Does the Federal Reserve Promote Economic Inequality Through Quantitative Easing?
The relationship between the Federal Reserve's quantitative easing (QE) policies and economic inequality is a complex and often debated topic. The hypothesis that QE directly promotes economic inequality is based on the assumption that the asset prices of stocks and property, which tend to benefit higher net worth individuals, are inflated during periods of monetary expansion. However, the causal relationship between easing and wealth accumulation is not clear. This article will explore the evidence and underlying economic principles to determine whether the Federal Reserve's actions truly contribute to economic inequality.
Historical Correlation and Money Supply Changes
To investigate the connection between money supply changes and wealth accumulation, it is essential to examine historical data and trends. Economic historians and researchers have attempted to identify a correlation between changes in the money supply resulting from QE and subsequent wealth accumulation. However, the relationship remains somewhat ambiguous. For instance, if we look at the historical trends of money supply and wealth accumulation, a positive correlation might appear, but it is crucial to consider other factors that could influence this relationship.
Understanding Quantitative Easing and Price Inflation
Quantitative easing is a monetary policy tool used by the Federal Reserve to increase the money supply and stimulate economic growth. Proponents argue that QE can lead to nominal price increases, but it is important to clarify that such price increases do not necessarily equate to sustained inflation. Sustained inflation, defined as a general and persistent rise in the price level, is a more precise measure of economic conditions. The Federal Reserve actively monitors inflation and adjusts monetary policy to maintain price stability. As such, engaging in QE knowing it would cause sustained inflation is counterintuitive.
Ownership of Assets and Wealth Accumulation
It is undoubtedly true that higher net worth individuals own more assets, such as stocks and property, which tend to appreciate during periods of monetary expansion. However, it is essential to note that lower-income individuals may not have access to such assets due to liquidity constraints. For instance, mutual fund investments and pension funds are less liquid and may not be accessible to the majority of the population. According to the Bureau of Labor Statistics (BLS), only 13% of private sector non-union workers are covered by a pension plan. This limited access can contribute to economic inequality, but it is important to assess the broader context.
Does the Federal Reserve Engender Inequality?
The term "promote" is a strong and active verb that implies deliberate action. To address this, we can rephrase the question to whether the Federal Reserve engenders inequality. The Federal Reserve has a mandate to promote price stability and maximum employment. However, the institution's actions can have unintended consequences. The increasing concentration of wealth and the rise in asset prices can be seen as outcomes of broader economic trends, which the Federal Reserve does not directly control.
Discussion and Analysis
While the Federal Reserve's actions can contribute to the increase in capital and asset prices, it is ultimately the result of a combination of factors, including market dynamics, corporate strategies, and legislative policies. It is also important to recognize that the institution sets policies to ameliorate or prevent economic inequality. For instance, the Federal Reserve can implement targeted policies to support community development, educational opportunities, and accessible healthcare.
Moreover, the increase in capital, such as corporate cash reserves and CEO salary increases, can be attributed to a shift in the economy towards capital ascendancy. This shift has been observed over the past thirty years, coinciding with the waning influence of labor unions and the growing influence of investment and capital.
Conclusion
In conclusion, while the Federal Reserve's policies, including quantitative easing, can contribute to asset price inflation and, in turn, wealth accumulation, attributing this to the institution alone is oversimplified. The complex interplay of factors, including market dynamics, economic policies, and broader social trends, must be considered. It is also worth noting that the Federal Reserve has a responsibility to address economic inequality through various policy initiatives.