In the Shadow of Davos, Central Bankers Go Rogue — and Rational

We’ve had quite a show up in the Alps this week, the first in-person gathering of the world’s mega rich since Covid hit. The occasion? The annual World Economic Forum at the Swiss resort of Davos, an ever-so-sober gathering that has an assortment of global deep thinkers sharing their wisdom with deep pockets ever eager for policy ideas that don’t involve sharing their wealth.

Also on hand, in person and remotely: a collection of the world’s most stalwart egalitarians, advocates ranging from activists with the Patriotic Millionaires to analysts at the anti-poverty powerhouse Oxfam. These analysts, on the eve of Davos, released gripping new data on how billionaires in food and energy have been swelling their fortunes — at consumer expense.

Summed up the Oxfam analysis: “The pandemic – full of sorrow and disruption for most of humanity – has been one of the best times in recorded history for the billionaire class.”

That billionaire class and those dedicated to its care and feeding have been swarming all over Davos this week. The over 2,000 registered attendees include 612 corporate CEOs, several hundred additional top corporate officers, and packs of luminaries from the worlds of high-finance, media, and academia.

All these power suits are doing their Alpine best to show how much and how sincerely they care about the challenges that face humanity. The World Economic Forum agenda showcases discussions on everything from outfitting Africa with patent-protected medicines to identifying climate “blind spots” and preventing a global food collapse.

But these global movers and shakers, in the process of doing their best, never seem to get around to confronting the continuing concentration of the world’s income and wealth. Hardly anyone on the Davos attendee list appears eager to even acknowledge that challenge, let alone debate how best to meet it.

And that stance has turned this week’s ideological battling at Davos into a nasty artillery duel, with each side heaving news releases into the fray, hoping for direct hits that make it onto the world’s front pages. Trust us, exhort the Davos elites, we care. Let’s trim the rich down to something close to democratic dimensions, counter the egalitarians. They’ve enfeebling our future.

Who figures to prevail in a battle this brutally simple? The deep pockets of the World Economic Forum have at their disposal the finest public relations and imaging talent lots of money can buy. The egalitarians, for their part, came to Davos with high hopes. But then something strange happened. Those egalitarians preaching “tax the rich” suddenly found themselves with a totally unexpected new ally: the high command of the world’s central bankers!

No, some impish egalitarians did not dress up as power-suited central bankers and hand out counterfeit news releases. The reality may actually be more bizarre: The world’s central banking nerve center is now calling for a clear pivot away from policies that let the rich get richer.

That call came last Thursday, just a few days before the opening of Davos 2022, when the “bank for central banks” — the Basel-based Bank for International Settlements — released a carefully argued 100-plus page report that essentially endorses the basic change agenda egalitarians brought to Davos.

The paper’s nearly impenetrable title — Inequality hysteresis and the effectiveness of macroeconomic stabilization policies — gives no clue to its political significance. This analysis doesn’t come from some obscure Bank for International Settlements researcher. The lead author, Luiz Awazu Pereira da Silva, serves as the BIS deputy general manager. His four co-authors include Benoît Mojon, the head of the BIS Economic Analysis division. And the foreword for the paper comes from the top BIS executive, the University of Chicago-trained general manager Agustín Carstens.

Inequality, this Bank for International Settlements team observes, is holding us back. The economic profession’s old conventional wisdom — that societies have to choose between equality and efficiency — no longer holds sway. Modern economists, the new BIS paper notes, have convincingly documented how “inequality diminishes growth and productivity.” They’ve provided convincing “evidence that reducing inequality can increase productivity and average standards of living.”

The new BIS research extends this understanding, in an analysis that revolves around what BIS general manager Carstens styles “a new facet of inequality: its persistence or ‘hysteresis’ after recessions.”

“Inequality metrics,” the new BIS paper shows, “generally deteriorate persistently after recessions,” largely because rising unemployment “tends to hit poorer workers harder” while “depressing the bargaining power of those who have kept their jobs.”

“Countries and regions with higher levels of inequality typically experience deeper recessions,” adds the BIS analysis. “In other words, excessive inequality serves to erode macroeconomic stability.”

And what happens to societies once they lose that stability? Inequality leaves them less equipped to clean up their economic messes, either through traditional fiscal or monetary policies.

On the fiscal side, the analysts note, governments over recent decades “have made personal income taxation less progressive, meaning that taxes on high-income households have fallen more quickly than taxes on low-income households.” At the same time, unemployment insurance has been replacing less and less of what jobless workers used to be earning. These two trends have left “fiscal policy less countercyclical and hence less capable of cushioning fluctuations in economic activity.”

