David Malpass wrote in the September 2, 2013 issue of Forbes
President Obama has an opportunity to transform the
country’s economic course when he chooses a Federal Reserve chairman to replace
Ben Bernanke. While the rich have seen big increases in their share of income,
the nation’s inflation-adjusted median income–the middle of the middle
class–has been declining sharply.
This is harmful and largely the fault of expansionary
government. The solution is for the President to downsize, with a new direction
for the Fed as a timely starting point.
In his July 24 speech in Galesburg, Ill., President Obama
said he’d like to stop the slide in middle-class living standards: “The average
American earns less than he or she did in 1999 … reversing these trends has to
be Washington‘s highest priority.”
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The President is right about that. The record is terrible,
and the trends need to be reversed. From 1999 through 2007 the real median
household income fell 1%. It fell another 4% during the 2008-09 recession. And
then, incredibly, the real median income fell again during the recovery,
dropping an estimated 5% in 2010-13.
Rationalizing this as the “new normal” diminishes the past
achievements of our economic system. Normal policy increases jobs, growth and
real incomes, but we’ve gone backward. Unemployment was still over 7% in
July–14% if workers who are underemployed or too discouraged to job-hunt are
counted.
The poor performance is the result of policies that seem
designed to make the rich richer and leave the middle class stagnant and more
dependent on government. While massive growth in government spending is
presented to the public as income redistribution, the reality is even worse.
Much of the spending ends up in the greater Washington area, which has one of
the highest and fastest-growing median incomes in the nation.
The Fed manages what has become the biggest transfer program
to the rich, channeling cheap credit to the government and big business. It
comes at the expense of small businesses, where most of the entry-level jobs
are created. Black teen unemployment stood at 41.6% in July, a stark challenge
for the Fed, which has a mandate to achieve maximum employment.
Once a champion of market prices, the Fed is setting
short-term interest rates artificially low. This distorts the economy and
markets, keeps the dollar weak and increases commodity prices. That benefits
the rich, who own and trade commodities, but hammers average Americans, who
need low prices and can’t hedge against asset price inflation. The Fed’s policy
of lowering long-term interest rates helps the rich even more–they do most of
the long-term borrowing, using their high incomes and valuable assets as
collateral. The burden falls on the retirement funds and savings accounts of
the middle class.
As the President considers candidates for the Federal
Reserve, at stake is the current policy of transferring income and wealth from
the middle class to the rich. The theory is that a bigger government and an
interventionist Fed are somehow reducing the maldistribution of income–”making
the rich pay their fair share.” This ignores history, recent performance and
the reality of the global economy: The income and wealth of the rich will move
toward lower tax rates and strong and stable currencies, burdening the middle
class with their government’s debt.
It’s Wall Street that’s cheering the loudest for Bernanke’s
successor to keep the status quo–massive bond buying, promises of low future
interest rates, high commodity prices and currency volatility to boost trading
profits. The risk from an immodest Fed is that it will remain the center of
attention, dominating finance and markets. The Fed and its chairman aren’t
supposed to be that consequential. Their duty is to keep the dollar and prices
relatively stable, facilitating maximum employment.
The President has an opportunity to guide the U.S. economy
in a better direction by downsizing the Fed in order to create more growth and
jobs and raise the median income.
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