David Michael Miller
The Republican tax bill has generated a mountain of criticism over the past weeks. Many believe its passage will greatly exacerbate income inequality in the U.S.
Whatever your opinion of the bill, there’s no denying that its primary provisions have received a very public airing.
Meanwhile, the Federal Reserve hiked interest rates in mid-December, for the third time in 2017. And there will be a new Fed chair soon, with Jerome Powell awaiting confirmation. Has any of this made it into your Facebook feed?
Preferential tax rates come and go. But the Fed abides, operating largely in the shadows, helmed by financial elites. It is a more powerful engine of economic inequality than a transitory GOP Congress could possibly be.
The Fed’s primary job is to manage the nation’s money supply. Congress chartered the institution in 1913 under a growing belief that the availability of credit, which is a function of how much money is circulating, should not be left to the vagaries of the free market. Congress did not even think itself fit to oversee the currency stock, because democratic pressures might tempt members to crank the credit spigot wide open. So the solution was to create “an independent government agency but also one that is ultimately accountable to the public.”
When the Fed senses that the economy needs a boost, it expands the monetary base by buying things, mostly financial instruments like U.S. Treasury bonds. With the click of a mouse button, it prints new money (technically, it generates ‘liquidity’) with which to make the purchases. The sellers in these transactions are private banks and other financial institutions. The idea is that the flusher these institutions are, the lower they will set their interest rates for consumers and businesses who are looking for loans. The lower the interest rates, the more eager people will be to borrow, thereby helping propel money into the general economy.
So monetary stimulus starts at the top and trickles down. That is, we hope it trickles down. The Federal Reserve actually lacks effective means to force financial institutions to push their liquid bounty down and outward to the public.
Indeed, just as the Fed was massively fattening banks’ balance sheets at the onset of the Great Recession, the consumer loan market went limp. This was not the Fed’s fault, but the bottom line for the struggling working class was “No monetary stimulus for you!”
On the bright side, this has helped keep the price of consumer goods in check over the last several years. Tellingly, though, there has been major price inflation in asset markets, especially among assets that the Fed-blessed investor class favors, like stocks. A recent study by the Institute for New Economic Thinking confirms that the richer you are, the better the recovery has been for you.
The Fed’s recovery-era policies did have some trickle-down impacts. But they were not necessarily salutary ones. To wit: Among lower earners, virtually all income is either spent immediately or saved in basic bank accounts. In the near-zero interest rate environment that the Fed nurtured, lower earners reaped little or no dividend on money they put in the bank. This induced them to spend more freely than they would have otherwise.
This was just fine by the Fed, because consumer spending is considered key to awakening a dormant economy. In a 2013 speech, the president of the Federal Reserve Bank of Chicago candidly wished that negative rates on bank accounts were possible. If unattended bank balances were visibly eaten away over time, surely the masses would save nothing at all!
What a diabolical bit of nudging. According to creditdonkey.com, almost a quarter of Americans do not have enough saved to cover an unexpected $100 expense. Almost 10 years after the Great Recession began, the lower end of our economy is still grappling with a host of problems. Saving too much money is not among them.
The Fed will continue to dial back its extreme easy money policies, with incremental rate hikes, until “normalization” has been achieved. Many predict that this will cause the stock market to give back some or all of the unprecedented gains it’s seen over the last several years. If so, then passive investors, like the millions of middle-class folks who own a 401(k), will take a hit. Savvy, big-money investors, on the other hand, will doubtless be the first to abandon a sinking asset market, thereby preserving their windfall.
Ah, to be an elite in America. It must be nice to have an institution that keeps the wind blowing at your back, even in dark economic times.
Michael Cummins is a Madison-based business analyst.