Too much coddling of the wealthy… so why loose monetary policy?
Mark Thoma is absolutely correct when he writes…
“The wealthy think it’s the same — in their minds they are the job creators, what’s good for the wealthy is good for America! — but it’s not.”
This is where I have to ask the question… So if loose monetary policy is good for the wealthy, then why support it? In your mind, you must still agree that they are job creators.
There is a contradiction. Economists seem to think that loose monetary policy will benefit the un-rich, but why can’t they see that this is not the case? Loose monetary policy is creating more imbalance of economic power than seen in a long time. This is not good for society.
So I find it intriguing that economists, and Mark Thoma is not the only one, put Fed policy into a different category from tax policy, financial un-regulation and political influence. Loose monetary policy is just another policy benefiting the rich… bringing undesirable consequences.
This is a moment where you might hear the phrase… “Well, don’t throw the baby out with the bath water.” The meaning is that we would still need loose monetary policy while we deal with other policies that directly benefit the rich. Well, loose monetary policy not only directly benefits the rich, it reinforces the other policies being criticized… and if you look closely, the creature being coddled in the bath water is not a baby, it is a rich person acting like a baby needing to be coddled.
Ah, The Rich, TAX THEM. 91% worked well from FDR to JFK.
“So if loose monetary policy is good for the wealthy, then why support it?”
Monetary policy has been keeping the economy afloat. Fiscal policy and the economic policies out of Washington have been a monumental failure.
A stronger economy, although still weak, benefits the entire economy. The Fed deserves a lot of credit (pun intended) learning from the Great Depression and Japan’s liquidity trap.
The question suggests raising everyone’s living standards is much less important than taking down the rich to make themselves look better, even if it means a lower standard of living for everyone.
PeakT,
Taking down the rich does not mean a lower living standard for everyone. It is the contrary. It means a better living standard for everyone. And loose monetary policy is maintaining the status quo of a growing rentier class that is limiting the potential of the economy by lowering aggregate effective demand.
Edward, your article is about monetary policy, not any other economic policy.
To assume accommodative monetary policy reduces aggregate demand makes absolutely no sense. That assumption isn’t supported by anything
Of course, if monetary policy is accommodative for too long, a more restrictive stance will eventually be needed to slow “out-of-control” inflation, which may cause a recession. At some point, raising nominal growth won’t raise real growth. It’ll just be inflationary. We’re nowhere near that point now.
You seem against accommodative monetary policy, just because it benefits the “rich,” and you seem willing to bring down the poor to bring down the rich.
PeakT,
The more you give to the wealthy, the less that people have relatively. The inequality is growing, and effective demand is falling.
Inflation will not be a problem as long as labor income is suppressed. This is why loose monetary policy is not working, liquidity is not being transmitted to the consumers. It is being transmitted to capital income instead. Tighter monetary policy would slow down the flow of liquidity to capital. The growing inequality is created an unsustainable and undesirable imbalance.
The growing power of the rich is bringing down the poor. Loose monetary policy is feeding the growing power of the rich.
The rich are not Job creators because there is weak effective demand which gives little incentive to invest. There is weak effective demand because policies are not in place to transmit liquidity to labor.
Even fiscal policy would be ineffective in an environment of policies re-directing liquidity and income to capital. Even if you give a lump sum to labor, as the sum circulates, it flows to capital maintaining the same weak percentage that is creating weak effective demand in the first place.
As long as labor share stays so low and there are policies to re-direct liquidity to the rich, any policy to increase liquidity to the rich weakens effective demand. And you will see that even inflation has no support to rise due to capital soaking up excess liquidity like a sponge.
My view is that loose monetary policy will further create instability only because there are no policies in place to divert liquidity to labor. Capital hoards it. If you start to see policies being implemented to increase labor share, then you will see inflation perk up and economic growth pick up too.
Instead of TAXING THE RICH, I could also be in agreement to printing an EQUAL amount of dollar documents that’s already out in circulation (say 30 trillion) and doleing it out to the 99% (through various programs, a sort of QE for Mainstreet) to avoid TAXING THE RICH. THE RICH GET TO KEEP THEIRS and Mainstreet can go about the business of buying and selling goods&services.
