Entitlement to Wealth
How the Federal Reserve System keeps most of us working for a few of us
The word “entitlement” has two meanings in common use: 1) a belief that certain privileges are deserved, and 2) a government program that provides benefits to a specific group of people. This essay is about the second meaning. I’m not a fan of entitlements. However, I believe they should benefit people who need the help.
Our two major entitlement programs, Social Security and Medicare, are facing solvency issues that must be addressed within the coming decade. The Social Security Administration (SSA) and Centers for Medicare and Medicaid Services (CMS) have been very clear about the situation and think tanks have offered abundant analysis and policy alternatives, yet because there are no politically attractive choices to encourage action by Congress, the most likely scenario is a three-alarm fire when the agencies are forced to announce specific cuts to seniors’ benefits. Unless we have managed by then to rediscover fiscal responsibility, full benefits will be paid but not funded — meaning we’ll be printing lots of money.
Since “entitlement” is going to be central to the policy debate regarding who pays and who benefits from these programs, and since the stakes could hardly be higher, both in terms of dollars and people affected, it seems only fair to include an entitlement program with even higher stakes by both measures: the Federal Reserve System (aka the Fed).
Most of us think entitlement programs are limited to the aforementioned programs for seniors funded by the payroll tax, plus Medicaid, Unemployment Insurance, and “welfare” programs such as TANF (Temporary Assistance for Needy Families) or SNAP (Supplemental Nutrition Assistance Program). However, I consider the Fed’s monetary policymaking not just an entitlement but another form of welfare. Why? Because it is just another transfer (redistribution) that clearly benefits some of us at others’ expense. It’s as reliable as any appropriation, and the mechanism excludes most of us just as effectively as any application for a direct welfare payment or benefit.
How is this relevant? Inflation of the money supply is a hidden tax on all of us. It differs from other forms of taxation in two ways: 1) We never get to vote on it and 2) We aren’t told how much it costs us. It has enabled the transfer of trillions of dollars from workers to investors over the last half century, and the Fed is preparing for another round to begin this year.
What most of us think of when we hear “inflation” is the Consumer Price Index or CPI. But that’s just a measure of what we see in the average dollar cost of retail goods and services. Erosion of purchasing power is a problem, but that’s not the whole story. The worst effect is that it hides the capture of productivity gains by the wealthy. The Fed’s mandate is to maximize employment and keep inflation in check. [1] In practice, this means using its enormous power to keep money flowing into the system unless the CPI exceeds its target rate of a 2 percent annual increase. It’s a nearly unlimited letter of credit for US banks.
Presumably, interest rates were held near zero to stimulate hiring as we recovered from the pandemic. Rates went up only after inflation approached double digits, and the Fed stopped raising them as soon as the CPI cooled down to around 3 percent late last year. Most analysts had expected massive layoffs and even a recession, and were surprised that unemployment stayed below 4 percent. Under these circumstances, it made sense to pause tightening measures that would put jobs at risk for questionable improvements to the rate of inflation.
What’s questionable is the assumption that we should lower rates as soon as possible, even though we’re not yet below the target inflation rate and unemployment is about as low as it gets. Officially, the argument for lowering rates is always about jobs — because when things get tough, businesses protect shareholder equity by shedding labor costs. But I suspect there is another hidden reason for this.
Our financial system is designed by and for the wealthy; it’s a heads-we-win, tails-you-lose economy, in which easy money inflates asset prices and tight money raises the cost of public debt — which is borrowed from those who own the assets. No wonder income inequality is on such a tear.
The Fed was created in 1913 to stabilize the banking system but has since been granted more power and relied upon to promote growth of the US economy. Initially and for almost six decades, operations were constrained by convertibility of dollars to gold. Since then, however, the only real constraints on expansion of the money supply have been price inflation and unemployment; when prices rise too quickly or unemployment gets too high, the bank has to apply brakes or extraordinary stimulus, respectively.
In other words, the bank operates at full throttle unless it sees trouble ahead. It is no coincidence that this sounds a lot like “maximize shareholder value.” This system clearly benefits wealthy owners of stocks and bonds who can rely on the Fed to provide an attractive return on their investments. Individuals and families whose livelihood depends on earned income are at the mercy of the financial markets and the less reliable trickle-down effect — from money creators to “job creators” to workers.
From the standpoint of liberty and morality, the foundation of property rights is suspect to begin with. Yet we compound the injustice by subsidizing and borrowing from the wealthy. I’m not in favor of confiscation by direct taxation of assets. But I do think we need to level the playing field with something resembling a free market for money.
What’s fundamentally wrong with fiat money is that it severs the link between savings and investment. Savers are stuck with the central bank’s arbitrary interest rates, which always seem to favor debtors. Gone is any natural connection to consumer preferences. [2] Built into public policy is a bias toward growth.
Of course, this is financed by deficit spending at all levels. Everyone in every household who is capable must work all the time. Those who can actually afford homes and cars and even savings must contribute to share prices, since cash offers negative real returns. The US Treasury borrows trillions each year because their creditors, who also control elections, would rather earn interest than pay taxes.
Balancing the federal budget and taking even modest steps toward slowing the Engine of Inequality run by the Fed is probably a pipe dream and would take decades even in the best case scenario. In the meantime, I propose a corrective mechanism — Social Security Basic Income — to reverse the upward transfer of wealth. As the name indicates, this program would replace the entitlement for seniors with a safety net for all adult citizens. Just as important as the (negative income tax) benefit is the way it would be funded — by eliminating the regressive payroll tax and most tax expenditures, and by raising marginal income tax rates.
As the year unfolds and we await the next hint from Jay Powell as to when the next round of monetary stimulus will begin, I hope a few more of us will see it for what it is — a gift to the entitled ruling class on Wall Street.
[1] In other words, stimulate demand so businesses can afford to hire workers, but don’t let prices get so high that workers will demand higher wages.
[2] In a free market, interest rates would reflect demand for borrowing and supply of savings. Those with urgent investment opportunities or consumption needs would bid for loans from others with surplus capital who are willing to defer their own investments or consumption.
