Question for our readers…
I am watchng the video of Paul Krugman on Bill Moyers. Mr. Krugman is seeing things about inequality that he hadn’t seen before Piketty’s book. So he is now seeing that inequality is a huge problem now and into the future. Inequality is the one major problem in the economy.
How should monetary policy change if reducing inequality was seen as the most important priority?
And please do not say “Helicopter drops of money”. You must use the tools available to central banks. The one stipulation is that your answer must reduce inequality, irregardless of the side effects. Think like a doctor giving medicine for the main illness knowing that there may be unpleasant side effects, like losing hair in chemotherapy.
Write your answers in the comments below…
I love the sounds of crickets chirping.
Thanks , Edward.
Easy. Stop or at least discount labor cost as being a simple contributer to core inflation.
Managers will ALWAYS see labor as a cost to be controlled and bond clippers will ALWAYS see any uptick in labor costs to put the country at risk of Weimar 2. That is the consequence of seeing labor through capitals eyes as a necessary evil.
I don’t know technically how you could compute an inflation index ex labor share but conceptually it seems as simple as looking for evidence (or lack thereof) that additional wage income/labor cost was actually driving up the cost of core goods. If increasing labor compensation is not driving up the cost of caviar and Lamborghinis why cavil at the fact that MacDonalds has to phase out their Dollar Menu for the Buck and A Half Menu. It is not like the Coupon Clipping Class is ordering off the bottom right part of the Fast Food Menu anyway or that the working class will somehow monopolize all the content at the Apple Store.
In this country anyway we are not at the levels where poor people having access to bare substinance and basic goods somehow would restrict consumption of the upper class. It is not like the 14th century when the rich man’s pig and stag were competing for acorns with the landless poor, for better (and often) worse the post-industrial revolution happened and supply is not constrained in quite the same ways as in the time of Malthus.
Not so sure Pikity’s book is worth the hoopla.
The central bank needs to be reformed. No reforms, no solution IMO. The fed just needs to be tweaked so that it interacts with different counterparties.
Buying assets through OMO’s or QE is very uneven or imbalanced because it works through increasing wealth of existing asset holders and assets are concentrated. Asset holders have a lower MPC than broader public so the effect is limited. Also policy needs to be less centered or defendant on the credit channel because if people don’t demand credit then we have trouble.
I have a solution and I hope its not defined as heli drops by OP because it doesnt require fiscal policy assistance and therefore maintains fed independance. This can be achieved by issuing reserve account to all people so the fed can directly conduct policy broadly and evenly with all.
The solution I see is to create a wealth effect that affects all people by transfering new assets (money) to all when targeting inflation or growth or whatever. Average people have a higher MPC meaning less money needs to be expanded to realize changes in gdp or inflation. Money received from asset sales is less likely to be spent when compared to money received from a transfer. No dependancy on credit channel to expand money either. Lower debt to gdp is shown empirically to result in less occurrence of recessions and shorter recessions.
If you have any questions or criticisms of this idea I would love to hear.
A TAX REBATE to every TAXPAYER making under $80,000 a year. It wouldn’t be sustainable for more than a few years and doesn’t change the dynamics of the economy, its borrowed money. It would act as a quick jumpstart.
The ACTUALLY WORKING solution is a high TAX on the rich, as the past has shown. It can go on for decades if need be with the revenue used to CREATE JOBS. Good jobs, good paying jobs that add useful wealth to the nation and improve the lot of those new generations of citizens. It worked for 4 decades in OUR history, 4 decades in a row, continuously AND the data has been saved to show as proof, to remove ALL doubt.
It made US the richest nation in OUR time. It placed OUR society to where ONE INCOME EARNER could buy a house, put groceries on the table, raise a family, put the kids through college, PAY FOR HEALTHCARE.
Inequality reached its peak in the US in the Gilded Age when there was persistent deflation, and its nadir in the 1970s when there was rapid inflation. It seems to me if you want less inequality you obviously need more expansionary monetary policy.
Monetary policy can help but it needs to be more effective. Buying assets has too weak an effect on growth.
In a way , this question has no reasonable answer. It’s equivalent to asking what the Mafia or Mexican drug cartels could do to reduce drug use and crime.
I don’t know the extent of the Fed’s bank supervisory powers , but I think they could make an impact with some bold actions against big finance. The biggest banks now have rap sheets as long as your leg. It seems that every week we hear of multi-$million fines being handed down against them for rigging a market , accounting shenanigans , etc. , such that it would be reasonable to conclude that they’re nothing but criminal enterprises. As such , the Fed should step in and remove the entire executive staff from all of them. Replace the staff from within the banks ( I’d suggest drawing from the clerical and maintenance depts ) , or from outside the banks ( random names from the phone book ).