The result? Recessions run “deeper in countries (and states) with higher levels of inequality.”

Meanwhile, amid rising income inequality, monetary policy moves start stumbling as well. Interest rate hikes become “less effective” as economic stabilizers, since inequality “determines how strongly consumption and aggregate demand will respond to monetary policy.” The more of it, the less impactful interest rate changes will be. The high-consumption rich, the BIS paper explains, will always be “largely insensitive” to interest rate increases.

The core message for central bankers in all this: “Greater income inequality implies deeper recessions, reducing the effectiveness of monetary policy. Therefore, policies that reduce income inequality could imply, as a side benefit, a more stable economic cycle both directly and indirectly, by restoring the effectiveness of monetary policy.”

“Once upon a time,” as the European University Institute’s Jean Pisani-Ferry observes in his preface to the new BIS report, the world had “more pressing problems for central banks to deal with than income and wealth distribution.” No longer.

“To pretend that central banks can be indifferent to distributional concerns,” sums up Pisani-Ferry, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., “is the moral equivalent to saying that males can be gender-blind.”

And how should modern economies address these “distributional concerns”? Reports from prestigious economic bodies typically get hazy and tentative when they venture into gameplans for reversing inequality. This new BIS Inequality hysteresis paper, by contrast, could hardly be more precise.

Nations, the paper declares, need to reconsider their tax policies “more forcefully for their redistributive consequences.” That means “a return to the more progressive tax system that was in place after World War II, with marginal tax top rates that were much higher than today.”

How much higher? In the United States, a wealthy couple filing jointly currently faces a 37 percent federal tax on earned income over $647,850. For most of the two decades after World War II, taxpayers faced a 91 percent tax rate on income at that comparable level. Those years of record-high taxes on America’s rich, not so coincidentally, saw the United States become the home of the first mass middle class in the history of the world.

But the Bank for International Settlements gameplan for greater equality doesn’t stop here, with the income tax. The BIS Inequality hysteresis paper also calls for “more progressive inheritance and real estate taxation” and suggests that a “recourse to a wealth tax” would allow us to reduce other existing tax levies that tend to privilege the already privileged.

And the BIS paper goes on to recognize that “the preservation of real income during recessions” requires as well “looking at pricing practices related to competition policies in various markets.” We need, the BIS paper declares, to reinforce “adequate regulation and anti-trust laws.” The price gouging we’ve seen during the pandemic “provides a good illustration” why we need this reinforcement. With “specific supply bottlenecks” leading to “sudden price rises for much-needed services used by low-income groups,” nations should be endeavoring “to incentivize a pricing behavior that avoids any oligopolistic or opportunistic re-pricing of basic services.”

“State-contingent stronger competition standards,” the Inequality hysteresis paper explains, “could help limit the windfall gains that accrue to producers when prices peak.”

Higher taxes on high incomes. Stiffer taxes on inheritances and grand properties. A wealth tax. A meaningful offensive against corporate price gouging. If these sorts of policy moves sound familiar, they should. They reflect exactly the sorts of steps egalitarian-minded advocacy groups and progressive institutions have spent the week of Davos working to advance.

These groups and institutions, a coalition that ranges from the Fight Inequality Alliance to the Institute for Policy Studies, have re-released a Taxing Extreme Wealth report from January that shows how a modest annual wealth tax on the world’s millionaires and billionaires “could generate upwards of $2.52 trillion a year,” enough to lift 2.3 billion people out of poverty.

This Tuesday, Oxfam added into the mix brand-new research showing “how billionaires and corporations in the food, energy, pharmaceutical, and technology sectors are reaping huge rewards at the same time as the soaring cost of living is hurting so many worldwide.” Oxfam is calling for a 90 percent tax on excess profits “to capture the windfall profits of corporations across all industries,” special one-time solidarity wealth levies on new billionaire wealth, and a permanent wealth tax on the world’s greatest personal fortunes.

All these proposals echo the sentiments and policy suggestions that course through the pages of the Bank for International Settlements BIS Inequality hysteresis analysis. What should this meeting of the minds tell us? Simply this: The case for our stunningly unequal status quo has totally collapsed. Outside of billionaires and people starstruck in their presence, rational people mostly all agree we need to make our Earth a much more equal place.

Maybe one day even the denizens of Davos will get that message.

Sam Pizzigati co-edits Inequality.org. His latest books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Readers can access his earlier book, Greed and Good: Understanding and Overcoming the Inequality that Limits Our Lives, online at Inequality.org. Twitter: @Too_Much_Online.