Engine of Inequality. Karen Petrou
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system crashes disastrously every decade or so.
The third fix to the inequality engine in this book thus redesigns US financial regulation not by removing all the costly rules imposed on banks after 2010, but instead by realigning rules so that like-kind financial activities come under like-kind rules. When only banks are under tough safety-and-soundness and consumer-protection rules, finance moves outside banks and thus outside a lot of equality-critical regulation. This it did from 2010 to 2020 and we know what happened then.
Fixing the financial system means not just new rules, but also new institutions. We can fix the unequal allocation of affordable credit in part by fixing how financial institutions are constructed. Equality Banks are thus among my fixes for a more equal financial system.
Finally, we can't forget the inequality engine's fuel: money. Companies such as Facebook and Amazon aren't just dominant in social media and retailing – they plan to issue new forms of money on a redesigned payment system. This could give them control not only over with whom we associate, what we buy, what we read, and even how we vote, but also over how much money we have and to whom it goes how. We are used to thinking about money as the bills in our wallets or the numbers in our bank accounts, but a quiet revolution redefining money is well under way. If it proceeds without appropriate controls, then the inequality engine's fuel will go still faster and in even larger amounts to those who need it least.
Thus, the last fix I detail crafts a new, digital money system under Fed control along with controls on the Fed to ensure that its new money enhances equal access and secure transactions, not just for the wealthy but also for the rest of us. Much in this book lambasts the Fed, but I still trust it with my money more than Facebook.
In the sixties, a social philosopher said, “In the same way as men [sic] cannot for long tolerate a sense of spiritual meaninglessness in their individual lives, so they cannot for long accept a society in which power, privilege, and property are not distributed according to some morally meaningful criteria.”4 When so much wealth is in so few hands, its morality is elusive and the fury this engenders becomes widespread.
To address the defining economic, social-justice, and moral questions of our time requires a fast-acting, targeted, and politically-plausible action plan aimed at the policies that exert the most force in the inequality engine. This book will prove that financial policy is this inequality engine and also that it can first be reversed and then shut down. If we fail in the 2020s as badly as we failed in the 2010s to fix financial policy, fury will indeed be loosed and financial policy-makers will deserve it. The rest of us, not so much.
Notes
1 1. Karen Shaw Petrou, “Income Inequality: The Battlefield Casualty of Post-Crisis Financial Policy” (speech, Chicago, November 3, 2020), available at https://fedfin.com/images/stories/press_center/speeches/Income%20Inequality-The%20Battlefield%20Casualty%20of%20Post-Crisis%20Financial%20Policy_Speech.pdf.
2 2. Karen Shaw Petrou, “The Inexorable Will of the Financial Market: Profit Imperatives and Financial-Policy Design” (speech, New York, March 1, 2018), available at https://fedfin.com/images/stories/press_center/speeches/Karen%20Petrou%20Remarks%20Prepared%20for%20Distinguished%20Speaker%20Lecture%20Federal%20Reserve%20Bank%20of%20New%20York.pdf.
3 3. Thomas Piketty, Capital in the Twenty-First Century, translated by Arthur Goldhammer (Cambridge: Belknap Press of Harvard University Press, 2014).
4 4. Irving Kristol, “'When virtue loses all her loveliness' – some reflections on capitalism and ‘the free society,’” Public Interest 8 (Fall 1970), available at https://www.nationalaffairs.com/storage/app/uploads/public/58e/1a4/afc/58e1a4afc4eee090463739.pdf.
Chapter 1 Inequality: Why It's So Much Worse and What to Do About It
Nobody had our backs in office, not Democrats or Republicans. I'm tired of being sugarcoated and being robbed in the process.… [Politicians] are so out of touch with reality and real people. All of them.
– An autoworker who voted twice for Barack Obama and then for Donald Trump*
This bitter sentiment was voiced by an autoworker in May 2019. One month later, the US achieved a seemingly remarkable milestone: the longest economic recovery ever, at least as tallied by economists.1 The Federal Reserve's chairman took comfort from this milestone, spelling out the broad benefits of this putative recovery – it was good for all Americans, not just the wealthy – or so he said.2 But the Fed was wrong, and the autoworker and hundreds of millions of Americans just like him were right: the economic recovery after the 2008 “great financial crisis” was extraordinarily unequal. When the COVID-19 pandemic hit in March 2020, the shared-prosperity facade disintegrated – unemployment ravaged millions and millions of households and millions of Americans also took to the streets not just to protest George Floyd's murder, but also to mark a decade of extraordinarily unequal growth. No wonder.
If more Americans had had more savings with which to buffer the shock of sudden unemployment and had the American financial system been more equitable, then COVID's economic cost would still have been dear, but not disastrous. But as the US headed into the pandemic, it was the most unequal of all advanced economies, becoming far more unequal far faster after 2010.3
It's no coincidence that 2010 also marks the start of massive changes to US financial policy due to the monetary and regulatory response to the 2008 financial crisis. The powerful link between financial policy and our far more unequal economy is the topic of this book; breaking it is its goal.
You might think that monetary and regulatory policy are far afield from economic inequality given the usual focus on factors such as tax and education policy. Economic inequality results from many causes, but who gets the money how is the most important element in each of them. Money doesn't just fall from trees (would that it were so). The job of central banks such as the Federal Reserve is to control who gets the money, with the Fed the only agency of the US government expressly responsible for allocating money not just for stable growth, but also for shared prosperity. It and other central banks around the world use their own money and the reserves banks hold to encourage markets to rev up or slow down a nation's economy. Starting in 2010, the Fed threw the money into the increasingly ample laps of the wealthiest households. In 2020, it redoubled those efforts with still more trillions for still fewer millions. Thanks to the Fed,4 the period immediately after the COVID pandemic struck was “one of the greatest wealth transfers in history.”5
Financial regulators also control who gets the money by opening or closing the money spigots to discipline banks or to protect borrowers. After 2010, bank regulators inadvertently turned off funding for affordable loans to average Americans and cut off the bank accounts that households once used to earn living