Here’s a bit of esoterica I think about from time to time: Mark Zuckerberg has a mortgage.
Or at least, he had one. A decade ago, the Facebook founder refinanced his loan on a $6 million Palo Alto mansion. He was worth $16 billion at the time, meaning he could have bought that house and a hundred more outright, no mortgage necessary. But First Republic Bank offered him an adjustable-rate loan with an initial interest rate of just 1.05 percent—below the rate of inflation, meaning the financier was paying him for the privilege of lending him money. Zuckerberg got to preserve his Facebook holdings, load up with tax-advantaged debt, and benefit from rising Silicon Valley real-estate prices. Why not take the loan?
“Why not take the loan?” has been a pretty good summary of American wealth building and class dynamics in the past few decades. An extended period of low interest rates has translated into surging asset values. That has made the small share of Americans capable of investing in homes, farmland, stocks, bonds, commodities, art, patents, water rights, start-ups, private equity, hedge funds, and other assets breathtakingly rich, fostering astonishing levels of wealth inequality. Given low labor-force participation and sluggish wage growth, the United States has come to look like what the theorists Lisa Adkins, Melinda Cooper, and Martijn Konings have termed an “asset economy”—in which prosperity is determined not by what you earn but by what you own.
The “why not take the loan” days are at least on hold. The Federal Reserve is hiking interest rates as it struggles to tamp down on inflation. That has pushed equities into a bear market (because corporate profits are at risk and investors are pulling back to safe assets), the housing market into a correction (because mortgages have become much more expensive), and the tech sector into free fall (as many companies are being asked to deliver profits, for once). Financing for mergers, acquisitions, and start-ups has dried up. And the economy might be on the verge of its second recession in two years, particularly if gas prices remain high. Animal spirits and a few hundred additional basis points have erased colossal sums of paper wealth in the past half year: $2 trillion and counting in crypto, $7 trillion and counting in stocks, uncalculated sums of home equity.
Rising interest rates and spiraling inflation might be killing off our age of asset capitalism, with no more 1.05 percent loans available for anyone, not even the richest of the rich. Does this mean a new economic equilibrium going forward, one less advantageous to capital and more advantageous to labor, less favorable for high-wealth rentiers and more favorable to regular-old renters? The uncomfortable answer is no. Low interest rates helped bolster growth and employment, even if they fostered inequality. But high interest rates are not going to build a more equitable economy either.
In some ways, this financial moment resembles the one that kicked off our grand, unequal age to begin with. In the ’70s, the United States economy was characterized by high rates of inflation, strong wage growth, and falling asset prices. (Fun fact: The S&P 500 gained essentially no value during the ’70s.) Inflation ate away at the earnings of working families, while stagnant asset prices squeezed high-income households.
Then, work started to pay less and ownership to pay more. The forces cleaving labor and capital were many and complicated. The share of employees in blue-collar professions declined, as did the unionization rate, as manufacturing became automated and shifted offshore. Corporations ballooned in size, and their tax bills fell, with big players’ dominance of their respective markets becoming more absolute and the financial economy going global. The minimum wage started falling in real terms, and the government deregulated the transportation, telecommunications, and financial sectors. All of these factors suppressed wage growth while jacking up corporate profits and increasing investment returns.
Over time, wealth inequality became more pernicious to society than income inequality. The problem is not just that a chief executive at a big company makes 33 times what a surgeon makes, and a surgeon makes nine times what an elementary-school teacher makes, and an elementary-school teacher makes twice what a person working the checkout at a dollar store makes—though that is a problem. It is that the chief executive also owns all of the apartments the cashiers live in, and their suppressed wages and hefty student-loan payments mean they can barely afford to make rent. “The key element shaping inequality is no longer the employment relationship, but rather whether one is able to buy assets that appreciate at a faster rate than both inflation and wages,” Adkins, Cooper, and Konings argue in their excellent treatise, The Asset Economy. “The millennial generation is the first to experience this reality in its full force.”
This reality took on its full force amid the monetary surfeit and fiscal austerity of the Obama years. Borrowing costs had been falling since the early ’80s. When the global financial crisis hit, the Fed dropped interest rates all the way to zero and started buying up trillions of dollars of safe financial assets, spurring investors to invest. Officials at the central bank begged—in their own way—members of Congress to spend more money to help the Fed get the country out of its slump. Instead, after a skimpy initial round of stimulus during Barack Obama’s first term, politicians started shrinking the deficit.
This kind of giving-with-one-hand, taking-with-the-other policy mix helped lower the unemployment rate, though not as much as it would have if the country had deployed more stimulus. It also flushed ungodly sums of money into financial markets and corporate ledgers. With money essentially free to borrow, rich people loaded up on pieds-à-terre and index funds. Businesses bought up their rivals and soaked up their own shares. Working families hobbled along. The Fed helped the country avoid a double-dip recession, and the outcome was yawning inequality. The Mark Zuckerbergs of the world got 1.05 percent mortgages they did not even need, while everyone else got priced out of the Bay Area entirely.
