Recent statements by two presidential aspirants, former Florida Governor Jeb Bush and New Jersey Governor Chris Christie, indicting the Fed for its role in inhibiting job creation, causing wage stagnation and paralyzing income mobility, come in the context of a titanic public dispute over the role of the Fed in causing such a sluggish, bad job creation, low wage growth economy. Both Govs. Bush and Christie deserve high praise for showing leadership in addressing what deserves to be a leading issue in the 2016 election.
Late last April, Ben Bernanke, in his Brookings blog, trenchantly critiqued prominent conservative economist John Taylor. The Wall Street Journal immediately ran an editorial entitled “The Slow-Growth Fed.” This triggered a response by the former Fed chairman in his blog. That promptly was followed by a WSJ op-ed indicting the Fed by Prof. John Taylor, “Taylor on Bernanke: Monetary Rules Work Better than Constrained Discretion.”
The most recent evolution of this altercation came on June 1 when Bernanke attempted to exonerate the Fed for income inequality in his blog:
Certainly, inequality and lack of social mobility are issues of first-order significance for economic policy in general. Should they also be first-order considerations for the making of monetary policy? I have my doubts.
First, widening inequality is a very long-term trend, one that has been decades in the making. The degree of inequality we see today is primarily the result of deep structural changes in our economy that have taken place over many years, including globalization, technological progress, demographic trends, and institutional change in the labor market and elsewhere. By comparison to the influence of these long-term factors, the effects of monetary policy on inequality are almost certainly modest and transient.
Dr. Bernanke’s desire to exonerate the Fed certainly is understandable. His reputation is at stake. That said, his pleadings “move along, nothing to see here” are unpersuasive.
As economic journalist John Aziz astutely noted, some time ago, in Azizonomics in a trenchant analysis entitled “Why the Left Misunderstands Income Inequality“:
The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.
Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.
Aziz is not a proponent of the gold standard, yet the flatlining of median family income and the breakout rise of the net worth of the “one percent” correlate so closely with the severance of “the link between the dollar and gold” represents a crucial insight. As the New York Sun editorialized on this very subject:
Well, feature the chart that Professor Piketty publishes showing inequality in America. This appears in the book at figure 9.8; a similar version, shown alongside here, is offered on his Web site. It’s an illuminating chart. It shows the share of national income of the top decile of the population. It started the century at a bit above 40% and edged above 45% in the Roaring Twenties. It plunged during the Great Depression and edged down in World War II, and then steadied out, until we get to the 1970s. Something happened then that caused income inequality to start soaring. The top decile’s share of income went from something like 33% in 1971 to above 47% by 2010.
Hmmm. What could account for that? … [S]ay, what about the possibility that it was in the middle of 1971, in August, that America closed the gold window at which it was supposed to redeem in specie dollars presented by foreign central banks. That was the default that ended the era of the Bretton Woods monetary system.
That’s the default that opened the age of fiat money. Or the era that President Nixon supposedly summed up in with Milton Friedman’s immortal words, “We’re all Keynesians now.” This is an age that has seen a sharp change in unemployment patterns. Before this date, unemployment was, by today’s standards, low. … From 1947 to 1971, unemployment in America ran at the average rate of 4.7%; since 1971 the average unemployment rate has averaged 6.4%. Could this have been a factor in the soaring income inequality that also emerged in the age of fiat money?
This is the question the liberals don’t want to discuss, even acknowledge.
The presidential contenders certainly should wish to pose “the question the liberals don’t want to discuss, even acknowledge.” Governors Bush and Christie are showing exceptional good judgment at raising the role of the Fed in low job creation, wage stagnation, and the loss of income mobility. “You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of cheap dollars.”
Ralph Benko, internationally published weekly columnist, co-author of The 21st Century Gold Standard, lead co-editor of the Gerald Malsbary translation from Latin to English of Copernicus’s Essay on Money, is American Principles in Action’s Senior Advisor, Economics.