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One of the good things about the speech that Jerome Powell, chairperson of the US Federal Reserve, delivered at the annual Jackson Hole conference this year was that it did not include the terms ‘inequality’ and ‘climate change’. That was quite something, given how enthusiastically central banks have climbed onto the climate and inequality bandwagon. It was just as well that he did not do so, because barely a fortnight later, it was learnt that the president of the Federal Reserve Bank of Dallas had carried out several million-dollar stock trades in 2020 and in 2021.

Inequality is discussed at two levels: Income and wealth. In the developed world, inequality is taken as axiomatic. Anecdotal and documented evidence are both strong. In a blog post, the Federal Reserve Bank of St. Louis demonstrated that the household net worth of the bottom 50% has taken a progressively longer time to recover from recession-time declines (‘How recessions impact household networth’, 23 November 2020). Three American recessions (1990-91, 2001 and 2007-08) were examined. The top 1% and 10% have had little difficulty in restoring their household net worth within a few quarters, and five years after a recession, their net worth had grown significantly.

When it comes to income inequality, the situation is far less dire. At the annual general meeting this June of the Bank for International Settlements (BIS) at Basel, Switzerland, Claudio Borio, its chief economist, spoke on the distributional impact of monetary policy (bit.ly/3zoolnV). One of his charts clearly shows that the Gini coefficient, the usual measure of income inequality in the developed world, is far less skewed once fiscal transfers are taken into consideration. Yes, fiscal policy is doing its job. But, you would not know that from the public discourse. The real issue is wealth inequality, and the quantitative easing (QE) policies of central banks have a key role in fomenting and perpetuating it.

In its quarterly review published in March 2016, BIS was forthright: “While low interest rates and rising bond prices have had a negligible impact on wealth inequality, rising equity prices have been a key driver of inequality. A recovery in house prices has only partly offset this effect. Abstracting from general equilibrium effects on savings, borrowing and human wealth, this suggests that monetary policy may have added to inequality to the extent that it has boosted equity prices." It’s a pity that its chief economist muted his message at the June meeting.

In July, an economic affairs committee of Britain’s House of Lords published a report (bit.ly/3kqKH41) on the QE policies of the Bank of England and wondered if it was a dangerous addiction. In four pages, the report deals with the distributional effects of QE. While it is cautious about attributing causality to QE’s correlation with income inequality, it’s less bashful on wealth inequality.

Further, the committee urged the Bank of England to engage in a debate about the trade-offs created by sustained QE policies. That is the crux of the issue. Central bankers are unelected powers, in the words of one who belonged to the club. They have also been largely unaccountable for the trade-offs that their policies have created. None of the major central banks in the West has been open to an honest debate on the consequences of their policies for economic, social and political stability over the medium to long-run, now that these policies have been in place for more than a decade. It gets worse. As an add-on, some of them now want a green mandate.

Macroeconomics textbooks tell us that monetary and fiscal policies are tools to manage short-run aggregate demand. Whereas, the long-run aggregate supply curve is vertical. In other words, this curve is not shifted to the right (a supply increase) by cyclical policy tools such as monetary and fiscal policy. Nor should the curve be managed by these tools, for it is a function of other factors like education, skills, geography, war, pestilence and yes, climate.

Therefore, to have central banks take cognizance of climate change induced its impact on potential growth goes against the canons of macroeconomic management. If it is indeed established beyond reasonable doubt that there is a need for policy action, then that is for elected governments to undertake, duly subject to public accountability.

Resources devoted to mitigating climate change or interest rates adjusted in response to the phenomenon’s estimated impact on potential growth have opportunity costs. Developing countries have other pressing concerns, such as infectious diseases like malaria, basic sanitation and hygiene, and the provision of clean water. We need debates and an examination of the consequences of such needs going unmet (or only partially so) and the sequencing of policy priorities before action is taken with respect to climate change.

Such prioritization needs to be subject to public scrutiny. These decisions cannot and should not be left to unaccountable and unelected ‘experts’, whether they are scientists or central bankers.

One silver lining in the overreach of central banks could be that it triggers an overdue debate on their usefulness and limitations, eventually resulting in both central banking and commercial banking becoming boring—and safer for societies.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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