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Central banks should take responsibility for inequality

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By Lewis McLellan
26 Nov 2019

Wealth inequality is among the hottest topics in politics and now one central banker believes that monetary policy has a role to play in addressing it. He is not wrong to acknowledge the influence that supposedly politically neutral institutions such as his wield in these matters.

The independence of central banks from political considerations has become a sacred cow, and very difficult for politicians or central bankers to challenge. Indeed, any change to the mandate of a central bank is interpreted as a political assault on a technocratic institution.

But Neel Kashkari, president of the Minneapolis Federal Reserve, wants to make wealth redistribution part of Fed's mandate.

And why not? Those who cry that wealth inequality is a political, rather than an economic matter are overlooking the obvious: central bank policy already affects wealth distribution.

The European Central Bank’s practice of purchasing billions of euros of bonds every month has inflated asset prices, benefitting asset owners disproportionately. Its constraints on liquidity mean that reductions in the cost of capital are larger for bigger companies.

The ECB is keen to play down the effects on wealth distribution, but if it wishes to defend itself from such accusations, why not include inequality in its mandates along with financial stability and inflation.

Although making a decision about an appropriate level of inequality for an economy appears a thorny and inherently political matter, we have been perfectly happy to delegate the responsibility for selecting the appropriate level of inflation to central bankers.

One doesn’t need to look far to encounter people (on Twitter) who believe that any inflation is theft, but we are happy for the technocrats at our central banks to set the level they believe is best. Why should inequality be different?

And if the central bank mandate was a perfect and untouchable edifice, why would the policies of the two largest central banks be different? The Fed has a mandate to maximise employment, but the ECB does not.

Politicians will still have the lion’s share of responsibility for determining policies of wealth redistribution. However, when a central bank embarks on a new programme of monetary policy, it will have the flexibility to make those decisions in the light of the effects it will have on wealth inequality.

Clinging to so-called central bank independence provides an easy way out of having to answer for the societal effects of monetary policy.

By Lewis McLellan
26 Nov 2019