate equitites and mutual fund assets

Bottom 50%

Stocks have soared ...

... benefiting the rich.

Periods of

quantitatve easing

S&P 500 (log scale)

Change in corporate equitites

and mutual fund assets

Start of post-2008

monetary policy

Bottom 50%

Stocks have soared to staggering heights ...

... benefiting the rich more than others.

Periods of

quantitatve easing

S&P 500 (log scale)

Change in corporate equitites and mutual fund assets

Start of post-2008

monetary policy

Bottom 50%

Home prices are up ...

Change in U.S. median home prices

... benefiting the rich more than others.

Change in dollar value of real estate

Bottom 50%

Home prices are up ...

... benefiting the rich more than others.

Change in U.S. median home prices

Change in dollar value of real estate

Bottom 50%

Home prices are up ...

... benefiting the rich more than others.

Change in U.S. median home prices

Change in dollar value of real estate by wealth group

Bottom 50%

Source: Board of Governors of the Federal Reserve System (wealth and equities); Zillow (home value index); Capital I.Q. (stock price).

What about Americans who are trying to get ahead not through assets, but through saving? Even low-income households are doing their best to save a surprising amount of money. But the Fed’s interest-rate policy robs savers of any interest they might see.

The inequality impact of the invest-you-gain, save-you-lose conundrum is clear. To understand why, imagine two people trying to grow $10,000 through investing or saving.

Low rates hurt savers

The Fed’s low interest rate environment causes stocks to surge, but everyday savers struggle to keep up with inflation.

$10,000 invested in 2007

Appreciates by ...

By June 2021, is worth ...

After inflation, is worth ...

$10,000 put in a savings account in 2007

Appreciates by ...

By June 2021, is worth ...

After inflation, is worth ...

In the stock market

value in 2007

stock appreciation

value by June 2021

value after inflation

In a savings account

value in 2007

compound interest rate

value by June 2021

value after inflation

$10k invested in 2007

Appreciates by ...

By June 2021, is worth ...

After inflation, is worth ...

$10k in savings account in 2007

Appreciates by ...

By June 2021, is worth ...

After inflation, is worth ...

The calculations above show that even if average Americans could save $10,000, they would be falling far behind investors. After inflation, their thrift would net only $9,529 – a flat-out loss.

What is the Fed for?

The Fed’s role is spelled out under its statutory charter, which establishes the road map for unraveling the inequality it helped create.

The charter’s first goal is “full employment,” meaning pretty much everyone who wants a job has one. This would get a meaningful, immediate boost if the Fed reversed its cheap-debt policies that lead companies to take out debt to fund investor profits, instead of funding new plants or products.

Another goal is “price stability,” best measured by what it costs for a middle-class household to make ends meet. The measure the Fed uses misses the cost increases obscuring a household-to-debt build-up for all but the wealthiest. The Fed thus misses the long-term risks this debt poses to financial security, home ownership, and a secure retirement.

The law has a third Fed goal: “moderate” interest rates. Rates below zero after taking inflation into account are anything but moderate, so they must be gradually raised, starting now.

The current recovery is being driven not by the Fed but by the stimulus bills passed by Congress. After that spending fades, we will be a nation in which at least a quarter of middle-class households still can’t even afford the medical treatment they require, lower-income millennials have student debt equal to at least 372 percent of income, and still more won’t be able to handle even a $400 unexpected expense.

This is wealth without prosperity, a violation of every tenet in the Fed’s statutory mandate. Instead of regretting inequality even as it makes inequality worse, the Fed can and must quickly rewrite policy with a new goal in mind: shared prosperity, measured by how most of us do, not by how high the market flies.

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