Over the past decade, inequality has been recognized as one of the most important political problems of the 21st Century. In 2013, President Obama labeled the growing gap between the rich and poor “the defining challenge of our time.” The next year, French economist Thomas Piketty’s Capital in the 21st Century—an explanation of how the world reached its current levels of inequality—became an unlikely best seller. Even the pope has spoken out about the issue, and for good reason. The statistics are oft-cited but bear repeating: the top 10% of US families own 76% of all wealth in the country, while the bottom 50% own just 1% of the nation’s wealth.
Reversing this economic trend requires a massive slate of government policies to combat inequality and its consequences. But in recent years—and especially during the pandemic—something else has happened. Ultra-conservative ideas have instead been repackaged as liberal ways to fight inequality. They have been put forth in the name of progressivism, advertised under the facade of promoting equality when they will actually do the opposite. Chief among them is criticism of the Federal Reserve’s recent monetary policy.
Who’s Afraid of Low Interest Rates?
Established in 1913, the Federal Reserve has long been a subject of intrigue, fascination, and conspiracy theories. The hallowed, secretive chamber consists of unelected policymakers, with significant sway over the American economy. Throughout its history, the body has been far from perfect, especially in the run-up to the 2008 Financial Crisis. But the coronavirus pandemic brought with it a strange kind of criticism of the American central bank. To fully unpack this critique requires examining the Fed’s actions in 2020.
When COVID-19 hit two years ago in March, financial markets immediately took a tumble. In order to prevent a 2008- or 1929-style meltdown, the Fed undertook a suite of actions. These included reducing its policy rate to nearly zero, buying trillions of dollars in government bonds, and lending to small businesses.
In order to better understand the Fed’s response, I spoke to Berkeley Professor Neil Fligstein, the author of a history of the Great Recession entitled The Banks Did It. Fligstein—often a critic of top economic policymakers—praised the American central bank, and its head, Jerome Powell. When COVID-19 arrived at America’s shores, he said, “it looked like we were going to have a repeat of what happened in the fall of 2008,” but the Fed “flooded the markets with money… It was amazing, it was impressive actually.”
But not everyone agrees with Fligstein’s analysis. One strain of criticism becoming popular is that the Federal Reserve has exacerbated inequality through its actions. This view gained steam after a New York Times op-ed by prominent financial commentator Karen Petrou recently went viral. The lower rates, Petrou argues, “result in even wider wealth inequalities as the gap between the rich and everyone else grows.” To be sure, this is a claim with some merit. Because the wealthy tend to be savers and the owners of assets, low-interest rates do disproportionately benefit them.
What critics of a low-interest rate policy forget though, is that the policy alternatives would be much worse. A regime of high-interest rates yields extremely poor outcomes for workers: as rates increase, expenses for consumers and businesses rise in tandem, leading to a decline in the demand for labor. This has been borne out in the data: unemployment, which was 14.7% in April of 2020, now stands at 3.8% after strong action from the Fed. This is a monumental victory for workers and the larger progressive project. If liberals seek to be representatives of the working class, it is a Fed with low-interest rates they should support.
Criticism has not been limited to a single opinion piece, either. In January of 2022, investigative journalist Christopher Leonard published The Lords of Easy Money, a populist peek into the halls of the Federal Reserve. Leonard makes many of the same claims Petrou does, and is particularly critical of quantitative easing (QE), a form of stimulus where the Federal Reserve buys bonds from financial companies like pension funds. But QE was a crucial part of the response to the Great Recession and COVID-19, an unconventional form of monetary policy that helped save the American economy. According to Professor Fligstein, “putting liquidity into banks was the most important thing.” The Fed “forced companies to borrow money and they made sure they weren’t going to go out of business… and that saved the financial system.”
In a review of Leonard’s book for The New York Times, Columbia historian Adam Tooze echoes Fligstein’s perspective. “What effect would withholding [QE] have had?” Tooze asks. “It would surely not have changed the course of American social development or political history over the following decade. The main effect would have been, marginally, to slow the recovery.” No progressive should dream of an even more sluggish economy coming out of 2008, a time period already marked by low wage growth. The agile monetary policy response to the unprecedented events of 2008 and 2020 was a necessary step in protecting the American economy and its labor force.
As for the issue of inequality, a better way forward would be for Congress to engage in some form of redistribution. The current political gridlock in Washington, however, poses a problem, leaving the Federal Reserve as the sole major economic player. Because economic policy in the United States is split with the Fed engaging in monetary policy and Congress owning the fiscal side, the inability of the House and Senate to come to an agreement leaves lowering interest rates and bond-buying as the primary levers the government pulls. This happened in 2008: the stimulus Congress approved and President Obama signed was far too small given the scope of the crisis. As such, wages were slow to rise and overall economic growth was poor.
