The Times Australia
The Times World News

.
Times Media

.

Racial income and wealth gaps are huge – but the Fed doesn't have the right tools to fix them

  • Written by Paul Wachtel, Emeritus Professor of Economics, New York University
Racial income and wealth gaps are huge – but the Fed doesn't have the right tools to fix them

Central bankers and economists from around the world are convening remotely for the annual Jackson Hole symposium[1] 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 – Macroeconomic Policy in an Uneven Economy[2] – seems appropriate given that the road out of the pandemic recession[3] has been bumpy, with Black Americans lagging behind[4].

Indeed, how central banks should address racial inequities in the distribution of wealth and income is a likely topic for discussion[5] at the virtual retreat and could get a mention in Fed chair Jerome Powell’s highly anticipated speech.

A ‘critical role to play’?

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[6].

In 2019, the median white household had nearly eight times greater wealth[7] than its Black counterpart. And the median Black household earned just 61 cents for every dollar[8] in income seen by a white family.

In a speech in October 2020, Mary Daly, president of the Federal Reserve Bank of San Francisco, asked[9]: “How can we build a society that delivers on the promise of equal opportunity and inclusive success?” Her answer started with “The Fed has a critical role to play.”

As an economist and expert on monetary policy[10], 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.

In a recent research paper[11] with co-authors, I examined how an easier monetary policy[12] – one in which interest rates are lowered to encourage lending and spur economic growth – 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?

Economists have long known that a policy of low interest rates and credit availability tends to reduce unemployment rates[13] and increase employment and earnings for all groups.

My research found that it also reduces the unemployment rate for Black Americans more[14] 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.

As assets go up, so does the racial wealth gap

As such, there would appear to be a case for the Fed to maintain its current easy monetary policies – 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[15] in March 2020.

But the story does not end here. Our research shows that the effect of low interest rates on the earning gap is very small – we estimate[16] 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.

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.

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[17] and stocks[18], both of which rise in value when policy eases and interest rates go down.

The run-up of the stock market in the past decade[19] – to a large extent driven by monetary policy – benefited relatively few Black households[20]. Only one-third of Black households own any stocks at all, compared with almost two-thirds of white households.

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.

Looking beyond the Fed

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’s mandate, which currently tasks the central bank with promoting stable prices and maximum employment[21]. Such a mandate, which has been proposed by some Democrats in Congress[22], might make it impossible for the central bank to raise interest rates when inflation is persistently above the Fed’s 2% target. An increase in interest rates to tame inflation might be resisted if it is seen as counterproductive to the Fed’s efforts to promote income equality.

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[23], improved educational opportunities and even reparations as a means to address racial gaps.

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.

[Understand what’s going on in Washington. Sign up for The Conversation’s Politics Weekly[24].]

References

  1. ^ convening remotely for the annual Jackson Hole symposium (finance.yahoo.com)
  2. ^ Macroeconomic Policy in an Uneven Economy (www.kansascityfed.org)
  3. ^ road out of the pandemic recession (theconversation.com)
  4. ^ Black Americans lagging behind (www.politico.com)
  5. ^ likely topic for discussion (www.marketplace.org)
  6. ^ are as large today as they were in 1950 (www.nytimes.com)
  7. ^ nearly eight times greater wealth (www.brookings.edu)
  8. ^ just 61 cents for every dollar (www.epi.org)
  9. ^ asked (www.frbsf.org)
  10. ^ economist and expert on monetary policy (www.stern.nyu.edu)
  11. ^ research paper (dx.doi.org)
  12. ^ easier monetary policy (www.forbes.com)
  13. ^ reduce unemployment rates (www.federalreserve.gov)
  14. ^ reduces the unemployment rate for Black Americans more (dx.doi.org)
  15. ^ since the start of the pandemic lockdown (www.cnbc.com)
  16. ^ we estimate (dx.doi.org)
  17. ^ more likely to own homes (www.cnbc.com)
  18. ^ and stocks (www.usnews.com)
  19. ^ in the past decade (grow.acorns.com)
  20. ^ relatively few Black households (dx.doi.org)
  21. ^ promoting stable prices and maximum employment (www.federalreserve.gov)
  22. ^ been proposed by some Democrats in Congress (theconversation.com)
  23. ^ child tax credits (www.brookings.edu)
  24. ^ Sign up for The Conversation’s Politics Weekly (theconversation.com)

Read more https://theconversation.com/racial-income-and-wealth-gaps-are-huge-but-the-fed-doesnt-have-the-right-tools-to-fix-them-166791

The Times Features

The Gift That Keeps Growing: Why Tinybeans+ Gift Cards are a game-changer for new parents

As new parents navigate the joys and challenges of raising a child in the digital age, one question looms large: how do you preserve and share your baby's milestones without co...

Group Adventures Made Easy: How to Coordinate Shuttle Services from DCA to IAD

Traveling as a large group can be both exciting and challenging, especially when navigating busy airports like DCA (Ronald Reagan Washington National Airport) and IAD (Washington...

From Anxiety to Assurance: Proven Strategies to Support Your Child's Emotional Health

Navigating the intricate landscape of childhood emotions can be a daunting task for any parent, especially when faced with common fears and anxieties. However, transforming anxie...

The Rise of Meal Replacement Shakes in Australia: Why The Lady Shake Is Leading the Pack

Source Meal replacement shakes are having a moment in Australia, and it’s not hard to see why. They’re quick, convenient, and packed with nutrition, making them the perfect solu...

HCF’s Healthy Hearts Roadshow Wraps Up 2024 with a Final Regional Sprint

Next week marks the final leg of the HCF Healthy Hearts Roadshow for 2024, bringing free heart health checks to some of NSW’s most vibrant regional communities. As Australia’s ...

The Budget-Friendly Traveler: How Off-Airport Car Hire Can Save You Money

When planning a trip, transportation is one of the most crucial considerations. For many, the go-to option is renting a car at the airport for convenience. But what if we told ...

Times Magazine

Sydney's Finest: How to Identify a Top-Tier SEO Company

In the dynamic realm of digital marketing, the success of your online presence relies heavily on effective search engine optimisation (SEO). A pivotal force in this journey is the SEO company you choose. In Sydney's competitive business landscape...

The Guide Dogs Australia and Black Hawk pet food ultimate Dog Care Guide

GUIDE DOGS AUSTRALIA & BLACK HAWK JOIN FORCES TO RELEASE THE ULTIMATE DOG CARE GUIDE WITH TIPS YOU CAN TRUST Guide Dogs Australia is proud to announce Black Hawk as its new dog food partner. Joining forces to ensure that Australia's most tru...

What Is Government Furniture And How Does It Differ From Commercial Furniture?

When you think about furniture, you might picture a cozy living room set or sleek office chairs. But have you ever considered the specific needs of government furniture? Government furniture serves a unique purpose, catering to the demands of public ...

Diablo IV: A Doorway to Pandemonium Hell

Here is the dark and twisted hell of Sanctuary, where the battle between angels and demons has raged for centuries. Yes, Diablo IV is here, and it's bound to leave you on the edge of your seat with its action-packed, role-playing goodness.  Develop...

Managing Your Online Reputation: Strategies for Removing Negative Content

Maintaining a positive online reputation is crucial for individuals and businesses in today's digital age. However, negative content such as negative reviews, defamatory posts, or outdated information can tarnish your reputation and harm your credi...

The Power of Tech in Business and How Mobile Solutions are Changing the Game

Technology is not just an option but a necessity, particularly in today’s fast-paced business world. From mobile apps to cloud-based accounting software, businesses are now more tech-driven than ever. Whether you are running a small local operation...