{"id":26516,"date":"2021-08-26T00:30:00","date_gmt":"2021-08-26T00:30:00","guid":{"rendered":"https:\/\/www.lifeandnews.com\/articles\/?p=26516"},"modified":"2021-08-28T08:20:50","modified_gmt":"2021-08-28T08:20:50","slug":"racial-income-and-wealth-gaps-are-huge-but-the-fed-doesnt-have-the-right-tools-to-fix-them","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/racial-income-and-wealth-gaps-are-huge-but-the-fed-doesnt-have-the-right-tools-to-fix-them\/","title":{"rendered":"Racial income and wealth gaps are huge \u2013 but the Fed doesn\u2019t have the right tools to fix them"},"content":{"rendered":"\n

Paul Wachtel<\/a>, New York University<\/a><\/em><\/p>\n\n\n\n

Central bankers and economists from around the world are convening remotely for the annual Jackson Hole symposium<\/a> on Aug. 27, 2021, to discuss the future of monetary policy.<\/p>\n\n\n\n

For the second year in a row, the annual conference will be virtual and the theme \u2013 Macroeconomic Policy in an Uneven Economy<\/a> \u2013 seems appropriate given that the road out of the pandemic recession<\/a> has been bumpy, with Black Americans lagging behind<\/a>.<\/p>\n\n\n\n

Indeed, how central banks should address racial inequities in the distribution of wealth and income is a likely topic for discussion<\/a> at the virtual retreat and could get a mention in Fed chair Jerome Powell\u2019s highly anticipated speech.<\/p>\n\n\n\n

A \u2018critical role to play\u2019?<\/h2>\n\n\n\n

It certainly is an issue that needs attention. Despite the vast changes that have occurred since the onset of the civil rights movement, the gaps between Black and white household income and wealth are as large today as they were in 1950<\/a>.<\/p>\n\n\n\n

In 2019, the median white household had nearly eight times greater wealth<\/a> than its Black counterpart. And the median Black household earned just 61 cents for every dollar<\/a> in income seen by a white family.<\/p>\n\n\n\n

In a speech in October 2020, Mary Daly, president of the Federal Reserve Bank of San Francisco, asked<\/a>: \u201cHow can we build a society that delivers on the promise of equal opportunity and inclusive success?\u201d Her answer started with \u201cThe Fed has a critical role to play.\u201d<\/p>\n\n\n\n

As an economist and expert on monetary policy<\/a>, I think it is reasonable to ask whether the Federal Reserve does, in fact, have a part to play in addressing racial wealth and income gaps. Unfortunately, my research suggests that the tools it has at its disposal are not suited for that purpose.<\/p>\n\n\n\n

In a recent research paper<\/a> with co-authors, I examined how an easier monetary policy<\/a> \u2013 one in which interest rates are lowered to encourage lending and spur economic growth \u2013 affects racial gaps in income and wealth. In other words, if the Fed reduces interest rates, will that reduce the economic disparities between Black and white households?<\/p>\n\n\n\n

Economists have long known that a policy of low interest rates and credit availability tends to reduce unemployment rates<\/a> and increase employment and earnings for all groups.<\/p>\n\n\n\n

My research found that it also reduces the unemployment rate for Black Americans more<\/a> than for whites. With better economic conditions workers, particulalry the less skilled, are able to find jobs. As a result, the gap between the earnings of the average Black and white household is reduced somewhat.<\/p>\n\n\n\n

As assets go up, so does the racial wealth gap<\/h2>\n\n\n\n

As such, there would appear to be a case for the Fed to maintain its current easy monetary policies \u2013 the target for the key policy rate, the Fed funds rate, has been kept at 0-0.25% since the start of the pandemic lockdown<\/a> in March 2020.<\/p>\n\n\n\n

But the story does not end here. Our research shows that the effect of low interest rates on the earning gap is very small \u2013 we estimate<\/a> that a decline in the policy rate of 1 percentage point reduces the gap between average annual Black and white household incomes by about $100.<\/p>\n\n\n\n

Moreover, an easier monetary policy increases the prices of assets, particularly on stocks and houses. This has an impact on the wealth distribution, widening the already large gap between white and Black wealth.<\/p>\n\n\n\n

White households gain more than Black households from asset price increases for the simple reason that they are wealthier to begin with. White Americans are much more likely to own homes<\/a> and stocks<\/a>, both of which rise in value when policy eases and interest rates go down.<\/p>\n\n\n\n

The run-up of the stock market in the past decade<\/a> \u2013 to a large extent driven by monetary policy \u2013 benefited relatively few Black households<\/a>. Only one-third of Black households own any stocks at all, compared with almost two-thirds of white households.<\/p>\n\n\n\n

So although an easing of monetary policy reduces the racial earnings gaps slightly, the effect pales in comparison with the capital gains brought about by the same policy. And this actually widens the wealth gap between the average Black and white household.<\/p>\n\n\n\n

Looking beyond the Fed<\/h2>\n\n\n\n

Our research does not bode well for anyone attending the virtual Jackson Hole retreat who would like to see reducing racial inequalities added to the Federal Reserve\u2019s mandate, which currently tasks the central bank with promoting stable prices and maximum employment<\/a>. Such a mandate, which has been proposed by some Democrats in Congress<\/a>, might make it impossible for the central bank to raise interest rates when inflation is persistently above the Fed\u2019s 2% target. An increase in interest rates to tame inflation might be resisted if it is seen as counterproductive to the Fed\u2019s efforts to promote income equality.<\/p>\n\n\n\n

This does not mean that achieving racial equality should not be a prime objective for policymakers, but only that monetary policy is not well suited to address these important issues. Policymakers need to look beyond the central bank and consider fiscal approaches such as child tax credits<\/a>, improved educational opportunities and even reparations as a means to address racial gaps.<\/p>\n\n\n\n

But with the tools it has available, the central bank is not able to design policies to reduce the racial income gap without also increasing wealth inequality.<\/p>\n\n\n\n

[Understand what\u2019s going on in Washington.<\/em> Sign up for The Conversation\u2019s Politics Weekly<\/a>.]<\/p>\n\n\n\n

Paul Wachtel<\/a>, Emeritus Professor of Economics, New York University<\/a><\/em><\/p>\n\n\n\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Paul Wachtel, New York University Central bankers and economists from around the world are convening remotely for the annual Jackson Hole symposium on Aug. 27, 2021, to discuss the future of monetary policy. For the second year in a row, the annual conference will be virtual and the theme \u2013 Macroeconomic Policy in an Uneven […]<\/p>\n","protected":false},"author":44,"featured_media":26517,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,277],"tags":[8488,172,224,6448,3371,350,6449,5209,347,348],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/26516"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=26516"}],"version-history":[{"count":1,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/26516\/revisions"}],"predecessor-version":[{"id":26518,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/26516\/revisions\/26518"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/26517"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=26516"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=26516"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=26516"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}