In a speech earlier this week, Federal Reserve Chair Janet Yellen mentioned a few reasons why economic inequality, which is at historic highs, could be problematic, going so far as to suggest that the gap between rich and poor may not be "compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity."
Pretty mild stuff, right? Yet conservatives promptly lost their minds.
Michael Strain of the American Enterprise Institute captured the outraged tenor of the right's response, saying Yellen was in danger of becoming a "partisan hack":
I think it is appropriate to ask whether the Fed chair should be expressing concern over whether income inequality is un-American. And to answer: No. The Fed chair shouldn't sound like a left-leaning politician opining about hot-button political issues. [The Washington Post]
But Strain has it backward on two levels. The Fed should not only be seriously concerned about inequality but also abandon any notion that central bankers are above politics.
First of all, there is ample reason to suspect that inequality is playing hell with monetary policy. Mike Konczal outlines several ways it does so. For example, falling median wages means most people can't put away savings, which blunts the impact of the Fed's attempts to juice the economy by lowering interest rates. Furthermore, inequality-driven changes in savings behavior is putting continual downward pressure on interest rates, while inequality-driven changes in corporate behavior could be fueling the craze for companies to increase shareholder value, rather than invest in new products and workers.
The upshot is that inequality may well be having serious effects on how monetary policy functions. Surely it's the Federal Reserve's job to take that into consideration, no matter what you think of the politics.
Second, monetary policy has, in fact, been a major player in the rise of inequality. If central banks smash the slightest hint of wage growth out of inflation paranoia, but react only hesitantly to recessions, inequality is a direct and obvious result. As economist Joseph Stiglitz explains:
When central banks, in their obsession with inflation, ratchet up the interest rate every time that wages increase, especially when wages increase faster than productivity, they ensure that workers get a declining share of GDP, but workers never recover the losses they suffer in those periods when the economy is weak. It's part of the explanation for the yawning gap over the past 40 years between productivity growth and wage growth. [The New York Times]
Third, the whole idea of a politically independent central bank was blown to smithereens after the financial crisis. The point of keeping monetary policy out of the hands of elected officials was that they were seen as too beholden to the whims of the electorate to be trusted. Under pressure to win re-election, so the argument goes, politicians would stimulate the economy too much and lower unemployment too far, resulting in skyrocketing inflation as cash-rich consumers carried out a bidding war for goods and services.
But the actions of central banks across the world since 2008 show that they are worse than supposedly feckless politicians. Jimmy Carter sacrificed his own re-election in 1980 by appointing Paul Volcker to the Fed, who created a sharp recession to fight inflation. The European Central Bank, by contrast, is the most politically independent central bank in history, and yet it has completely laid waste to the eurozone with psychotically tight policy, the result being that the eurozone has needlessly suffered a downturn worse than the Great Depression. The bank has been aggressively active on the political front to boot, demanding neoliberal "structural reform" and savage austerity packages with political pressure that includes executing a coup d'etat against a euro member state.
The lesson is that "political independence" as an ideal is impossible. All people have views and opinions, and all institutions exist in a political context. The kind of wealthy, highly educated people who run central banks are more likely, not less, to have strong views about which policies are best. As the most powerful economic institution, central banks are more likely, not less, to be subject to political pressures of one sort or another. Removing them from democratic oversight simply makes them subject to other interests.
Indeed, the arguments of Strain and others are exactly what moneyed interests throw around when they want to work the refs. Trying to keep the Fed from even thinking about income inequality is very beneficial to the wealthy, since it removes an extremely powerful, potentially field-leveling force from the discussion.
If that's what an independent central bank entails, then I'd rather have a partisan hack.
