- As American institutions address what they can do to combat racial inequality, the Federal Reserve has an opportunity to address the economic inequality that Black and brown Americans face.
- The struggle for economic inequality has always been an aspect of protests for racial equality, and for decades Fed policy has failed to tackle the economic disparities in the country.
- By fighting for true full employment and more effectively supporting economic activities that support Black workers, the Fed can help to close the gaps.
- The Federal Reserve has the tools to efficiently address this, but has largely failed to do so.
- Matthew Zeitlin is a writer in New York City.
- This is an opinion column. The thoughts expressed are those of the author.
- Visit Business Insider’s homepage for more stories.
What can the Federal Reserve do to fix racial inequality in the US?
This may seem like an odd question — the protests that have gripped the country following the death of George Floyd and other Black people at the hands of police have so far focused, rightly, on the police or on far-reaching reforms to American policing.
But demands for changes in economic and monetary policy have been long intertwined with the various iterations of the Black freedom struggle, up through and including the Civil Rights movement. And those economic disparities are very much still present, even if they aren’t at the forefront of the most recent, markedly multiracial protest movement.
Just because a more inclusive economic system won’t necessarily stop police from treating Black people unfairly does not mean that the most important economic policy actor doesn’t have a responsibility to address glaring racial inequities.
The Fed has historically failed to tackle racial disparities
The Fed’s mandate exists at a high level — stable prices, maximum sustainable employment — and does not obviously call on it to proactively address racial disparities.
But the labor market itself is unequal, meaning the Fed policy has disparate effects on different racial groups, most notably Black people.
Before the coronavirus-induced lockdowns, the Black unemployment rate had hit its lowest recorded level ever, 5.4%, but this was still noticeably higher than the overall unemployment rate of 3.7%.
And as the pandemic shutdowns have decimated employment, this gap has become more apparent. As the unemployment rate unexpectedly fell over the past two months, the Black unemployment rate only ticked down to 15.4%, compared to just over 11% overall.
It’s precisely the labor market’s inability to provide equal employment to Black people the same way it had to other groups that has long motivated Black and other civil rights activists to put jobs at or near the center of their advocacy. What’s now commonly referred to as the March on Washington, where Martin Luther King, Jr. gave his “I have a dream” speech was really the March on Washington for Jobs and Freedom and when King was assassinated in Memphis in 1968, he was there in support of a strike by Black sanitation workers.
While many of the formal barriers to Black employment have fallen thanks to the efforts of those civil rights activists, the persistence disparities show that the struggle for “jobs and freedom” is still active.
“That impulse and desire for material provisioning is going to express itself differently, a job or income is a different way of expressing that same impulse, people want to survive and material provisioning is a core aspect of freedom,” David Stein, a historian at the University of California, Los Angeles told Business Insider.
Stein traced this history from the formerly enslaved demanding land after the Civil War in order to be able to support themselves through agriculture, through the demands for jobs from civil rights leaders like Bayard Rustin and A. Philip Randolph.
Even today, the Federal Reserve’s mandate to pursue maximum employment along with stable prices is partially thanks to the efforts of Coretta Scott King, the political activist who was married to Martin Luther King, Jr. Her efforts to establish a right to a job or income culminated in the Full Employment and Balanced Growth Act, typically known as Humphrey-Hawkins.
But despite its mandate to pursue full employment, the bill is still seen as something of a road not taken by many progressive activists.
“Congress was closer to implementing a job guarantee and a legally enforceable right to a job,” Nathan Tankus, research director of the Modern Money Network said. “A combination of [then President Jimmy] Carter and economists saying it was unworkable got that kind of thing stripped out of Humphrey-Hawkins, made it arrive as a dead letter.”
And following on the heels of that missed opportunity to more fully pursue economic — and thereby racial — equity, Federal Reserve Chairman Paul Volcker jerked up interest rates in an effort to curb inflation, generating unemployment over 10%, with the unemployment rate for Black Americans rising to over 20%.
