The Biden-Harris administration has made stamping out racial “inequities” the focus of all its policies. But the government interventions proposed to close these gaps will only “accentuate inequalities for extended periods” of time, according to a recent study.
Days before the 2020 election, Kamala Harris announced a plan to replace equality with equity in government policymaking. Rather than treating people equally, politicians committed to advancing equity would try to assure an equality of outcome between racial and ethnic groups. In one of the many executive orders Joe Biden signed on his first day in office, the president promised an “ambitious whole-of-government equity agenda” to fight “systemic racism.”
This includes the prospect of instrumentalizing the Federal Reserve’s control over monetary policy to equalize wealth across racial categories. His campaign platform, which pledges to “strengthen the Federal Reserve’s focus on racial economic gaps,” states that “the Fed should aggressively enhance its surveillance and targeting of persistent racial gaps in jobs, wages, and wealth” and then report “what actions the Fed is taking through its monetary and regulatory policies to close these gaps.”
The idea has a full slate of supporters, who want to add effecting racial equity to the Federal Reserve’s two existing mandates of “maximum employment and price stability.” Elizabeth Warren, Kirsten Gillibrand, and Maxine Waters introduced the Federal Reserve Racial and Economic Equity Act last year, which instructs the Federal Open Market Committee “to minimize and eliminate racial disparities in employment, wages, wealth, and access to affordable credit.” And Rep. Ayanna Pressley raised the issue with Fed Chairman Jerome Powell during a House Financial Services Committee hearing last Tuesday.
It is, shall we say, a going concern.
These politicians would have the Fed keep interest rates artificially low and the monetary supply growing, based on the Phillips Curve. Jared Bernstein, one of Biden’s economic advisers, believes that lower interest rates and what are traditionally regarded as inflationary policies will juice the economy enough to decimate persistent pockets of poverty.
As it turns out, the policy would backfire, thanks to the law of unintended consequences.
The Federal Reserve Bank of New York tested the impact of a “monetary policy shock” on the black-white racial gap. While such a “policy increases employment of black households more than white households, the overall effects are small” – a mere 0.2 percentage points.
But the “solution” creates two new problems. Low interest rates and inflation punish savers and reward investors by making more capital available and driving people to seek a higher rate of return in the stock market. The study found that a monetary shock would raise stock prices by 5 percent, raising the annual incomes of white people by 200 percent to 300 percent more than those of blacks.
The Fed also made the startling discovery that inflationary policies result in inflation. The proposed policy would raise “house prices by over 2% over a five year period.” That will only deepen the 30-point home ownership gap between whites and blacks. Home ownership accounts for approximately 60 percent of the average household’s wealth.
In the end, the equity-building policy actually “exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value.”
Critical theory’s single-minded focus on “equity” constitutes a four-fold error of collectivism:
- It assumes an individual’s race, sex, ethnicity, or other self-identification category is the most important aspect of his or her identity;
- It asserts that the individual’s well-being is controlled by membership in these discreet groups
- It presumes the individual’s lot in life can be dictated by government intervention; and
- It posits that the individual has been harmed when his or her income, wealth, and living standards increase if other groups benefit even more at the same time, widening the gap between population cohorts.
Measuring “wealth inequality” has its share of empirical pitfalls. But critical theory causes its true believers to advocate for policies that are self-defeating on their own terms.
This is all the more frustrating, since the United States has recent experience in how to improve the status of the poor and minorities. President Donald Trump’s administration did not rely on Fed policy to achieve record-breaking employment for blacks and Hispanics. These results came about through a combination of tax cuts and deregulation, which freed the pent-up creativity and innovation that had been lying dormant under more restrictive policies. While they were active, black and Hispanic wealth grew by 1,100% to 2,200% more than whites, according to the Federal Reserve:
Between 2016 and 2019, median wealth rose for all race and ethnicity groups … Growth rates for the 2016–19 period were faster for [b]lack and Hispanic families, rising 33 and 65 percent, respectively, compared to [w]hite families, whose wealth rose 3 percent, and other families, whose wealth rose 8 percent.
These gains came from a president whom critical theory proponents regard as indifferent or hostile to minorities’ interests. The legislation contained no special provisions to boost “equity” by increasing minority wealth. Yet these policies, which generally tended to reduce the role of government in people’s lives, succeeded because they allowed individuals greater margin to pursue their God-given talents for the service of others.
Perhaps the wisest counsel to reduce racial inequities comes from the Apostle James: “My brothers and sisters, believers in our glorious Lord Jesus Christ must not show favoritism” (James 2:1).
This Acton Institute article was republished with permission.