Wealth Gap Actually Widening Less Under Obama, Bernanke

by: Lok Sang Ho

A CNBC story posted February 15 2011 suggested that the wealth gap is widening under Obama and Bernanke. That is a misleading statement.

Obama conceded to the extension of the tax cuts on all income classes, as demanded by the Republicans, for two years because he had no choice. If the Republicans had been in the helm, the extension would have been indefinite.

Bernanke with his quantitative easing and innovative monetary policy helped bring the economy back from the brink of utter collapse. He helped save jobs and create new ones. We had been seeing job losses well in excess of half a million per month for months, now we have had positive job creation for many months. The unemployment rate is now down to 9% from over 10%. Saving jobs and creating new ones definitely had helped the poor.

The claim that excess liquidity is fueling commodity price inflation is overplayed. Food price rises are largely due to abnormal weather conditions that had destroyed crops from China and Australia to America. Global food stocks are at their lowest point in years. You cannot blame excess liquidity for this.

Oil prices had hit almost $150 a barrel without quantitative easing before the financial tsunami. Now they are hovering below $90 per barrel. Much of the oil price rebound from its recent lows is due to the global economic recovery. Commodity prices would rise with the global economic recovery regardless of quantitative easing.

This is not to dispute that QE had to some extent fueled inflation. But American inflation is still well below 2%. This is still well within the range of any reasonable inflation targets.

Inflation is rising much more sharply in India and China. In part that is because food takes up a much larger proportion in household expenditures. In part it is also because their economies had started to overheat. As Bernanke had claimed, these economies could rein in excess growth by monetary tightening, which they have been doing recently.

Before we say a statement like the one found in the CNBC story, we need to compare our economy with the realistic alternatives. The poor definitely would not have fared better under a Republican administration, and inflation might have been lower—even deflation could have been possible, without the monetary stimulation. But the poor would have fared even worse.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.