Tag: We Do Need a Better Press Corps

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.

Hoisted from Comments: The Idler on Ryan Avent vs. Clive Crook on Thomas Piketty’s “Capital in the Twenty-First Century”

Posted on by Brad DeLong

Apropos of Ryan Avent Is Very Unhappy with Clive Crook’s Review of Piketty’s “Capital in the Twenty-First Century”, The Idler makes a good catch. I would dearly love to hear anybody’s proposed reconciliation.

Clive Crook today:

The Most Important Book Ever Is All Wrong! Piketty’s terror at rising inequality is an important data point for the reader. It has perhaps influenced his judgment and his tendentious reading of his own evidence…

Clive Crook back before the election of Barack Obama:

First Principles: September 2006: The Height of Inequality: America’s productivity gains have gone to giant salaries for just a few… Productivity growth has always been seen as perhaps the single most important indicator of rising, broad-based prosperity. But remarkable growth in top-end pay, together with the relative constancy of labor’s overall share of income, has an obvious implication: the highest earners are now capturing most of the gain in national income caused by economy-wide productivity growth….

This is quite disturbing. Historically, rising productivity has been a tide that lifted nearly all boats. For more than twenty years during the long surge of productivity growth that followed the Second World War, median incomes in the United States rose as quickly as the highest incomes. This came to be regarded as normal—and, seen from a global vantage point, it still is. The dispersed benefits of high aggregate productivity are the reason why jobs of almost every kind pay better in rich countries than in poor ones….

Perhaps the CEOs’ appetites can be curbed. Maybe the superstars will find that their audiences cannot widen without limit. And perhaps, if both those things happen, productivity growth will again raise incomes broadly, as it once did, and as it is supposed to. If not, how much longer before the dwarves get restless?…