Given that this would only involve only some dozens of people , it wouldn’t immediately impact inequality , but it could over time , by setting a new “tone”.
The Fed reduces income inequality by smoothing-out business cycles, to maintain sustainable growth, and keeping the country near full employment, ceteris paribus.
Of course, some people believe faster growth won’t be inflationary. However, they don’t know what they’re talking about. Once inflation begins to accelerate, much more tightening will be needed. resulting in even slower growth.
We need fewer disastrous and better economic policies from politicians, e.g. earned income tax credits, progressive tax rates, fewer regressive taxes, better regulations, and the minimum wage.
And, I’ve already explained. the Fed just giving away money to lower income households will cause the collapse of the financial system and another severe recession.
Dannyb2b says: “Monetary policy can help but it needs to be more effective. Buying assets has too weak an effect on growth.”
Monetary policy has a powerful effect on growth. You’re ignoring the history of the Fed and confusing negative economic factors outside of the Fed’s control with monetary policy.
I stated before, lower interest rates and higher asset prices induce people to spend and borrow, and reduce saving, a lower cost of capital spurs production, refinancing at lower rates increases discretionary income, lower mortgage rates makes buying a home more affordable, 401(k)s and IRAs increase in value, etc. There are massive multiplier effects throughout the economy.
All these comments presume that any solution will still unfold within a Capitalist system. I am now considering if the Capitalist system can continue to function to the betterment of society and its people in a world where there will continue to be less and less work. For example: IBM WATSON supercomputer will soon be able to make more accurate and faster diagnoses than doctors. The powers of this Supercomputer while unique today will be ubiquitous in 10 or 15 years. Many functions now performed by professional -flesh and blood- humans in the near future are going to be taken over by smart robots and advanced computing. What than when even doctors, stock and bond fund managers, even farming and farmers no longer need anything but a handful of humans?
When so much is understood of how the human brain works and how human nature functions that even creative careers like architecture, design and poetry & literature (computers are already writing very good poetry) can be done by advanced machine intelligence? Humans not needed…
The trend of history is for more and more technological advancement to remove the need for human work and sweat, and most recently, human brain power. This trend has been advancing this century and will continue to advance. Soon only a handful of actual human input will be required for most endeavors. What than when most humans have no useful work? When the only work is low wage/low demand work that is left over from what can’t be done by machines (plumbing? bricklaying?)
This is not so far out in the future as people may think. Many if not most of these concepts are being worked on today.
The bigger question is can capitalism even work in such a system? I think not as all wealth will flow to a very, very few which we see happening now and will see happening increasingly in the future. This is unstoppable in a capitalist system and tinkering with Fed rates, distribution, tax policy, etc is just that… tinkering… and not a real fix. I frankly don’t know what the real fix is but doubt it will be found in a Capitalist system.
The effect on gdp from the wealth effect as a result portfolio rebalancing does exist but it is limited and less effective than dealing with the broader public. For example the richest 20% own more than 90% of stocks so most people arent experiencing much wealth effect there. Housing: only 2 thirds of households own a house, etc…
Increasing the wealth of the richest is also less effective because they do have a lower average MPC. Also increase the value of assets isn’t as effective as increasing money balances because assets need to be sold before spending and things like taxes can be a hindrance.
Directly crediting accounts of people broadly would affect wealth of 100% of people. Increasing base through money transfers will also reduce rates and do the same as asset purchases but in a balanced manner.
If you advocate for the current monetary policy regime you are supporting long term inequality to create short term equality. Your hoping for a trickle down effect from the rich to the poor. The current system has worked for a period but it isnt sustainable because inequality isnt sustainable or an efficient use of our human resources.
Dannyb2b, you continue to ignore my statements and cling to an impractical and economically disastrous belief.
Also, I may add, income inequality can be reduced substantially, if the Fed, rather than politicians, controlled fiscal policy and other significant economic policies out of Washington, which have had too many undesirable effects.
OK what is it exactly that I’m ignoring? I addressed the limitations of the wealth effect and interest rates while you haven’t addressed my points.
it is easier for a camel to pass through the eye of a needle than for a central banker to reduce inequality..
Here are some charts of a multiplier effect:
Also, I cited many positive and negative factors on growth, including headwinds, domestically and globally. The Fed is a powerful positive factor on growth, which is supported mathematically and empirically.