“The economic devastation wrought by Volcker and the deep recession of ’79 through ’82 that layered atop ten years of economic misery especially in Black and Latinx communities,” Stein said.
Following Volcker’s example, the Fed over the next few decades tended to err on the side of tamping down inflation, even if it meant choking off growth. But in the mid-1990s Chairman Alan Greenspan decided to let the economic expansion run its course, betting that inflation would stay tame because of technology-induced gains in productivity that had not yet shown up in official statistics. Not coincidentally, Black unemployment hit its then-lowest level ever in April 2000.
But Greenspan was famously a not particularly systematic or rule-bound thinker and in order for the Fed to orient itself around addressing racial disparities will require systemic changes in how it operates.
A new way of thinking
While the Fed and Congress’s challenge now is trying to cushion the economy from the economic devastation wrought by coronavirus, it has, in the last few years, at least started talking about how different groups, including different racial groups, experience the economy. This was a departure for the Fed, which, according to analysis by Georgetown law professor Emma Coleman Jordan did not mention race once in its 2007 and 2008 transcripts from meetings of its Board of Governors.
But while Powell was a notable dove last year — pushing for a series of interest rates cuts throughout 2019 — and has implemented unprecedented measures to keep the economy going in face of the coronavirus shock, his commitment to running the economy hot enough to materially close the economic disparities between Black Americans and the country more broadly is still untested.
“Would Powell and company tolerate inflation getting to 3%, 3.5%if there was evidence that the unemployment or wage rate disparity was falling under the pressure? How much were they willing to let concern about disparities carry them forward with overall inflation?” Tankus asks.
Jared Bernstein, an advisor to Joe Biden when he was Vice President and well known progressive economic policy thinker, and Janelle Jones of Groundwork Collaborative have proposed that the Fed explicitly target Black unemployment when it makes interest rate decisions.
Both Tankus and Stein recommended that the Fed, even if it weren’t to completely overhaul how it does monetary policy, could at the very least expand its institutional capacity to look at race more closely. Both pointed to efforts by the Minneapolis branch of the Fed, but thought the central bank as a whole could go further.
“I would tell them to hire 1,000 historians and sociologists,” Tankus said. “Their operational budget is unlimited, they can certainly do full employment for Black history-centric social scientists. The gains for them are much higher than hiring another macro-economist.”
Tankus said that changes around the edges of the Fed’s current framework — having interest rates stay lower for longer, making its municipal liquidity facility more accessible for cities that have suffered white flight into neighboring areas — would also have outsize benefits for minorities.
“That’s where I would look,” Tankus said, “they don’t have the basics of a racial lens for understanding how the US economy works.”
He also suggested that the Fed could provide unlimited credit lines for state and local governments at zero interest rates and purchase IOUs issued by the states. This would, Tankus explained, ease funding pressures on the state and local governments who are facing harsh state and local austerity thanks to coronavirus hammering tax receipts.
This could make demands around reshaping local budgets to do less policing and provide more social services easier to achieve, instead of just reallocating a smaller budget.
But while it’s clear that the Fed can do more to help heal some of the economic inequities that Black Americans face today, there’s a limit to what these goals can do to address the source of the current movement.
These economic disparities are “a constant and Blacks are not perpetually in protest over those conditions. But violent anti-Black police action invariably leads to Black protest,” William Darity, a Duke economist and one of America’s most prominent advocates for a suite of radical economic policies to help out African-Americans, including a job guarantee, “baby bonds,” and reparations for slavery.
“Reparations designed to eliminate the racial wealth gap are unlikely to eliminate police malfeasance. White supremacists in the police force will not discriminate between black folk on the basis of their wealth levels. While higher levels of wealth may facilitate negotiating the criminal justice system more effectively, higher levels of wealth among blacks will not erase the high degree of racist bias in policing.”
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