In relation to a Brookings symposium on inequality and monetary policy which took place today, Ben Bernanke wrote a piece on his blog about why the Fed’s policies, while not completely innocent of favoring the haves and disfavoring the have-nots, did not in fact contribute to the widening wealth gap. In broad strokes, his critique relies on a handful of old economic fallacies.
First, argues Bernanke, even if monetary policy inflates asset prices, money is neutral in the long-run, such that any possible effects on wealth are “almost certainly modest and transient”. Second, Bernanke shifts the bulk of the blame on technological progress and globalization, and the responsibility from the Fed to fiscal policymakers for not redistributing wealth in a more orderly fashion. Third and finally, he lists a few countervailing factors to the inequality that easy money breeds: one, job creation; two, housing prices raising the equity of middle class households, and three, the fact that the debtors, generally poorer than creditors, are favored by inflation and low interest on their mortgages. Overall, Bernanke argues, some people might have been roughed up by the Fed’s policies, but that’s no reason to disregard the broad, aggregate benefits of stable prices and maximum employment. Inequality must be of concern to economic policy in general, but not to monetary policy.
As it happens, things are exactly the opposite. Money is not neutral, either in the short run or in the long run, because there is no separation between the structure of prices in an economy and the value of the monetary unit. They are two sides of the same coin. Easy money ripples through the structure of prices gradually and unevenly, with prices rising at different times and to different extents, and during this sequential process, those who receive the money first are benefited at the expense of those who receive the money last. Were it not for technological progress or globalization, this inequality would likely be much higher. Most importantly, these changes in the social distribution of wealth are never made up for, especially not by the aggregate “boon” of job creation or fiscal redistribution. These further redistributions only compound the initial shifts in wealth, but can never compensate them. Last but not least, therefore, if inequality is to be of any concern to any kind of policy, it is monetary policy.
I’d like to think Mises would have spared a few minutes of his precious time “exploding the fallacy”—an often used expression in his writings—of Bernanke’s most recent musings. If so, Mises’s blog post would probably go something like this:
As long as inflation is in progress, there is a perpetual shift in income and wealth from some social group, to other social groups. . . The result is that there is in the economic system a new dispersion of wealth and income and in this new social order the wants of individuals are satisfied to different relative degrees, than formerly. [The proponents of] methods to undo changes in purchasing power already effected if there has been an inflation… do not realize that by this procedure they do not undo the social consequences of the first change, but simply add to it the social consequences of a new change. If a man has been hurt by being run over by an automobile, it is no remedy to let the car go back over him in the opposition direction. […]
I must protest against the belief that it has to be a goal of monetary policy to make money neutral and that it is the duty of the economists to determine a method of doing so. I wish to emphasize that in a living and changing world, in a world of action, there is no room left for a neutral money. Money is non-neutral or it does not exist. (Mises 1990, 73; 77)