Of course there is factors outside of the area of influence of monetary policy. But your not addresing the fact that monetary policy can be made much more efficient by dealing with counterparties that have a higher MPC and by making policy not overly dependant on credit.
If the fed is so powerful under the current regime then why is it not reaching its targets?
Dannyb2b, I already responded to your statements and you saw them, because you repeated your same statements again nevertheless.
The Fed creates or destroys money by exchanging one asset for another at market rates.
Low income people have too few assets to exchange for money to increase the money supply enough to generate growth, and the Fed couldn’t sell those assets to drain enough money out of the economy when needed.
If the Fed gave money away, money would be worthless. You cannot create unlimited assets with no liabilities. Even when cutting taxes, the government has to borrow, including from the future, and run budget deficits.
And, Fed policy is reaching its targets through a multiplier effect.
“Low income people have too few assets to exchange for money to increase the money supply enough to generate growth, and the Fed couldn’t sell those assets to drain enough money out of the economy when needed.”
The money supply doesnt need to contract. Im not aware of any period in history when the base money supply was contracted for any sustained period of time.
The fed could stabilize money supply. Im not aware of any period when base money supply was stable and excessive inflation persisted or any inflation. If the fed didnt allow money to grow for sustained period of time we would get deflation historically due to productivity advances. Even in the case where inflation persisted and the money supply isnt growing it will be caused by non monetary factors which monetary policy cannot address. This will place the onus on other aspects of government to deal with it instead of obfuscate.
Contracting money will have no benefit if prices are sticky becuase it will contract rgdp. Prices will take time to reduce but ngdp wont.
The money is not expanded to the general public in exchange for anything. It can be simply transfered to the public.
“If the Fed gave money away, money would be worthless. You cannot create unlimited assets with no liabilities. Even when cutting taxes, the government has to borrow, including from the future, and run budget deficits.”
If the base money supply was expanded by 5% in a year through asset purchasing or just issuance to citizens the result on inflation would be the same assuming both sets of counterparties (public or large corporates) had equal MPC. But because the public has a higher MPC the fed would print less and achieve the same growth and inflation goals. You are arguing my case.
The money supply needs to be managed with reference to the fed’s targets. Money dervies its value becuase it is a medium of exchange, store of value unit of account. Not becuase it is issued as debt.
You can create assets so long as you maintain the optimum supply. Its got nothing to do with liabilities. Money can be recognized as equity on fed balance sheet.
“And, Fed policy is reaching its targets through a multiplier effect.”
Not its inflation, growth, UE targets or stability.
Vernon says: “The bigger question is can capitalism even work in such a system? I think not as all wealth will flow to a very, very few which we see happening now and will see happening increasingly in the future.”
You’re ignoring the real economy. and if capitalism is allowed to expand, the real goods market will also expand.
I’ve seen immigrants in the U.S., from poor countries, who can barely speak english, with little education, and through hard work, buy a house, drive an almost new car or truck, own an iPhone and a computer, able to eat out at Applebee’s, etc., and their living standards can improve faster with better economic policies from politicians.
Dannyb2b, so, you believe there weren’t any Fed easing and tightening cycles?
If money was free, it would have no value.
“If money was free, it would have no value.”
Money supply growth would be lower than under current regime to achieve same goals. It would be more scarce but when created it would be free to citizens.
If money was free, demand would shift to another medium of exchange.
And, giving away free money wouldn’t make monetary policy more efficient, it would make it ineffective.
Non debt issuance does not equal uncontrolled supply. Money demand will be according to how efficient it is as a store of value, UOA and medium of exchange. If money is produced according to monetary targets which are efficiently met then it will have more value.
Debt issuance makes money less valuable because it should lead to greater instability such as the current system. If banks can collapse and your money disappears the money is less functional compared to money that you could deposit at the fed.
Dannyb2b, there are so many false assumptions and implications in your statement, I don’t know where to start. So, I’ll just state what I stated before:
When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice.
It’s not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What’s important is maintaining sustainable growth (of goods & services), which is optimal growth.
Many shocks take place, e.g. Y2K (when the money supply spiked higher and then lower around 2000), 9-11, an oil shock (or commodities in general, e.g. gold, copper, and steel), minor technology shocks in the ’80s and ’90s, and the quick and massive “Creative-Destruction” process in the early ’00s.
