Central Banks Channel Piketty Inequality Concerns, Nowotny Says

Inequality is becoming a factor in monetary policy as central bankers increasingly realize it can cause financial instability they’ll have to fix, European Central Bank Governing Council member Ewald Nowotny said.

Imbalanced income and wealth distribution, a rising topic of global debate following publication of Thomas Piketty’s book “Capital in the 21st Century,” was one of the main causes for the U.S. subprime-debt crisis, Nowotny told reporters in Vienna yesterday. Society’s inability to address the rising inequality has thrust the issue into monetary-policy debates, he said in reply to a question about his view of Piketty’s book.

“Monetary policy makers, including also the IMF, are paying more attention to questions of inequality, because we’ve seen that distribution can have effects that are relevant for monetary policy,” Nowotny said. “For instance, it was a key reason for the U.S. financial crisis that policy makers tried to solve the housing problem for lower income brackets not by social housing but by very cheap credit.”

Piketty, a 43-year-old professor at the Paris School of Economics, has ignited a global debate saying wealth disparity has widened in most of the western world. His best-selling tome has been hailed by Nobel-prize winning economist Paul Krugman as “the most important economics book of the year -- and maybe of the decade.” Piketty has given presentations on his findings to the White House Council of Economic Advisers, the International Monetary Fund and the United Nations.

‘Side Effects’

Nowotny declined to comment on Piketty’s proposal about how the wealth gap may be closed using fiscal policy. Piketty urged governments to coordinate a global wealth tax to narrow disparities, he said yesterday in a Bloomberg Television interview.

“The objective is not to increase total taxation of wealth or capital but rather to make it more progressive so that more people can enter wealth accumulation,” Piketty said. “The problem that we actually have today is that the share of wealth going to the middle class is actually shrinking.”

Nowotny said tax policy is the remit of governments and out of his control. Policy makers are nevertheless paying more attention to how decisions contribute to inequality, he said.

“Monetary policy itself has distributive effects,” he said. On one hand, lifting employment by monetary easing could result in lower inequality, he said. On the other, if low rates boost share prices while punishing savings deposits, they also lead to widening disparities.

“We’re acutely aware that monetary policy is linked to distribution in many ways,” Nowotny said. “That doesn’t mean you shouldn’t do it, but like any doctor prescribing a medicine, you have to consider the side effects, too. But it’s not our job to say what is a just income distribution.”

    Before it's here, it's on the Bloomberg Terminal.