Why wealth inequality isn’t a bad thing

The phrase “wealth inequality” is fast becoming the mantra of the 2016 presidential election. Concerns over wealth inequality are completely appropriate as it has become a major problem over the past 25 years. However, hearing the phrase constantly spoken has left people a little numb to its meaning. Wealth inequality is not a bad thing.

As a matter of fact, wealth inequality is a healthy and necessary component of a growing economy. An economy that has no wealth inequality will, most certainly, stagnate and die leaving widespread poverty behind. We want and need the right amount of wealth inequality to fuel the creative ambition that leads people to seek a better financial future.

What these politicians mean to say is “exaggerated wealth inequality.” It may seem like a subtle difference, but it isn’t. If a body doesn’t get enough water in a couple of days, it will die. If a body gets too much water in a couple of minutes, it will die. This same relationship is true of most things, yet it is often overlooked. For instance, there is a commonly held belief that drinking alcohol is bad. It’s just not true. Alcohol is good. Excessive alcohol is bad, but unfortunately that’s not the message that most people hear. Those of us whose job depends on paying close attention to Federal Reserve policy have noticed growing evidence that the economy may have been overserved its low rate policy.

Long-term easy money has clearly boosted the assets that the wealthy hold, like stocks and property, while also raising the costs of things that eat up disposable incomes of the middle class, like food and energy. Low rates have also discouraged saving and encouraged risk-taking. When you extend this effect over many years, the economy has a way of sorting out the winners and losers and placing them at separate ends of the wealth spectrum. Low-rate policy, at its core, was meant to be a short-term economic kick to take the edge off of recessions. The last couple of decades it’s been used as a constant counterbalance against the headwinds of fiscal policies that limit growth.

There was a recent paper published by Philadelphia Fed economist Makoto Nakijima, in which he suggests that years of accommodative Fed policy may have exacerbated wealth inequality. Here’s the part that makes me a crazy: The Fed’s words make it seem like their involvement — maybe, just maybe — made a growing problem a tiny little bit worse. Nothing to really blame them for, of course, because it was just a little bit more. The problem is that their part in this process is the very thing that moved the needle from healthy levels of wealth inequality to a toxic corrosive level that’s accompanied by a potential to polarize a society.

This is not a small deal. History shows us that exaggerated wealth inequality has the potential to derail successful societies. To put it more plainly, the Fed’s 10-percent addition to the situation may easily be the thing that created 100 percent of the problem. It’s like this: I know that I can have about four beers in an evening and have a great night with friends and be perfectly fine the next day. I also know that if I have just one or two more, then an otherwise productive Sunday morphs into watching golf on the couch. I often make the wrong decision but it always seems reasonable at the time. I mean, what could one little beer hurt?

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