Hi Peak Trader,
I agree, I’ve personally seen the situation you are describing with immigrants you describe. For example the Vietnamese after the war who came over frequently had nothing but their suitcases. They sacrificed and worked and now the third generation are doctors, lawyers and very successful. I think the Capitalist system can continue to work (in a half-assed manner) for many years more, maybe even a decade or two, and when Capitalism works it works very well… but its a different world now than in the 70’s 80’s and even the 90’s. The avenues for advancement continue to shrink. Huge advancements in artificial intelligence & manufacturing continue to be made. Historically it was the low skill/low education jobs that first disappeared and went over seas, next it was the semi-professional jobs that went, now we are seeing high skill jobs such as design and engineering jobs being taken over seas (including advanced manufacturing with some pockets of exceptions scattered around the USA). Next it will be the upper middle class and upper class jobs to be going, mostly to increased artificial intelligence and automated manufacturing. There will be a smaller and smaller middle class to support a capitalist style economy IMO. The Fed, Interest rates, policies, etc will have increasing less impact on keeping a healthy middle class (consumer) alive with disposable income. We will either have to find some other medium to provide wealth (spending power) to the middle class if Capitalism is to survive or come up with a new system with new values with which to assign monetary value and rewards to.
All this talk about income inequality, Fed rates, payment transfers, interest rates, policy is mote if Capitalism no longer works. These are all backward looking. IMO this is economic thought equivalent to generals preparing to fight the last war and being unable/unwilling or just plane ignorant of what current advancements imply for our future economy and the middleclass.
I hope you and Danny hang around.
Vernon, perhaps, a thousand years ago, someone said:
All this innovation and technology in farming will soon put everyone out of a job and there won’t be any “middle class” left 🙂
And, if we can get foreigners to produce our goods, then why waste our time?
PT nobody said that a thousand years ago. There were no striking innovations in farming c.1014 that I am aware of and the agrarian economy of the Early Middle Ages in Europe was one of my areas of interest when I was in the History PhD program at Berkeley back in the day.
And when technological innovation in farming DID take off starting maybe 300 years later than that the net effect WAS to drive the ‘middle class’ (in context the small mostly indepenent cultivator) off the land and indeed put “everyone out of a job”. It was called the ‘Enclosure Movement’ and over a five hundred year period in England first replaced small farmers in Scotland and Wales with sheep and then in the Lowlands of England to replace the small free and copyholders with purely hired help.
And of course similar effects were seen in this country with the advent of industrial agriculture. Not all of this was a bad thing but it is a flat out demographic and historical fact that advances in agriculture over the last 700 years did in fact hollow out the farm population and turn a spectrum into a chasm between rich landholder/capitalists and poor wage working laborers.
To which you might say “What boots a thousand vs 700”. Hmm the same time that separates us from Franklin’s boyhood?
And I can’t tell if your last sentence was suppposed to be snark or in earnest. But of course the answer is that Ricardian Equivalence calculations just assume away distributional issues on the basis that National Income is paramount and that if the result is the 1% getting rich and the 99% being gradually placed on the other side of the chasm then it is All Good! Because GDP!
But as I have said a couple of times in your case it is difficult to tell snark from pure mush. Then again neither has to be taken seriously so that helps.
ha! Good point, but from their perspective at the time it was difficult to see anything but another 1000 years of farming. Knowledge and technological advancement have been growing at what some consider an exponential rate though and we have some ability to see where this will lead us that could never exist as early as 100 years ago. Agree, we can get foreigners to produce much and they do. Foreigners now not only produce for us they increasingly think (“creative design, innovation and such) for us. But the point is – what will we do to create value for ourselves to gain some financial reward? If we could just keep printing dollars and foreigners keep taking them it wouldn’t be a problem but that is unsustainable. Where will Americans find work in sufficient numbers to create value & financial reward sufficient to support true Capitalism? Heck, we have more & more college grads working in jobs that used to be high school graduate only jobs… this is the continuation of a tread begun several decades ago and will continue. What will happen when even PhD’s have a hard time finding work, when doctors are replaced by computers and some low wage worker (or even a robot) just takes your blood and automation and machine intelligence do the rest? IBM’s Watson already makes better diagnoses than flesh and blood doctors. How long till machine intelligence takes over the jobs of accountants, engineers, etc… I guess what I’m saying is that for Capitalism to work we need a vibrant consumer middleclass and I see that disappearing and the trend for a smaller and smaller consumer class to continue. I don’t think any policy or action can do anything but delay and maybe buffer the detrimental effects of this on a system built on Capitalism. What the answer is? I don’t know
Without (yet) reading any other comments so my vote is unbiased (and possibly uniformed) I would:
1) raise the upper marginal tax rates.
2) increase the minimum wage.
3) increase the tax rates on capital gains and dividends.
