Tag: Dean Baker

Must-Read: Dean Baker: George Will and the Fed: Do Low Interest Rates Redistribute Upward?

Posted on by Brad DeLong

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.

Dean Baker: 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.

Must-read: Dean Baker: “The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor”

Posted on by Brad DeLong

Must-Read: Dean Baker: The Elite’s Comforting Myth: We Had to Screw Rich Country Workers to Help the World’s Poor: “Roger Cohen gave us yet another example of touching hand-wringing from elite types…

…about the plight of the working class in rich countries…. Cohen acknowledges that there is a real basis for their rejection of the mainstream: they have seen decades of stagnating wages. However Cohen tells us the plus side of this story, we have seen huge improvements in living standards among the poor in the developing world. In Cohen’s story, the economic difficulties of these relatively privileged workers is justified by the enormous gains they allowed those who are truly poor. The only problem is that these workers are now looking to these extreme candidates. Cohen effectively calls for a more generous welfare state to head off this turn to extremism, saying that we may have to restrain ‘liberty’ (he means the market) in order to protect it. This is a touching and self-serving story. The idea is that elite types like Cohen were winners in the global economy. That’s just the way it. Cohen is smart and hard working, that’s why he and his friends did well. Their doing well also went along with the globalization process that produced enormous gains for the world’s poor. But now he recognizes the problems of the working class in rich countries, so he says he and his rich friends need to toss them some crumbs so they don’t become fascists.

We all should be glad that folks like Cohen support a stronger welfare state, but let’s consider his story… imagine that mainstream economics wasn’t a make it up as you go along discipline. The standard story in economics is that capital is supposed to flow from rich countries to poor countries…. Rich countries lend poor countries the capital they need to develop… [run] large trade surpluses with the developing world. In effect, the rich countries would be providing the capital that poor countries need to build up their capital stock and infrastructure, while still ensuring that their populations are fed, housed, and clothed. We actually were seeing a pattern of development largely along these lines in the early 1990s….

This pattern was reversed in 1997 with the U.S.-I.M.F.’s bailout from the East Asian financial crisis…. The countries directly affected began to run huge trade surpluses in order to accumulate massive amounts of reserves. Other developing countries also decided to go the same route in order to avoid ever being in the same situation as the countries of East Asia. From that point forward developing countries like China and Vietnam ran enormous trade surpluses. This implied huge trade deficits and unemployment for manufacturing workers in the United States and to a lesser extent Europe…. Cohen is giving us this impressive display of hand-wringing…. It’s very touching, but in the standard economics, it was hardly necessary. The standard economics would have allowed the pattern of growth of the early and mid-1990s to continue…. The fact that the textbook course of development was reversed, with massive capital flows going from poor countries to rich countries, was due to a massive failure of the international financial system…. The fact that manufacturing workers paid this price, and not doctors, lawyers, and other highly paid professionals, was by design….

It’s touching that folks like Roger Cohen feel bad for the losers from the process of globalization. But the story is that they didn’t just happen to lose, his friends designed the game that way.

Must-read: Dean Baker: “Prime-Age Workers Re-Enter Labor Market”

Posted on by Brad DeLong

Must-Read: The Federal Reserve is looking at the past six months and seeing significant improvement in the labor market. It is also looking at financial markets and seeing increased pessimism about inflation. It is having a difficult time reconciling these two.

The reconciliation is, I think, that financial markets now believe that the Phillips Curve is flatter and that the NAIRU is lower than they thought two years ago–and they are likely to be right:

Dean Baker: Prime-Age Workers Re-Enter Labor Market: “The economy added 215,000 jobs in March…

Graph Employment Rate Aged 25 54 All Persons for the United States© FRED St Louis Fed

…with the unemployment rate rounding up to 5.0 percent from February’s 4.9 percent. However, the modest increase in unemployment was largely good news, since it was the result of another 396,000 people entering the labor force. There has been large increase in the labor force over the last six months, especially among prime-age workers. Since September, the labor force participation rate for prime-age workers has increased by 0.6 percentage points. This seems to support the view that the people who left the labor market during the downturn will come back if they see jobs available. However even with this rise, the employment-to-population ratio for prime-age workers is still down by more than two full percentage points from its pre-recession peak.

Another positive item in the household survey was a large jump in the percentage of unemployment due to voluntary quits. This sign of confidence in the labor market rose to 10.5 percent, the highest level in the recovery, although it’s still more than a percentage point below the pre-recession peaks and almost four percentage points below the levels reached in 2000.

While the rate of employment growth in the establishment survey was in line with expectations, average weekly hours remained at 34.4, down from 34.6 in January. As a result, the index of aggregate hours worked is down by 0.2 percent from the January level. This could be a sign of slower job growth in future months.

Must-read: Dean Baker: “The Fed and the Quest to Raise Rates”

Posted on by Brad DeLong

Must-Read: Dean Baker: The Fed and the Quest to Raise Rates: “The justification for raising rates is to prevent inflation from getting out of control…

…but inflation has been running well below the Fed’s 2.0 percent target for years. Furthermore, since the 2.0 percent target is an average inflation rate, the Fed should be prepared to tolerate several years in which the inflation rate is somewhat above 2.0 percent… [and] allow for a period in which real wage growth slightly outpaces productivity growth in order to restore the pre-recession split between labor and capital…. The most recent data provide much more reason for concern that the economy is slowing more than inflation is accelerating….