Call it “A Loose Monetary Policy For Mainstreet”!!!
Every time I get ready to give up on PT he/she says something I agree with and in this case I have to side with him/her. In retrospect perhaps the whole thing should have collapsed in 2008-2009 because that would have convinced the wealthy that they can not get it all, but I do not blame the fed or the government generally for bailing out the banks and the wealthy. It is called the great recession and the recovery has been anemic for everybody but the 1%, but it was way, way better than the Great Depression. I do not think that the continued loose monetary policy has been particularly effective in stimulating the economy and Edward is quite right in pointing out the reasons, but the idea that we should significantly tighten monetary policy because the wealthy are benefitting disproportionately is ridiculous. I think growing income/wealth inequality is the one single factor which is dooming the U.S. economy and that there are a variety of policies which are designed to make that inequality grow, but I surely would not attack it by trying to make things tougher for the 1%. Not only is that effort going to fail, but it is like cutting off your nose to spite your face.
M.M. “THE RICH GET TO KEEP THEIRS”….Who says it’s theirs?
The monetary policy is an artificial means of keeping the economy alive and I would have thought we had learned such. Obviously not. Had the money created via the policy actually entered the economy through the bottom, then would you have some solid economic activity to support such an artificial approach.
Everyone knows it is an artificial stimulus which is why the market gets funny when there is a treat of tapering. At this point the fed has to deal with the psychology of the people mostly benefiting from the policy as such people have “learned” to rely on it and count it as real.
Depends what you mean by “loose monetary policy.”
For Scott Sumner’s circular definition, of course, it means “whatever results in higher NGDP.”
I think announcing a 3% inflation target — which you could certainly call “loosening” — would benefit debtors (generally lower income, less-wealthy people, and their government) at the expense of creditors (wealthy people and their financial corporations).
It would also increase NGDP, and perhaps any inflation would appear somewhat more in wages than in prices — increasing labor share of income.
http://www.openthebooks.com/
“A new venture called Open the Books, based in Illinois, was founded with a mission to bring transparency to how the federal budget is spent. And what they found is shocking: between 2000 and 2012,. That doesn’t include all the billions of dollars doled out to housing, the top Fortune 100 companies received $1.2 trillion from the government auto and banking enterprises in 2008-2009, nor does it include ethanol subsidies to agribusiness or tax breaks for wind turbine makers.
What Open the Book’s forthcoming report does reveal is that the most valuable contracts between the government and private firms were for military procrument deals, including Lockheed Martin ($392 billion), General Dynamics ($170 billion), and United Technologies ($73 billion). “
Edward, accommodative monetary policy stimulates aggregate demand through lower interest rates for households and firms, higher asset prices, e.g. for homeowners, 401 (k)s, IRAs, etc., and raising what Keynes called the “animal spirits” of men and women.
Monetary policy is a crude tool. It doesn’t micromanage the economy or helps only the rich. It has proven to be a most powerful tool in the past (and supported by mathematical models). You assume it’s ineffective or counterproductive, because you ignore the negative forces, or headwinds, outside of monetary policy.
For example, at the beginning of last year, a massive contraction in fiscal policy began, raising both federal tax revenue and reducing federal spending, substantially.
Harriet: Good Point!!!
Gee PT, weren’t you bitching the other day about how the minions over spent and got themselves in a mess? But, hey now you are suggesting their rising assets meant for retirement is there for the spending?
And with just what rising income are these people supposed to pay back that spent pile of assets? Idiot!
Reply to the comment about the contraction in fiscal policy.
The business cycle has an expansionary period that ultimately ends in the natural level of output. The fiscal contraction only slowed down the expansion, but did not affect the ultimate natural level of output. What I am talking about is a fall in the natural level of output which is the top limit upon the business cycle.
When labor share fell, the top limit fell too. The ultimate top limit is determined by labor share’s effective demand. We see the IMF imply that in Japan now.
