One of the many problems with governments getting involved in setting monetary policy is that the conduct of monetary policy necessarily picks winners and losers. Due to the distributional effects of who gets to use the government’s new money first, those who get the new money before prices rise are able to benefit handsomely, while those who only see the money after prices have risen are impoverished. That’s a pretty well known effect, but one that central banks throughout history have tried to deny. But now new research is confirming what everyone knew all along: the monetary policy of the past century has benefited the rich more than anyone else.
The Dutch central bank recently published a paper looking at the wealth of the top 1% and how their share of national wealth reacts to monetary policy. Not surprisingly, they found that the top 1% increase their share of wealth by 1 to 6 percentage points in the aftermath of expansionary monetary policy. That only stands to reason, given how easy money and low interest rates spur significant rises in asset prices.
The Dutch researchers also pointed out that previous central bank research into this issue looks only at short-run effects of monetary policy on income inequality, which offers a much less convincing case. As anyone looking at charts of income inequality in the United States can plainly see, inequality is a long-term phenomenon, and its effects have definitely gotten stronger as the Federal Reserve has engaged in more and more expansionary monetary policy.
The Fed may continue to try to deny its role in exacerbating income inequality in the United States, but the evidence is clearly there. From the high-flying Wall Street executives whose compensation always seems to increase to the people on Main Street who only see their grocery bills increase, it’s clear that the rich are getting richer and the poor are getting poorer. And unless the Fed is called out for its actions, it’ll be capitalism as a whole that will get the blame rather than crony corporatism and loose monetary policy.
