Right after he was inaugurated, President Biden told federal regulators that they must henceforth consider economic inequality and racial equity. This is an overlooked but critical change — the United States can’t have robust economic growth without economic equality and, the more unequal we get, the greater the odds also for still more frequent and destructive financial crises.
The rules Biden has in mind are those that deal with fair housing, taxation, environmental justice, and other recognized sources of inequality. However, economic inequality is at its root about money and nothing moves money as powerfully as monetary and regulatory policy. Thus, as my new book makes clear, equitable policy must also prioritize rapid reform of financial policy. And, unlike many other reforms, equitable financial policy generally doesn’t take new law; all it needs is new will.
The reason financial policy has such an impact on equality is straightforward: economic inequality works like an engine — unless someone steps on the brakes, the cumulative force of unequal policy makes the rich wealthier, the poor still worse off, and the middle class just a statistical median with little to show in terms of day-to-day financial security. Many policies — taxation, trade, and so forth — power the engine, but the fuel of economic inequality, as its name denotes, is money.
The Federal Reserve sets monetary policy under a statutory mandate demanding maximum employment, price stability, and moderate interest rates. The last of these mandates is almost never mentioned, but it’s established in law for reasons all too evident after years of ultra-low rates that are often negative after taking inflation into account: low interest rates make paupers of savers and princes of stock-market investors.
With rates at or below zero, it’s simply impossible for most Americans to save for a home down payment, ensure a secure retirement, or establish the financial cushion needed for the unexpected. Economists argue that low rates lead to “maximum employment,” but employment rates even before Covid obscured the reality that millions of Americans are working gig or part-time jobs or have just given up searching.
Low interest rates make paupers of savers and princes of stock-market investors.