Must-Read: Dean Baker: George Will and the Fed: Do Low Interest Rates Redistribute Upward?
Must-Read: Low interest rates redistribute wealth upward, but they do not redistribute income upward. Rather, in the present they create not income but capital gains on old capital owned by rich, and in the future they reduce income on new capital investments made by the rich.
And these effects are overwhelmed, at least in a low-inflation environment, by the benefits of lower interest rates in creating a higher-pressure fuller-employment economy.
: George Will and the Fed: Do Low Interest Rates Redistribute Upward?: “George Will… complain[s] that the Federal Reserve Board is redistributing upward with its low interest rate policy…
…Since this is a source of confusion that extends well beyond Will, it is worth taking a few minutes to address this issue directly…. The argument is that the higher asset prices are helping the rich at the expense of the rest of us…. People who have a more valuable asset can only benefit in terms of current consumption if they borrow against or sell it, but by itself the higher asset value doesn’t do anything for them….
Lower interest rates affect the economy through several channels. Probably the most important one in this downturn is the reduction in mortgage interest burdens as millions of new homeowners were able to get low interest rate mortgages and tens of millions of existing homeowners refinanced at lower interest rates. This is real money…. Investment is at least somewhat higher today than it would be if the Fed had not pursued its low interest rate policy. There is a similar story with state and local governments that borrow to finance infrastructure…. This applies to the federal government as well…. The sum total of these effects has likely been to reduce the unemployment rate by 1.0-2.0 percentage points compared to a situation in which the Fed was not doing anything to try to boost the economy. The effect of lower unemployment is higher redistributive to those at the middle and bottom end of the income ladder. It leads to both a shift from capital to labor and also a shift to less-educated workers since their unemployment rates fluctuate most during the business cycle….
When we hear George Will being concerned about giving the rich money, it’s worth asking questions. In this case, we find that the policy in question is giving more people jobs, making it harder for people like Will to find good help and giving workers more bargaining power so that they can get higher wages. It is not in any meaningful way redistributing income upward.