At the same time, other policy forces came along to screw over many Millennials. Cities stopped building houses, causing or intensifying housing shortages and driving up rents. Millennials got locked out of the housing market for a decade, and prices had swelled by the time they were able to get in. As housing got more expensive, everything got more expensive, particularly child care. Student-loan debt soared too, yoking young people to decades of repayments.
The rise of the asset economy has not just disadvantaged the poor relative to the rich or the young relative to the old. It has also disadvantaged Black families relative to white families. Black students are more likely to have student-loan debt and more likely to owe large balances than their white counterparts, making it harder for them to save, buy homes, or start businesses. The housing bust hit Black homeowners far harder than it hit white homeowners, and relatively few Black families have benefited from the recent increase in prices. White families remain much richer than Black ones, and much more capable of passing wealth on, generation to generation.
Things started to turn around for the 99 percent during the Trump years. Wages started to tick up among low-income Americans, in part because of states and cities hiking their minimum wages. The jobless rate fell enough that the country neared full employment. When the coronavirus pandemic hit, Republicans were in charge, so they decided deficit spending was fine, and Congress suffused the economy with stimulus. Families are still living off the savings from the stimulus checks and extended unemployment-insurance payments and child allowances sent out during the Trump and Biden administrations.
But supply-chain problems, rising energy prices, and all that stimulus have ginned up the highest rates of inflation in four decades, forcing the Fed to hike interest rates. Once again, as in the ’70s, working families are getting sacked by rising prices as rich families watch their paper wealth go up in flames. We are in a bear market, a punishing one for the roughly half of Americans who own stock and a particularly punishing one for the wealthiest 10 percent of Americans, who own about 90 percent of all equities. Trillions of dollars of wealth have vanished this year. Trillions of dollars more might vanish in the coming months. Low, low interest rates—ones that many people expected to be around for years to come—underpinned that entire run-up in wealth.
Despite the gyrations in the financial markets and the collapse in the price of homes, crypto, and so on, the underlying real economy retains some real strength. The unemployment rate is very low, and households have not yet pulled back on spending. But inflation is dampening consumer sentiment and bleeding working families of cash; gas prices are particularly troublesome. To try to return the country to price stability, the Federal Reserve is continuing to hike interest rates, raising its benchmark rate 0.75 percent this week, the biggest jump since 1994. The central bank has no track record of pulling off the kind of “soft landing” it is aiming for. There’s a good chance the Fed will smother so much demand that the unemployment rate will climb and the economy will shrink, putting millions of families in financial peril. Everybody might end up worse off for a while.
In the future, should the Fed avoid lowering interest rates and flooding the country with money to avoid ginning up more inequality? That notion is certainly out there in progressive circles. “The basic thrust of the argument is that low interest rates make life sweet and easy for big corporate predators, who can do more of their bad predatory things thanks to lower financing costs. Stock valuations rise, the rich get richer, the powerful and corrupt thrive while the weak and ordinary are ignored,” writes Zachary D. Carter, the biographer of the economist John Maynard Keynes.
But this line of argumentation, as Carter notes, downplays the downsides of high interest rates for regular families. High interest rates mean slower growth means higher unemployment means smaller wage increases for low-income workers, in particular Black and Latino workers. In that way, low interest rates might help hold down wage inequality, even as they amp up wealth inequality. Sharply higher borrowing costs also make it harder for working families to pay off their credit cards, buy cars, start businesses, and fix up their homes.
The answer to our unequal age lies not in better monetary policy. It lies in better fiscal and regulatory policy. The central bank has enormous influence, but primarily over borrowing costs and the pace of economic growth. The power to alter the distribution of wealth and earnings—as well as expand the supply of child care, housing, energy, and everything else—lies with Congress. It could spend huge sums of money to hasten the country’s energy transition and make it less vulnerable to gas-price shocks. It could overhaul the country’s system of student-loan debt, helping Black families build wealth. It could break up monopolies and force companies to compete for workers and market share again. It could task states and cities with increasing their housing supplies, so that regular families could afford apartments in Queens and houses in Oakland and condo units in Washington, D.C. It could implement labor standards that would mean the middle class could afford to buy into the stock market too. Yet it remains hamstrung by the filibuster, and by a minority party dedicated to upward redistribution.
The problem with our asset age is not that so much wealth has been generated. It is that so much wealth has been generated for so few. If everyone could own some Facebook stock and a house in Palo Alto, everyone would be better off, even in a down market. But low interest rates cannot create that world on their own.