Hard money is a terrible way to fight the racial wealth gap. By Matthew Yglesias

Hard money is a terrible way to fight the racial wealth gap. By Matthew Yglesias

Between February 20 and March 20 of last year, the S&P 500 index lost nearly one third of its value as it became clear that efforts to prevent the SARS-Cov-2 virus from spreading globally had failed.

Since a relatively small number of rich people own the vast majority of the stock in the United States, this was a huge negative shock to the wealth of the wealthy, but it had little impact on most people’s net worth.

A very foolish person might characterize that month as a great era for economic equality in the United States. Or a right-wing troll might say that progressive concern about economic inequality is mistaken because by progressives’ logic, March 2020 was a great success story.

Of course in the real world, no progressive saw it that way. But a fresh paper from the staff of the Federal Reserve Bank of New York argues with a straight face that stimulative monetary policy is bad for racial justice on essentially these grounds. Specifically, Alina Bartscher, Moritz Kuhn, Moritz Schularick, and Paul Wachtel argue that while stimulative monetary policy reduces the Black/white employment gap, “an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value.”

I’m not here to quibble with the empirical work. But the overall framing and analysis of the paper underscores the extent to which slapping a superficial racial equity lens on everything under the sun can generate some very perverse conclusions.

It matters why stocks are moving

Civil Rights plus Full Employment equals Freedom

The stock market can go up or down for different kinds of reasons, including pure speculative mania. But in terms of a policy-driven shift in the stock market, you have your good reasons and your bad reasons.

A good reason for the stock market to go up would be because investors have raised their estimate of the economic growth rate of the American economy, and more growth equals more profits.

A bad reason might be some change that gives capital the upper hand vis-a-vis labor, allowing corporate America to grab a larger share of the pie without faster growth. Or, since the stock market contains today’s big corporations but not tomorrow’s hypothetical startups, an increase in monopolization could boost stocks while being bad news for the economy.

“Accommodative monetary policy,” as they call it, boosts the stock market because it boosts growth. This is the rising tide lifting the boats.

Now it’s true that a rising stock market raises wealth inequality, because if you’re one of the large number of people with little-to-no wealth, then the increase in asset prices doesn’t help you. As I wrote in “The Racial Wealth Gap is a Class Gap,” the racial lens adds very little here. Black people are overrepresented among the poor and underrepresented among the rich, so something like a stock market boom that mostly benefits rich people is going to exacerbate a “racial gap” without actually exacerbating a gap between two similarly situated people, regardless of race.

By contrast, race actually matters a lot for the labor market side of the analysis.

High unemployment is really bad for Black America

One nice thing about the stock market is it genuinely cannot engage in racial discrimination. A Black person’s GameStop share is worth exactly the same amount as a white person’s GameStop share. It’s kind of beautiful in that regard. The racial imbalance just consists of the fact that white people are richer so they own more shares.

The labor market is not like that.

Instead, there’s quite a bit of evidence of various kinds of racial discrimination. Some of this is what economists call “statistical” discrimination (basically stereotyping) and some is “in-group bias” or even “inaccurate statistical discrimination.” A famous field experiment did an audit using otherwise identical resumes featuring either stereotypically Black or stereotypically white names and found clear evidence of discrimination. David Neumark and Judith Rich have a paper where they argue that some of the literature on this is biased toward finding more discrimination than there really is, but they still find discrimination.

At the same time, you see persistent differences in big picture labor market outcomes. A snapshot of the labor market at any given point in time shows the unemployment rate for Black workers is nearly double that for similarly educated white workers.

Consequently, while the aggregate Black/white unemployment gap is somewhat inflated by differential educational attainment, correcting for that doesn’t come close to closing it.

Now here’s the key trick. The ratio of Black to white unemployment stays similar over time, but because the overall amount of unemployment is always changing, the gap itself changes a lot over time. In particular, it soars during recessions and narrows during recoveries.

The basic picture is that intense competition diminishes discriminatory impulses. When workers are plentiful, it’s easy for hiring managers to indulge their biases or prejudices at little cost to themselves. But when competition for workers is fierce, discriminatory behavior is costly.

And the longer the boom goes on, the better the news for marginalized people. After all, a totally non-biased hiring manager might prefer an experienced candidate to one with spotty work history. But your spotty work history might be the result of bias on the part of other hiring managers in the past. By blowing past certain discriminatory doors and creating a low-unemployment situation, robust, full employment monetary policy can make a real impact on structural inequalities in the labor market.

The Fed report is thinking too small

In contrast to my charts, the Fed researchers conclude that “although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small.”

If that’s the answer you get, then you are asking the wrong question. The difference between the labor market conditions of 2011 and those of 2019 is the difference between an 8 percentage point racial unemployment gap and a 2 percentage point gap. Now, I’m not saying the Fed could have waived a magic wand and made those 2019 conditions appear in 2011. But could a more aggressive approach, applied consistently from 2009 onward, have gotten it done by 2018? By 2017? Sure. By 2016? Maybe.

I don’t think we know exactly how fast the return to full employment could have happened with better macroeconomic policy. And obviously “better policy” would’ve had a fiscal policy aspect as well as a monetary policy one. But the Federal Reserve is a big player in determining the pace of labor market recoveries. And it’s plain as day from the charts that the state of the overall labor market is a really big deal for racial justice.

Dismissing it as a small effect is wrong, and characterizing it as counterproductive because it makes the stock market go up is borderline crazy — you might as well say vaccinating people is bad because it increases the racial wealth gap.

Racial justice inquiries need to be more thoughtful

There’s a lot of interest these days in looking at things through a racial equity lens.

But to do that in a way that adds rather than subtracts value, you need to do some actual inquiry into the subject. The reason it makes sense to think about the Fed as being able to advance racial justice through the provision of adequate monetary stimulus is threefold:

We know from the empirical literature that racial discrimination exists in the labor market.

There’s a body of theoretical work going back to Gary Becker showing that robust competition is bad for discriminators.

We can see that tight labor markets reduce the racial unemployment gap, which is exactly what you’d expect to see given (1) and (2).

It’s important to actually take steps (1) and (2) here. There’s a specific problem (labor market discrimination) and a specific reason to think that the Fed can combat it (by creating more competition to hire workers).

The wealth gap analysis, by contrast, is a statistical trick. Rich people own all the stock. Rich people are a disproportionately white group. Therefore anything that is good for the stock market increases the racial wealth gap mechanically. This is not a great state of affairs, but obviously causing recessions to crash the stock market is not a reasonable social justice agenda. You need to actually redistribute the wealth with taxes. But if you insist on taking the whole background structure of wealth in the United States as a given, then you’ll reach the bizarre conclusion that anything that causes stock market crashes (pandemic, recessions, etc.) is a win for racial justice and anything that ameliorates them (vaccines, monetary stimulus) is making things worse. But those conclusions are nuts, and just go to show that this is the wrong way to look at things.