To Fix Income Inequality Fix The Fed

Rich_Lowrie_of_Put_Growth_First.jpgPerhaps the most pressing question of our time is whether wage growth for the bottom 90% should be welcomed as a sign of across-the-board prosperity, or combated as though it is inflation.  Hopefully the 2014 elections will shape up as a national referendum on this issue.

As the nearby chart shows, after each of the last three major tax cuts, the Fed stamped out the prosperity to prevent further wage gains of the bottom 90%.  As a result, real income for this group is lower today than it was more than 30 years ago.  Meanwhile, it is up more than 75% for the top 10% over the same span.  

The longer the bottom 90% experiences stagnant real income, the more people will be willing to consider redistribution and entertain the notion that maybe something is wrong with free enterprise.  Too many people work hard but don’t feel free enterprise is working for them.  If left untended too much longer, it will tear apart the fabric of the country.  This is also the reason that tax cuts have lost some luster, and why there is an element of truth to the refrain that tax cuts benefit the rich.  Of course, it has nothing to do whatsoever with tax cuts, and everything to do with the Fed.  

  

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It didn’t used to be this way.  For example, from the period 1948 to 1968, real income for both groups increased more than 85%.  This was the “golden age” of the middle class.  In JFK’s words, this was a rising tide lifting all boats.  When the economy grew, everyone participated.

What changed?  The operating mandate of the Federal Reserve did.  When they had a mandate to stabilize the dollar, wages rose within the context of a stable price level.  In 1968 that monetary regime began to get dismantled by Democrat Lyndon Johnson and by 1971 Republican Richard Nixon had it completely demolished, ushering in the floating dollar.  After the ensuing misery of the 70’s, a new Fed paradigm emerged that featured a “dual mandate” of price stability and full employment.

The Fed’s favored measure of inflation is the PCE Deflator (Personal Consumption Expenditure Deflator).  This is an index of finished goods based on the current year’s GDP.  Any finished goods index, including this or the better known CPI (Consumer Price Index) can be deconstructed into generally three types of costs:  raw materials, labor and capital costs.  Because labor represents the largest component, the Fed feels justified by its price stability mandate in fighting wage growth as though it is inflationary.  The result has been stagnant real wages for over 40 years.

The Fed’s dual mandate has become a “double standard.”  The Fed reduces interest rates early in an economic cycle, which helps capital income, but later increases them to prevent growth from reaching wage income.

The dollar is a unit of measure just like the hour, pound and foot.  All units of measure should be stable and reliable.   The economy functions better with a stable dollar and prosperity is more widespread.  Congress has the responsibility and authority to set and periodically review the Fed’s operating mandate.  To sort out the matter, we must pass the Centennial Monetary Commission (HR1176), known as the Brady-Cornyn bill, which provides an official platform to elevate the issue to national prominence.

If you agree that rising wages for the bottom 90% is a sure sign of across-the-board prosperity, sign the petitions below to return the Fed to a single mandate of stabilizing the dollar.  If you believe the dollar should continue to float, please explain to me why the foot, hour and pound shouldn’t also float.  While you’re at it, good luck winning the argument that higher wages are bad and should be combatted as though they are inflationary.

Centennial Monetary Commission

 


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