NEW YORK TIMES by Ed Conard | October 27, 2014
The Federal Reserve has neither the mandate to redistribute wealth nor the tools to do it effectively. Should it try, it will likely fail. Were it to succeed, it would likely lower middle- and working-class incomes. Either way, it would violate one of America’s founding principles — no taxation without representation — as well as its mandate to promote stable prices. A blatant political act like this would justify Congressional intervention and jeopardize the Fed’s critically needed independence. A Federal Reserve that abides by its wisely chosen mandates is best for America.
The Fed can do little more than allow price inflation after the economy recovers by refusing to rein in the monetary base at that time. Unexpected price inflation may transfer wealth from lenders to borrowers but it is unlikely to transfer wealth from higher- to lower-income workers. Wealthy Americans can afford to bear greater risks and earn higher returns from holding equities. Equity tends to hold its value in a bout of unexpected inflation.
Even if the Fed could transfer wealth from higher- to lower-income Americans, this would probably decrease middle- and working-class incomes. Unlike the 1950s and ‘60s, when the supply of labor was more restricted, the Baby Boom increased workforce participation of women, immigration, and trade deficits greatly increased the supply of labor. Growth subsequently increased much needed employment rather than pushing up wages.
Since 1980, U.S. employment has grown nearly 50 percent — twice as fast as Germany and France, and three times faster than Japan — at median after-tax disposable incomes that were 20 to 30 percent higher. Lowering the value of successful risk-taking by distributing incomes more equally may slow risk-taking, growth, employment and wages as appears to be the case elsewhere.
Free markets logically bid up the value of what they need most and have least — properly trained talent willing to take risks that produce innovation and growth. Why should we think central planners know better?
Read Joseph Stiglitz and others in the Room for Debate on New York Times.com