Accommodative monetary policy is feeding a growing inequality. Do you not see how that is a greater social cost?
The TAX&DON’T SPEND Republicrats. If WE want to take down the deficit that badly then quit selling The Fed T-Bills for QE.
Daniel, your poor choice of words matches your poor understanding of economics. Citing is not bitching and lower income workers aren’t minions.
An increase in aggregate demand generates employment and an increase in employment generates aggregate demand.
A self-sustaining cycle of consumption-employment can achieve full employment, to where demand is raised to meet supply, and the Fed can tighten the money supply to preempt or control inflation and maintain full employment.
Also, I may add, accommodative monetary policy induces demand and reduces saving (see Keynes “paradox of thrift”).
An increase in demand raises output = GDP = income, and consumption + saving = income.
So, by reducing saving (through low interest rates), and inducing demand (including through more borrowing), saving rises through higher income.
PT,
Increase in demand? From monetary policy as implemented currently? Where? Cause as I noted in prior posts I ain’t seeing it and I ain’t feeling it especially at the flower shop. Nor by my fellow other actual small business owners.
Don’t get me wrong (as you have) I don’t doubt there are pockets of “increased aggregate demand”. But, when we recovered from the last depression increased aggregate demand was through out the nation.
Which still leaves you trying to have it both ways. People have themselves to blame for getting in debt by spending their increase asset wealth which lead to the housing bubble which crashed the economy which created the solution of the current monetary policy so we’ll have increased asset wealth which will lead to increased aggregate demand via spending or borrowing against that aggregate demanded increased wealth. Some of that increased asset wealth being what was saved in accounts for retirement.
And, having to do this monetary policy to stimulate the economy is not a “self sustaining” cycle. But, if it is, then there should be no concern if the Fed pulled the plug tomorrow.
As to your equation: An increase in demand raises output = GDP = income, and consumption + saving = income.
Show me the sub equation that relates to raising income for everyone with “increased aggregate demand” formula of yours.
Loose monetary policy benefits the rich over the poor. But history tells us that deflation also benefits the rich over the poor. Of the two, which would we rather have?
What we don’t have is our Pecora, our Huey Long, our FDR. What we do have is the Tea Party.
Min:
Been a while . . . maybe Elizabeth Warren may make a stand?
Harriet, if it’s not theirs, to whom does it belong?
jed:
Do you really believe they did it all by themselves?
What puzzle me is this: the US population is rapidly aging, and surely nobody can miss the large numbers of people now monthly joining the retired, nor the increasingly worried tone of articles decrying the lack of retirement savings. Whenever I visit my parents’ retirement home, populated by solidly middle class people, the residents sound increasingly worried at how little income their savings now generates and desperate as they ponder what spending they can cut still further. So I wonder: HOW is decimating their income benefitting anyone other than the rich, who most definitely will spend significantly less of their income (thereby generating demand) than the middle class – retired or otherwise – ever will? Assuming, that is, that it even benefits the rich, who are floating on a money-eased bubble of epic proportions.
nope, I don’t. but I don’t think I have a claim on Michael Jordan’s income because I paid for a ticket to a Bulls game once. I don’t think I have a claim on Bono’s money because I paid for a concert ticket several times. I don’t think I have a call on Woody Harrelson’s money because I subscribe to HBO. I don’t think I have a claim on Steve Jobs’ estate because I own an iPod. I don’t think I have a claim to Mark Zuckerberg’s wealth because I use Facebook.
My doctor, I’m pretty sure, doesn’t feel like she has a claim on my money because she’s treated me. My teachers, most of them anyway, I’m reasonably certain don’t feel like I owe them part of my income because they taught me. My bus driver doesn’t ask me for extra money because he gets me safely to work.
Jed:
non sequitur remarks following “nope, I don’t.” What is fair than other than skewing a large percentage of tax breaks to them?
tax breaks, aside from EITC and/or negative income taxes (both of which I support), generally skew to those who actually pay taxes.
but it seems harriet’s starting point is pre-tax income. since you seem to also believe they didn’t do it by themselves, how much of their income/wealth do you believe your entitled to?