Monetary policy has yielded substantial social and economic benefits to modern economies.

Not least the achievement of low and predictable price stability. But to whose benefit? 

It’s no secret that monetary policy increases the wealth inequality gapThat’s because it benefits those with assets, and by doing so it widens the chasm between the very rich and everyone else, making many Australians – in particular, the least financially secure – worse off. 

While governments and central banks are openly aware of the inequalities these policies create, they have not taken measures to appropriately address the issue – the first step of which would be to update the RBA’s mandate. 

Let me explain why. The Reserve Bank of Australia (RBA) has again announced that it’s kept the official cash rate on hold at 0.1 per cent, with the possibility it will remain thus until 2024. An RBA document released under a Freedom of Information request estimated that a permanent 1% cash rate reduction increases house prices by 30% over a three-year period. 

For a middle-class family who own a $800k (median Australian) home, a 1% interest rate reduction increases their wealth by $240k. For the very rich who own a $100m portfolio of propertiestheir wealth increases by $30m, a windfall gain $29.76m greater than that of the middle-class.  

For the one-third of Australians who do not own a home, not only does their net wealth remain unchanged, but the cost of entry becomes substantially higher. They are forced to work, save and pay more for essential assets such as housing, perpetuating the cycle and widening the gap. 

The fiscal equivalent is government awarding a grant of $30m to people with $100m in assets; $240k to people with $800k in assets; and nothing to people without assets. 

You don’t need to be an arch-communist to consider these outcomes unfair. However, the nature of the unfairness will depend upon the theory of justice invoked. For example, equality of outcome theory finds the unequal impacts of monetary policy unjust because Australians end up with different outcomes.  

Alternatively, a Rawlsian theory of justice contends that social inequality is permissible only where the inequality benefits the least well-off to the greatest extent possible – a principle known as the difference principle.  For a Rawlsian, existing monetary policies are unjust because there are alternate policies (including tax and transfer and direct cash transfer policies), that would be of greater benefit to the least well-off members of society.

The theory of justice I find most compelling is equality of opportunity. Like most theories of justice, equality of opportunity can be interpreted in different ways. What I have in mind is substantive equality of opportunity theory, which holds a fair society as one where individuals with the same level of talent and motivation, have the same prospects for successregardless of their place in the social system

Most Australians believe equality of opportunity is an important feature of our national ethos. Indeed, many Australian politicians cite equal opportunity as a key element of a just society (even if this rhetoric is not always followed with policy).  Yet what we are seeing here is falling short of that ideal.

Monetary policy that penalises the least well-off and rewards people based on their starting level of wealth does not provide Australians with equal opportunity. 

Indeed, justifying why the very rich deserve windfall gains is challenging unless one ascribes to the slightly perverse virtue theory that to have wealth is to deserve more wealth. 

One solution is for government to tax and transfer windfall monetary policy gains. This policy might allocate an equal benefit to each Australian, or otherwise ensure each Australian has an equal opportunity to benefit.  

While simple in theorythere are several practical shortcomings with this approachOne issue is measurement: for any asset value increase, determining the increase due to monetary policy versus other factorssuch as asset improvements, is not straightforward. Another issue is timing: there is typically a substantial lag between monetary policy actions and asset value increases. 

However, it seems to me, the most substantial issue is political pressure from vested interest groupsTaxing assets – regardless of whether people have earned those assets or the assets were merely granted to them through government policy – is eminently harder than simply not transferring windfall wealth in the first place.  

Finding prevention, rather than jumping straight to the cure, has the added benefit of avoiding the unnecessary social antagonism that occurs when creating groups of “us” (the “lifters” who are taxed) and “them” (the “leaners” who receive). 

A preventative solution can be found in updating the RBA’s mandate, a change that might take on various degrees. The more substantiative update would be to require all future monetary policy to produce no negative impact on wealth inequality. This would make some existing policies unviable or mean that if pursued they must be coupled with additional mechanisms that even up the ledger for the middle and lower classes.

A middle ground alternative might merely begin by requiring the RBA to consider unfair wealth impacts as tiebreakers. For example, when all other features of opposing policy are equal, that which provides all Australians equal opportunity to benefit would be considered preferential. This mandate should require the RBA to consider various options and justify those adopted on the principle of fairness, relative to the alternatives that were overlooked.  

Reserve Bank Governor, Dr Philips Lowe recently stated that the responsibility for controlling asset prices is not that of the RBA: That’s not our mandate. I don’t think it’s sensible and I don’t think it’s even possible”. 

That the RBA cannot and does not control asset prices isimilar to the fact that the RBA cannot and does not control the social phenomenon of inflation. 

Yet the RBA can and does influence asset prices, simply look at the ripple effect of the 0.1% cash rate. The RBA can and does also target asset prices, noting the RBA bond-buying programs which are designed to prop up bond prices. To suggest otherwise is misleading.

Like any other public institution, the RBA is accountable to those they serve – the general public – not to their own endsAnd the Australian public may want a little more rigour in that accountability than, ‘that’s not our mandate’ when dismissing the policy options put forth by economists such as Milton Friedman, Frederic Mishkin and Patrick Honohan.  

It might be true that alternative policy options such as cash transfers through the budget (where the central bank issues money directly to the government who distribute it) or direct cash transfers (where the central bank issues money directly) are unworkable.

However, allowing the RBA to dismiss their policies negative effects because their mandate does not require this considerationis not something Australians should consider acceptable.