What’s Happening in the World Economy: Central Banks Gain a Social Conscience

Hello. Today we look at the debate over central banks’ expanding interest in joining the inequality fight, how Asia’s emerging economies are outperforming and why women in Korea are losing out in the workforce.

Federal Reserve Chairman Jerome Powell isn’t alone in his newfound focus on economic inequality.

This chart from the Bank for International Settlements shows a jump in references to the topic by Powell and his counterparts elsewhere.

Equality Concerns

References to ‘inequality’ in central bankers’ speeches have risen

Source: BIS

This shift has triggered a debate about whether monetary policy can really offer much of a solution for societal disparities. Some even say it’s a source of them.

One critic is Charles Gave at the research group Gavekal. He argues easy money doesn’t ensure stronger growth — think Japan — and it often exacerbates wealth gaps by inflating asset prices. Case in point: the S&P 500 is up 48% over the last year, despite the pandemic.

Low interest rates also spur disproportionate price increases for goods that low-income people rely on such as food and energy, Gave says. Since 2002, his “Walmart CPI” measure for the U.S. has risen 77%, compared with 50% for overall consumer prices.

Others are defending the central banks.

Bank of America’s Ethan Harris and his team of economists said in a report Tuesday it’s “bizarre and unfair” to criticize the Fed for creating inequality by stimulating financial markets. The point is that policy makers are using the one key tool they have that aids the less well off — fostering easy financial conditions in the hope that buoys the entire economy, they said.

Agustin Carstens, head of the Bank for International Settlements, offers a more nuanced defense.

Yes, he conceded Thursday, central banks can affect wealth and income in the short term, and prolonged periods of high inflation and recession do disproportionately hurt the most disadvantaged. Policy makers should also be on guard against creating financial imbalances.

But “over the long run inequality is not a monetary phenomenon,” he said. 

It’s for governments to reduce inequality through targeted fiscal and structural policies. The best contribution monetary policy can make to an equitable society is to try to keep the economy on an even keel, he said.

Simon Kennedy

Save the Date

The fourth annual Bloomberg New Economy Forum will convene the world’s most influential leaders in Singapore this November 16-19, 2021 to mobilize behind the effort to build a sustainable and inclusive global economy. Learn more here.

The Economic Scene

Asian Exception

In the pre-pandemic decade, Asian economies posted much faster growth and lower inflation rates than their emerging-market peers

Source: International Monetary Fund

Classic problems such as rising inflation, capital flight and concerns over bloating public debt are starting to show up in some emerging markets, but less so in Asia.

Thanks largely to lessons learned from the traumas of the past three decades — from the late-1990s regional meltdown to the global crash of 2008 and the so-called “taper tantrum” of 2013 — their economies now boast hefty foreign-exchange reserves, stronger financial systems and an unassailable place as the world’s manufacturing powerhouse. Indeed, many look increasingly like they’ve emerged.

Today’s Must Reads

  • U.S. payrolls. Applications for U.S. state unemployment insurance fell last week to a fresh pandemic low, another bullish sign ahead of Friday’s jobs report that’s expected to show the U.S. added about 1 million jobs in April. Now, talk is even shifting to labor shortages.
  • Fed warning. A rising appetite for risk across a variety of asset markets is stretching valuations and creating vulnerabilities in the U.S. financial system, the Fed said in its semi-annual financial stability report. It’s another warning after Chair Jerome Powell surprised investors last month by describing markets as “frothy.”
  • Euro taper? The European Central Bank could decide to scale back its emergency bond-buying program as early as next month if the euro-area economy doesn’t deteriorate, Governing Council member Martins Kazaks told Bloomberg.

  • China trade. China’s export-led recovery is showing no signs of slowing with shipments surging more than expected in April while imports jumped on higher commodity prices. But, the Biden administration is likely to maintain pressure on Beijing by preserving Trump-era limits on U.S. investments in certain Chinese companies. 
  • Vaccines. The U.S.-backed effort to waive patent protection for Covid-19 vaccines, even if successful, is unlikely to narrow a yawning gap in access to life-saving shots anytime soon. The proposal faces weeks of difficult negotiations and intense pushback from the pharmaceutical industry. And if it were approved at the  World Trade Organization, it could take a year or more to meaningfully increase supplies, vaccine specialists say.
  • Latin American levies. Chile is nearing the introduction of taxes on copper sales, but Uruguay is committed to trimming its budget deficit without resorting to large tax hikes.

Need-to-Know Research

Children and Jobs

The more children a mother has, the more likely she’ll quit employment

Source: Bank of Korea

Working mothers in South Korea have suffered far greater job losses than single women during the pandemic, according to research by the central bank. Among women aged between 30 to 45, those who were married accounted for 95% of the reduction in female employment in the year through March 2021. While the country has done relatively well in containing outbreaks, schools have often been shut and work-from-home hasn’t been as widely applied as in other countries, putting an increased childcare burden on mothers. That sets the pandemic apart from previous recessions when men typically suffered significant job losses.

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