I would also like to encourage employee-owned companies and unions but don’t have specific proposals on those. Some sort of mandatory, two-year term of public service might help to show the 1% how the other 99% live, also.
Maybe, you should see a Charlie Chaplin movie for an idea how Americans lived a hundred years ago:
I’m afraid that your question, “How should monetary policy change if reducing inequality was seen as the most important priority?” has brought out the usual effort of deflection from some of the crowd that’s been hanging around here lately. In this case, however, it may be the fault of the question itself rather than the inclination to obfuscate discussions about wealth and income inequality by those usual deniers. Any effort to reduce inequality through the manipulation of monetary policy can only result in a Rube Goldberg-type of process because monetary policy doesn’t deal with the direction of income. Granted that it can effect income from wealth, but that is only an indirect means of reducing the inequality that already exists in our economic system.
Why not take the bull by the horns Ed? The gross distortion of income distribution is contributing to the increasingly distorted distribution of wealth, and that further distorts the distribution of income. There has to be a disincentive to distribute income as it is being done at present, and the only way to accomplish that is to tax the day lights out of gross incomes. That approach seems to have historical validity. Look at wealth and income distribution from the 1950s through the 1970s. Look at tax rates on the highest brackets. I’m not suggesting that such taxes be redistributed to others in any direct manner, but when it becomes
Sorry, the comment post prematurely.
I’m not suggesting that such taxes be redistributed to others in any direct manner, but when unconscionable levels of income are eaten up by taxation it is more likely to stop flowing so easily to the top of the income pyramid. That tax income flow can be used for any variety of necessary governmental spending, such as infrastructure, education, environmental quality control, etc. Simply make gross levels of income less functional by way of taxation. And that includes all forms of income, not just wages and benefits.
Bottom line –
Monetary policy is the wrong tool to do the desired job.
“When the Fed targets prices, output fluctuates little. When the Fed targets output, prices fluctuate a lot, which leads to instability. I suspect, if the Fed targeted the money supply, that would also lead to instability, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. However, the money supply determines prices in the long-run. Asset prices are residuals of monetary policy. So, price stability (of goods & services) is the Fed’s best choice.“
It can target price stability through changes in the base or the target interest rate with the public as counterparties. Expanding base through the public or primary dealers increases the supply and sends rates down. If inflation is too high the interest rate would automatically increase without the fed needing to contract base money. Higher inflation sends rates up, it’s an automatic stabiliser. There is no precedent Im aware of where the fed has had to contract the base.
Interest rates aren’t very indicative of the stance of policy though. If the lending system if saturated with demand for credit suppressed then even 0% may not even be expansionary. The best thing to look at is money expansion rates into the broader system. Not just expansions of money to banks or other hoarders. Focusing on rates is misguided because the system shouldn’t be overly centered on lending. Lending should be important but not central.
“It’s not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What’s important is maintaining sustainable growth (of goods & services), which is optimal growth. “
Of course things like growth are what matters but policy achieves those things through money growth and the like.
“Many shocks take place, e.g. Y2K (when the money supply spiked higher and then lower around 2000), 9-11, an oil shock (or commodities in general, e.g. gold, copper, and steel), minor technology shocks in the ’80s and ’90s, and the quick and massive “Creative-Destruction” process in the early ’00s.”
Not base money.
Dannyb2b, small changes in the monetary base, including the rate of change or growth to maintain price stability, or the inflation target, has a large effect on the money supply.
The Fed has been very effective smoothing-out business cycles, resulting in faster (and compounded) economic growth (of course, other factors also contributed to faster growth, including fiscal policy and the establishment of the minimum wage).
Average annual per capita real GDP growth:
1913-2012: 2.04% (after Fed)
1813-1912: 1.38% (before Fed)
List of recessions in the United States – Wikipedia
Recessions in the Industrial Revolution – 1871-1914
Period – Percent Decline of Business Activity
1873-79 – 33.6%
1882-85 – 32.8%
1887-88 – 14.6%
1890-91 – 22.1%
1893-94 – 37.3%
1895-97 – 25.2%
1899-00 – 15.5%
1902-04 – 16.2%
1907-08 – 29.2%
1910-12 – 14.7%
1913-14 – 25.9%
Recessions in the Information Revolution – 1982-2007
Period – Percent of Contraction
1990-91 – 1.4%
2001 – 0.3%
Just because the current monetary system is imbalanced, unsustainable and inefficient doesn’t mean it wont have a moderately positive effect for a while.
The fed could be modified to be more efficient though by interacting with broader and balanced counterparties and its overreliance on credit can be easily be rectified.