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

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, DC, “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 uneven 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.

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