Insights Blog

Wealth and Inequality: What Can the Federal Reserve Do?

December 7, 2023

Schwartz Lecture by Atlanta Fed President Raphael Bostic Provokes Rich Dialogue | In these times of broadening precarity, how can Americans build wealth, economic mobility, and security as they grow older? What can policymakers do to give financially fragile aging Americans a fighting chance, and build greater economic equality? This crucial question was the focus of this year’s Schwartz Lecture, by Dr. Raphael Bostic, president of the Federal Reserve Bank of Atlanta.

Serving as president and CEO of the Atlanta Fed since 2017 (he also worked as an economist for the Fed from 1995-2001), Dr. Bostic has written widely on the need for economic and racial equity. While the Fed’s primary mission is “to pursue price stability and maximum employment,” Bostic said, he interprets the goal as “sustained maximum employment”—what he called “a more inclusive objective.” (You can read the full transcript of Dr. Bostic’s speech here.)

Reflecting on the goal of “maximum employment” and Federal Reserve Bank policies, Dr. Bostic told The Washington Post in 2022, “one of the things that we've learned over the last, really, 10 years or so is that the Federal Reserve was a little too aggressive in slowing growth as we got closer to maximum employment, and there was as risk that maybe we were preventing the economy from including people in terms of employment that we might have otherwise.”

As Professor Teresa Ghilarducci of the New School laid out in opening remarks, the long-term trajectory of economic equality in wealth-building is not promising: median household wealth for Americans over 50 is down; Social Security benefits are down; and retirement benefits are, on average, in worse shape than they were in 1992.

Despite these grim trends, Dr. Bostic pointed to some hopeful progress in recent decades, particularly before the COVID-19 pandemic. In the late 2010s, preceding pandemic, Black and Hispanic unemployment reached all-time lows, and their disparities with white unemployment decreased, according to Dr. Bostic. In this same period, Black workers made significant economic gains. Also promising were gains in educational attainment for Black and Hispanic workers, “far outpacing” overall rates between 2010 and 2020. This progress was soon stifled by the tidal wave of COVID-19, which reversed many of these gains and hit Black and Hispanic communities especially hard.

Building Economic Mobility and Resilience

Toward the larger aim of building “economic mobility and resilience,” Dr. Bostic stressed the importance of creating maximum sustainable employment as a primary path to reducing America’s widening wealth inequality. Monetary policy, while constrained in its role, can help prod toward that “inclusive objective” of creating “gainful employment in a job that is consistent with their full potential,” Dr. Bostic noted.

While constrained in its mandate, the Federal Reserve Bank connects with other policymakers to find workable solutions that increase economic mobility and resilience in the communities they serve, Dr. Bostic said. But since many of the ideas and solutions needed are beyond the authority of the central bank and monetary policy, Dr. Bostic challenged other policymakers and leaders to collectively step up to find effective and lasting solutions that reduce wealth inequality in this and future generations.

One example Dr. Bostic described from his region: with assistance from the Federal Reserve Bank of Atlanta’s “Advancing Careers” team, a bi-partisan initiative in Florida helps address the “benefits cliff” that can discourage many poor people from moving from public aid to more gainful employment. These benefits cliffs cut aid when recipients earn money, often creating a treadmill that keeps people poor instead of building assets to climb out of poverty.

In this initiative, recipients in Florida’s children's health insurance program (CHIP) can earn more while keeping their benefits so they can build self-sufficiency, “tiding people over while they get better off,” Dr. Bostic described. The Florida initiative, he said, “demonstrates that, even in today's hyper-charged political environment, policies to mitigate benefits cliffs are achievable and, in some cases, uncontroversial.”

The Atlanta Fed “did not lobby for this policy shift,” Dr. Bostic pointed out. “Rather, our tool allowed policy makers to get objective information that informed their thinking about the issue and ultimately led them to pursue a policy change.”

Big Structural Challenges

Despite such promising initiatives and some hopeful short-term trends prior to the pandemic, longer-term structural challenges are posing big obstacles to progress in economic equality, wealth-building, and resilience.

For the bottom 90% of households nearing retirement, wealth has declined since 1992, according to a forthcoming research paper by SCEPA director Teresa Ghilarducci, research associate Jessica Forden, and former associate director Siavash Radpour, now assistant professor of economics at Stockton University. In fact, they found, the only source of wealth helping this group is Social Security.

Even with policies and tax breaks to promote more savings, SCEPA’s team found, the share of the bottom 50 percent having any retirement account barely budged in 20 years: 46 percent in 1992 and 47 percent in 2016. The middle class—the next 40 percent in the economy—suffered in this same period, with the portion holding retirement savings sinking from 85 percent to a low of 71 percent.
Analyzing 20 years of data, the SCEPA researchers observed that “the bulk of working-class wealth is government social insurance.” Outside of Social Security, most wealth-building institutions in the U.S, they concluded, “are failing the typical American.” For most Americans who are nearing retirement age, wealth “primarily comes from social insurance—Social Security—not stocks and bonds held in retirement accounts and not, contrary to popular opinion, home equity.”

Confronting Obstacles

In his closing remarks, Dr. Bostic acknowledged, “a consensus around the best ways to address disparities remains elusive.” Inequality in America, he stressed, “has been well over a century in the making. It won't dissipate quickly. There is much to do, and much can go wrong. But I'm optimistic because we're having the right conversations, smart people are doing important research and practical work, and there is a real appetite for change.”

Alluding to the scholarly crowd, he added, “researchers like you have a vital role to play in marshaling evidence so that policy is informed by sound information rather than stubborn misconceptions.”

After Dr. Bostic’s talk, a panel of these scholars weighed in. On the matter of wealth inequality, Professor Ghilarducci asked, “is the Fed doing enough?”

“No,” responded Darrick Hamilton, founding director of the Institute on Race, Power and Political Economy at the New School. Reflecting on Dr. Bostic’s earlier remarks on inflation and inclusion, Hamilton added, “the Fed is not doing enough,” and its focus on inflation “is overemphasized at the expense of ensuring there is greater inclusion in the economy.” Beyond basic employment, said Hamilton, “there needs to be an emphasis on good jobs.” The Fed, as “the people’s bank and the bank of banks,” can help prod “distributionally better outcomes,” he argued.

Panelist Tony James, co-founder of the Partnership for Education Advancement, offered a different view: “I’m all for the Fed erring on the side of jobs,” he said, but is sensitive to the idea that “inflation is more painful than you know for people at the low end of the income scale.” James contended that recent analysis by the Fed suggest that income rises from the 2010s are now gradually being reflected in wealth shifts.

Meanwhile, labor economist Kate Bahn, research director of the Urban Institute’s WorkRise, noted it is “huge” and “major” that the Fed is “recognizing that wealth inequality is bad for the economy.” In the labor market, this inequality “is not some incentive for people to work harder and to move up,” Bahn said. “It’s actually a constraint and a barrier to people being able to do that.” Beyond maximum sustained employment, Bahn emphasized the importance of worker mobility and job quality. “There is evidence that unions result in wealth-building power, particularly for workers from marginalized groups,” she said. “The ability for workers to exercise rights … [and] to be protected against retaliation through unions is huge. It changes the dynamics of how the economy functions.”