Proponents of reducing inequality would be far better served pointing to the legislature’s lack of action instead of the central bank’s effort. The American Rescue Plan’s child tax credit, for example, lifted more than three million children out of poverty. In December of 2021, the legislature allowed it to expire with no fix in sight. These are the kinds of policies that will create a more equitable economy; the central bank simply does not have the tools to fix the country writ large. As Professor Fligstein told me, central bankers “don’t have a lot of levers and the interest rate is the big lever they have.”
The Myth of Democratic Finance
A close relative of the pseudo-progressive critique of the Federal Reserve is the promotion of stocks like GameStop. Its story is well-told; in 2021, a group of investors on Reddit bought massive amounts of stock in the ailing video game retailer using a commission-free brokerage called Robinhood. Then, after a few days, Robinhood ended the party, refusing to accept more trades because it ran out of money. Something strange happened, though: prominent people within the progressive movement— including Representative Alexandria Ocasio-Cortez—began to take up the cause of the Redditors.
This is a view that is entirely mistaken. For one, the Reddit day traders are not the little guy in any sense of the term. As Derek Thompson of The Atlantic outlines, “the typical day trader is a pretty well-off man in his 30s… some of the Reddit group’s leading members are current and former finance workers.” This is a group progressives ought to be regulating, not holding up as the successor to Occupy Wall Street. But there’s a deeper myth here that ought to be dispelled: the stock market and democratization of finance are emphatically not the optimal paths to closing the wealth gap.
Studies have repeatedly shown that day trading is not a sustainable way to make a living. It requires putting in the kind of effort that few have the time to devote. More broadly, however, the inherent volatility of the stock market should preclude liberals from endorsing it as an avenue to reduce wealth inequality. In his magnum opus The General Theory, John Maynard Keynes wrote, “when the capital development of a country becomes the byproduct of the activities of a casino, the job is likely to be ill-done.” Some may counter that trading on Wall Street enables society to discover the true value of companies, but as Keynes’ biographer Zachary Carter explains, “If you leave it to professional gamblers to determine the social value of any activity, they will almost always give you the wrong answer.” Does anyone really believe that GameStop’s true value was its artificially inflated price in February 2021?
While Keynes was writing back in 1936, the reality remains similar to this day. Wall Street is a beast that ought to be tamed, not fed. Keynes proposes a way to do this, a solution gaining traction with Congressional Democrats: a financial transactions tax to discourage rampant speculation. The proposal seems more necessary in light of what Professor Fligstein told me: “finance is just one of those places where you depend on people not getting it.”
Just as a monetary policy that harms workers is an unrealistic way to reduce inequality, so too is the promotion of day trading. Both are propositions ostensibly aimed at closing the economic gap that will instead only hurt the ones they claim to help. How to solve inequality is a complicated question with a variety of valid answers. Two responses we can immediately rule out, however, are hurting workers and giving away tickets to a casino. In practice, these two views form a Trojan Horse. They are two sides of the same coin: ultra-right-wing ideas masquerading as liberal ones.
It’s unclear why self-proclaimed progressives and populists are advocating in favor of these ideas. Perhaps they are simply mistaken or ill-informed. More apparent, however, is why conservatives are in favor of them. The last Federal Reserve chair appointed by a Democratic president, Janet Yellen, came under heavy fire from Republicans for pursuing low interest rates. Congressman Jeb Hensarling, the chair of the House Financial Services Committee at the time, said, “if we are not careful, we may wake up one day to find our central bankers have instead become our central planners.” And in the aftermath of the GameStop situation, Donald Trump Jr. tweeted out, “this is what a rigged system looks like, folks!”
This is not just guilt by association. Individuals in the conservative movement are promoting these ideas because it achieves their political goals: reducing the role of government, promoting finance and Wall Street, and elevating capital over labor. It aligns with their vision for the future. For progressives to take up this mantle, though, is confounding. These ideas represent the antithesis of what the Democratic Party should be about.
Though there is a grain of truth in these two arguments, perhaps their biggest flaw is that they miss the big picture. Huge public policy interventions will be necessary in order to cure the disease of inequality. Neither critique has an answer for this. The solution to combating income and wealth inequality lies not in an anti-worker monetary policy or large-scale financial investment, but instead with the progressive taxation of wealth, a stronger social safety net, and the promotion of union power. Until we recognize this, pseudo-progressivism will continue to live on.
Featured Image Source: Microsoft