End quantitative easing policies so that we have a more equal world
One of the positive aspects of the speech Jerome Powell, chairman of the US Federal Reserve, gave at the annual Jackson Hole conference this year was that it did not include the terms “inequality” and “climate change”. It was something, given the enthusiasm with which central banks have jumped on the climate and inequality bandwagon. So much the better that he did not do it, because barely a fortnight later, we learned that the president of the Federal Reserve Bank of Dallas had carried out several stock transactions of several million dollars in 2020 and in 2021.
Inequality is discussed at two levels: income and wealth. In the developed world, inequality is taken for granted. Both anecdotal and documented evidence are strong. In a blog post, the Federal Reserve Bank of St. Louis showed that the household net worth of the bottom 50% took progressively longer to recover from the lows of the recession (“How Recessions Affect household net worth ”, 23 November 2020). Three US recessions (1990-91, 2001 and 2007-08) were examined. The richest 1% and 10% had little difficulty restoring their household equity in a matter of quarters, and five years after a recession, their net worth had grown significantly.
With regard to income inequality, the situation is much less dramatic. At the June annual general meeting of the Bank for International Settlements (BIS) in Basel, Switzerland, Claudio Borio, its chief economist, spoke about the distributive impact of monetary policy (bit.ly/ 3zoolnV). One of his graphs clearly shows that the Gini coefficient, the usual measure of income inequality in the developed world, is much less biased once tax transfers are taken into account. Yes, fiscal policy is doing its job. But, you wouldn’t know from public discourse. The real problem is wealth inequality, and central bank quantitative easing (QE) policies have a key role in fostering and perpetuating it.
In its quarterly review published in March 2016, the BIS was frank: “While low interest rates and rising bond prices have had a negligible impact on wealth inequality, rising equity prices have been negligible. a key factor in inequalities. A recovery in house prices only partially offset this effect. Leaving aside general equilibrium effects on saving, borrowing, and human wealth, this suggests that monetary policy may have increased inequality to the extent that it inflated stock prices.
In July, a UK House of Lords Committee on Economic Affairs released a report (bit.ly/3kqKH41) on the Bank of England‘s QE policies and questioned whether this was a dangerous addiction. In four pages, the report deals with the distributive effects of QE. While he is cautious about attributing causality to the correlation of QE with income inequality, he is less timid about wealth inequality.
In addition, the committee urged the Bank of England to engage in a debate on the trade-offs created by sustained quantitative easing policies. This is the crux of the matter. Central bankers are unelected powers, as one club member puts it. They also ignored the compromises their policies created. None of the major Western central banks have been open to an honest debate about the consequences of their policies for medium to long-term economic, social and political stability, now that these policies have been in place for more than a decade. . It’s getting worse. In addition, some of them now want a green mandate.
Macroeconomics textbooks tell us that monetary and fiscal policies are tools for managing aggregate demand in the short run. Whereas the long-term aggregate supply curve is vertical. In other words, this curve is not shifted to the right (an increase in supply) by cyclical policy tools such as monetary and fiscal policy. The curve should not be managed by these tools either, as it is a function of other factors such as education, skills, geography, war, plague and yes, climate.
Therefore, making central banks aware of the impact of climate change on potential growth runs counter to the canons of macroeconomic management. If it is indeed established beyond a reasonable doubt that there is a need for political action, then it is up to elected governments to undertake it, duly subject to public accountability.
Resources devoted to climate change mitigation or interest rates adjusted in response to the estimated impact of the phenomenon on potential growth have opportunity costs. Developing countries have other pressing concerns, such as infectious diseases such as malaria, basic sanitation and hygiene, and the supply of clean water. We need debate and consideration of the consequences of such unmet (or only partially) needs and the ordering of political priorities before taking action on climate change.
Such prioritization must be subject to public scrutiny. These decisions cannot and should not be left to unaccountable and unelected “experts”, be they scientists or central bankers.
One of the benefits of central bank overreaching could be that it sparks an overdue debate about their usefulness and limits, which will ultimately make central bank and commercial banking boring and safer for corporations.
V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the personal opinions of the author.
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