Tags: Dawson | Stiglitz | Fed | inequality

Economists: Should the Fed Focus on Wealth Inequality?

By    |   Tuesday, 28 October 2014 12:39 PM

A growing chorus of economists is urging the Federal Reserve to act to rein in America's growing wealth inequality.

If the growing income gap is not controlled, our peace and prosperity will be at risk, argues Michael Dawson, a University of Chicago political science professor, in an op-ed for The New York Times.

The Fed alone cannot stop the trend of the rich getting richer while middle-class wages stagnate, Dawson concedes. But it can worry less about inflation and more about creating more jobs, as well as fighting discrimination in lending, housing and labor markets.

Fed Chair Janet Yellen is correct to argue that the increasing inequality in wealth is contrary to American values, Dawson writes.

"I would also argue that it presents a substantial danger to the prospects for economic prosperity and social peace as well," he adds.

"We need to remember that within the U.S., economic inequality itself is distributed unequally among women, blacks and Latinos, who are more likely to be at the bottom of both wealth and income distributions." And since minorities will make up the majority of the population in coming decades, Dawson warns, their economic disadvantage may pose an ever-larger drag on the overall economy.

Dawson was one of several economists arguing both for and against Fed action to address income inequality in The Times. Like Dawson, Columbia University professor Joseph Stiglitz says the Fed should stop obsessing about inflation and focus on wage growth.

In the past, the Fed raised rates when wages ticked up, a strategy that helped cause wage growth to stagnate during the last 40 years, Stiglitz says.

"Today, so long as inflation remains mild, the Fed should hold back on interest rate increases until wage growth makes up for the lost time of the Great Recession."

The Fed, he adds, can also restrict banks from lucrative but risky activities like originating derivatives and credit default swaps to encourage them to lend more to businesses.

However, others argue the Fed should not focus on income inequality, saying it's a partisan issue not within the central bank's mandate.

"The Federal Reserve has neither the mandate to redistribute wealth nor the tools to do it effectively," Edward Conard, a visiting scholar at the American Enterprise Institute, writes in The Times. Trying to tackle the issue could prompt a Congressional counter-reaction and jeopardize its independence.

The Fed could also end up inadvertently decreasing lower- and middle-class incomes, he warns. For instance, allowing greater inflation may transfer wealth from lenders to borrowers, but probably won't transfer wealth from the wealthy to lower- and middle-class workers.

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A growing chorus of economists is urging the Federal Reserve to act to rein in America's growing wealth inequality.
Dawson, Stiglitz, Fed, inequality
Tuesday, 28 October 2014 12:39 PM
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