There are many other measures indicating that there continues to be considerable slack in the labor market despite the relatively low unemployment. There are no plausible explanations for the sharp drop in the employment rate of prime-age workers at all education levels from pre-recession levels, apart from the weakness of the labor market. The amount of involuntary part-time employment continues to be unusually high…. And the duration measures of unemployment spells and the share of unemployment due to voluntary quits are both much closer to recession levels than business cycle peaks…

Must-read: Dean Baker: “The Upward Redistribution of Income: Are Rents the Story?”

Posted on by Brad DeLong

Must-Read: Contra Dean Baker, I suspect that Thomas Piketty would say that the ability of the rich to manipulate property rights and market power in order to keep the rate of profit high even as the economy becomes more capital-intensive is a feature that is “intrinsic to capitalism.” Thus I think Piketty would say that Baker is wrong here at the end:

Dean Baker: The Upward Redistribution of Income: Are Rents the Story?: “The top one percent of households have seen their income share roughly double…

…from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period…. The bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

http://cepr.net/publications/reports/working-paper-the-upward-redistribution-of-income-are-rents-the-story

http://cepr.net/documents/working-paper-upward-distribution-income-rents.pdf

Must-Read: Dean Baker: The Upward Redistribution of Income: Are Rents the Story?

Posted on by Brad DeLong

Must-Read: Contra Dean Baker, I suspect that Thomas Piketty would say that the ability of the rich to manipulate property rights and market power in order to keep the rate of profit high even as the economy becomes more capital-intensive is a feature that is “intrinsic to capitalism.” Thus I think Piketty would say that Baker is wrong here at the end:

Dean Baker: The Upward Redistribution of Income: Are Rents the Story?: “The top one percent of households have seen their income share roughly double…

…from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period…. The bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

http://cepr.net/documents/working-paper-upward-distribution-income-rents.pdf

Must-Read: Dean Baker: Growth Falls Off Sharply in Third Quarter

Posted on by Brad DeLong

Must-Read: Dean Baker: Growth Falls Off Sharply in Third Quarter: “The economy grew at a 1.5 percent annual rate in the third quarter…

…a sharp slowing from the 3.9 percent rate reported for the second quarter…. For the first three quarters of the year GDP has risen at a 2.0 percent annual rate…. There continues to be no evidence of inflationary pressures in any sector…

A 2.0%/year growth rate over the past three quarters, a 2.1%/year growth rate over the past four quarters, a 2.9%/year growth rate the year before (2013:III-2014:III), and a 1.6%/year growth rate the year before that (2012:III-2013:III).

The case for tightening monetary policy is not obvious, to say the least…

Monday Smackdown Watch: Paul Krugman Admonishes Me on My Making Out of Milton Friedman Not a Golden, But a Paper-Money Calf

Posted on by Brad DeLong
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Paul Krugman: Milton, Money, and Interest Rates: “I have a moderate disagreement with Brad DeLong…

…[who] has been arguing that demands for tight money are, in fact, contrary to the bankers’ own interests:

It was Milton Friedman who insisted, over and over again, that in any but the shortest of runs high nominal interest rates were not a sign that money was tight–that the central bank had pushed the market interest rate above the Wicksellian natural rate–but rather that money had been and probably was still loose, and that market expectations had adjusted to that.

Friedman did in fact make that claim. But… he was wrong.

Consider the Volcker disinflation. The Fed… did everything one might imagine to make it clear that there was a regime shift that would lead to disinflation…. This policy change nonetheless led to a severe recession… conclusive evidence against both the Lucas notion that only unanticipated monetary policy has real effects, and the Prescott view that business cycles reflect real shocks. But the episode also undermines the Friedman claim on interest rates…. Short rates… were sharply elevated for three years…. Long rates… rose along with short rates and stayed high for several years. So put yourself in the (very expensive) shoes of a bank CEO today…. Even if you understand the macroeconomics and know the history (which you probably don’t), this is a story about a better bottom line four or five years down the pike, by which time you will have foregone a lot of bonuses and may well be retired. As I see it, interest-rate hawkery on the part of bankers isn’t irrational, just evil.

Touché…

I confess I have been thinking that we have a choice between:

  • The Federal Reserve starts its liftoff this fall, and then has to reverse course within two yours back to the ZLB, thus cementing market expectations that we will be at the ZLB for a loooong time…

  • the Federal Reserve waits two years to start liftoff, and then successfully accomplishes normalization…

Paul says: It won’t be that quick. And the historical evidence is certainly on his side.

Plus: Dean Baker piles on:

Dean Baker: The Argument for Higher Interest Rates: Are the Bankers Evil or Stupid?: “I would mostly agree with Krugman, but for a slightly different reason…

…An unexpected rise in the inflation rate is clearly harmful to banks’ bottom line. This will lead to a rise in long-term interest rates and loss in the value of their outstanding debt…. While we (the three of us) can agree that such a jump in inflation is highly unlikely in the current economic situation, it is not zero. Furthermore, a stronger economy increases this risk….[Banks] are faced with a trade-off between a greater risk of something they really fear, and something to which they are largely indifferent. It shouldn’t be surprising that they want to the Fed to act to ensure the event they really fear (higher inflation) does not happen. Hence the push to raise interest rates.

I suspect also there is a strong desire to head off any idea that the government can shape the economy in important ways. There is enormous value for the rich to believe that they got where they are through their talent and hard work and that those facing difficult economic times lack these qualities. It makes for a much more troubling world view to suggest that tens of millions of people might be struggling because of bad fiscal policy from the government and inept monetary policy by the Fed.