Banking

Here’s how Biden administration could tackle economic inequality

For all the talk of how President-elect Biden’s top economic advisers will advance economic equality, the team knows well that proposals, ranging from a wealth tax to wholesale overhaul of U.S. health and education policy, will be hard and slow going.

However, inequality doesn’t pause — there was already disastrous U.S. data before the coronavirus pandemic widened the income and wealth gaps into a deeper abyss. Economic inequality is a proven cause o fslow macroeconomic growth and of financial crises.

In fact, the Treasury’s Office of Financial Research recently said that economic opportunity is essential to financial stability. It’s thus well within the ambit of the Financial Stability Oversight Council, which needs to establish an office of economic equality as soon as the Biden administration is open for business.

The office of economic equality I envision would do more than conduct research, also providing an array of policy analytical and advice services to FSOC and all its member agencies.To give it the stature it needs given the critical importance of economic inequality, the economic equality office should ideally be established by statute and run by a presidential appointee, like the OFR’s structure. But any way to get an economic equality office is a good way to begin.

To ensure policy effectiveness, the proposed office’s mandate should be focused on financial policy. If it is deputized also to look at fiscal policy or broader social-welfare challenges, it will stray quickly from the immediate contributions it can and should make to more equitable U.S. monetary and regulatory policy.

I have a long list of projects for the Office of Economic Equality that would make a meaningful, short-term difference. One first-order task should be for the Equality office to review every major regulatory proposal from every member agency with an eye to implications for income and wealth equality.

Since 2012, the current cost-benefit analyses have myopically focused only on big-bank earnings and the regulators’ concept of what ensures financial stability. A keener eye on financial resilience through sustainable, sound financial services would have averted some of the wrenching hardship now faced by millions of Americans and the long-term damage this does to stable, equitable growth.

Secondly and as importantly, the office of economic equality should ensure that new financial services do not just claim to be inclusive; but effectively demonstrate based on rigorous analytics that they are inclusive by ensuring sustainable, sound, wealth-enhancing financial products for vulnerable consumers through the economic cycle in an accessible, transparent and unconflicted way. If inclusion is only promised, but not likely, then FSOC should ensure that rules make the inclusive word equivalent to the including deed.

Next, the office needs to identify financial products and services that could be genuinely inclusive, and work with regulators to eliminate barriers to offering them. What about new charters such as the “Equality Bank” I outlined in 2019?

A new look at risk-based pricing recognizes that many subprime borrowers are actually better bets than nominally prime ones. The Office of the Comptroller of the Currency has just added tax-equity financing to the list of products that can be offered, up to a certain capital threshold. Why not do the same for equality-enhancing financial services so that banks could do more good without doing themselves any harm?

Of course, looking forward will not cure the inequality wrought by policy actions that brought us to this unhappy juncture. So, while the office should prioritize ensuring that future actions do no equality harm, it must also undertake extensive, policy-focused research to understand which financial policies did so much harm to so many for so long without securing either the growth or stability for which they were intended.

This analytical ammunition will give the agencies — none of which wishes to exacerbate inequality — the insights needed to mend their ways.

In 1964, the Great Society included an Office of Economic Opportunity that made significant contributions in a remarkably short period of time. Over time, much of what the OEO created ended up institutionalized as programs in other federal agencies like the U.S. Department of Housing and Urban Development, and the Department of Education. These have made meaningful equality contributions to this day.

An office of economic equality could help us do the same through the all-important channel of monetary and regulatory policy. After all, these are first and foremost about money, and money is the fuel that drives the inequality engine.

Editor’s note: This article originally appeared, in slightly different form, in an email to Federal Financial Analytics’ clients.


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