Tag Archives: Inequality

New FED Mandate – Equality

The Federal Reserve is “governed” by a Congressional mandate:

  • Maximize employment.
  • Keep prices stable.
  • Retain moderate long-term interest rates.

I propose another:

  • Minimize income inequality.

Now, there’s a problem with all of these mandates. The FED has but three primitive tools with which to accomplish their goals.

  • The Discount Rate, that is, the oft stated “interest rate”.
  • Banking reserve requirements, what percentage of deposits banks are required to retain to substantiate their loans.
  • Open market activity, buying and selling of treasuries like the Quantitative Easing they did during the 2008 Financial Crisis.

So, what new (or existing) tool can Congress give the FED to help it with this new “Min- Inequality” mandate? How can the FED do its work with only a throttle/brake (interest rate), a bottle of NOX (QE),  and seat belts (banking reserve)?

If we postulate that the three main drivers of income inequality are corporations that:

  • Pay their executives and officers far more than they are worth, and pay their employees far less than they are worth.
  • That they distribute the income of the company’s business to shareholders rather than a larger portion going to employees (as wage, salary or shares).
  • And that they use net income to buy-back shares of the company from the stock market (which boosts stock prices).

Then those are the behaviors we want to change.

These are therefore the leverage points we can use:
1) Corporations borrow money from banks to fund growth.
2) They borrow money from investors as bonds to fund growth.
3) And corporations issue additional common or preferred stock to fund growth.

We would need to give the FED the power to throttle each of these corporate growth behaviors. With me so far? For each of these corporate expansion tactics we’ll add an inequality tax. This tax will be a calculation of the highest paid employee divided by the lowest paid employee — and that then divided by 100.

   CEO    ÷ low wage ÷ (adj)
5,000,000 ÷  50,000  ÷  100  = 1.00

The FED will now be given additional power, a number the “Inequality Quotient” IEQQ, by which they can lower the inequality penalty or raise it.

With the FED IEQQ number set to 1.00, a corporation with the above inequality metric would have to pay 1% higher interest rate to borrow money from any bank. Would have to pay 1% more in bond interest for any bonds they issue. And they would have to pay 1% gratuity tax on any new shares they offered.

   CEO    ÷ low wage ÷ (adj)
5,000,000 ÷ 50,000   ÷ 100 * (1.00 FED IEQQ) = 1.00%

All funds collected would go into — Social Security!

Simple right? Now, how do we convince Congress that this is important and that this (or a version of it) will work?

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A tale of two billion dollars

A monetary story

Let’s do an experiment. First we’ll hand out bundles of 500 one hundred dollar bills to wealthy couples who own expensive homes and drive expensive cars. We’ll do this until a  billion dollars is spent. 20,000 wealthy couples will have been given fifty grand as gifts – gratis.

Next we’ll do it all again but this time we’ll target a different class of people.

This time we’ll visit any area that has been hardest hit by poverty, unemployment, off-shoring of jobs, etc. We’ll search out mothers and or fathers with a child or two in tow. If they live near the poverty level we’ll hand them $1,000 without a blink. One billion dollars gifted out in $1,000 increments. A million recipients.

Six months pass. We call a random 100 of the wealthy couples. We ask them how much, if any, of the money is remaining. We find out that in nearly every case, the money had been invested in some brokerage or investment account. They’d taken the gift and saved it.

We next called 1000 of the poor families that we’d given $1,000. Again we ask how much, if any, of the original gift remained. We find that rarely was any of the money was left; they’d spent every cent.

In this experiment two billion dollars was injected into the economy. The first billion, that gifted to the rich, was effectively lost, sequestered into bank or investment accounts. That first billion vanished from the economy. Eventually it might return, but for now, gone.

The second billion drove the economy. For the most part every dollar gifted to the poor was returned to the economy by immediately being spent. That billion dollars began to circulate as soon as we walked away from handing it out. Wherever it was spent it invigorated the local economy. That billion dollars had a direct and immediate impact on the economic health of the nation.

Now a rationalization. To the first part we’ll switch out the gifts to the wealthy and replace them with tax breaks, loopholes that are given to the wealthy. To the second let’s just call it what it really is – it’s welfare.

Lesson learned? To stimulate the nation’s economy, to drive the velocity of money to increase the liquidity of commerce should we hand gobs of cash to the rich or support the working, struggling poor??