No one, including the Fed, has done the necessary analysis to answer the question re QE and inequality.

October 27th, 2014 at 8:37 am

If you’re in the NYC area tonight, be sure to come see Larry Kudlow and me debate the issue of income inequality at the 92nd Street Y on behalf of the “bring light not heat” Common Ground committee. See you there!

Speaking of inequality, though this argument has been around for a while, ever since the Boston Fed’s inequality-of-opportunity conference a few weeks ago, the idea that the Fed’s quantitative easing and low interest rate policies have exacerbated inequality has gained steam.

The argument is twofold. First, QE inflated asset prices which are disproportionately held by the wealthy. Second, low interest rates have hurt lower-income savers, like seniors, who live on fixed incomes. Also, low yields on bonds have goosed the stock market as the TINA destination for investors (“there-is-no-alternative”).

As I’ve stressed in various places, I find this argument unconvincing, in no small part because it lacks a counterfactual. That is, the argument fails to account for two critical factors. First, how middle and lower-income households would have fared through the Great Recession and weak recovery in the absence of monetary stimulus, and second, how asset prices would have trended under a no- (or less-) stimulative regime.

William Cohan, for example, delivers a cogent argument that QE has exacerbated inequality, except for the fact that he completely ignores its impact on the “real” economy—growth, jobs, unemployment. As I note in one of the links above:

analysis by Fed economists finds that its asset-buying program “…may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.”

I’d also note, and Dean Baker dives a bit deeper into this point, that while corporate profitability and equity market returns have more than recovered well ahead of the middle class, that unfortunately looks much like the pattern in the last few recoveries, when Fed policy was not nearly as aggressive as today’s. I suspect the forces driving structural inequalities are much more in play here.

So those suggesting the Fed’s actions are exacerbating inequality need to first make the case that those actions are not helping to offset unequal growth through faster job growth and lower unemployment than would otherwise be the case. Neither can they just point to rising asset prices without analysis showing QE to be a primary player.

But—and here, I’ll defend Cohan et al a bit—the Fed itself should be doing more of this work. They’ve got large staffs of some of the top analytical economists in the world and yet I find little to nothing in defense of their actions in this space. I deeply respect and defend their politically neutral, independent position above the fray, such that they can’t be pulled into such debates the way Dean and I are. But it is well within both their skill sets and analytical purview to provide a lot more analysis of the type referenced above.

I pulled the quote above out of an old Bernanke speech and even that, as far as I can tell, came from internal, unpublished work. What are their current estimates of the impact of their actions on jobs, unemployment, wages, profits, and equity prices relative to the relevant counterfactuals? It’s possible that they’ve done so and I’ve missed it, but I follow such things pretty closely.

While I’m not asking them to get into the hurly-burly of high-frequency economic policy debates, they do have a responsibility to not only evaluate the impact of their actions, which I know they’re always doing internally, but to provide that analysis to interested outside parties so we can both better assess their impacts and have a more informed public debate about them.

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9 comments in reply to "No one, including the Fed, has done the necessary analysis to answer the question re QE and inequality."

  1. Edward Lambert says:

    As I and Brad DeLong say, inequality and record profits are mostly caused by the unusual drop in labor share since the turn of the century.
    Yet, one problem with QE and easy money is that the weaker firms are coddled and protected, which keeps the economy from rising to a stronger level. Weak firms are resistant to raising wages. They are less productive. More productive firms have a disadvantage in replacing less productive ones in this easy money environment. Ultimately, workers suffer in a less productive economy.
    The drop in labor share tightens the effective demand limit upon utilization of labor and capital. The Fed is not guilty for the drop in labor share. But the drop in labor share is partly due to less productive firms being protected by easy money, QE.
    So QE can create jobs and such, but the quality of those jobs is ultimately weak.


    • smith says:

      I find this argument about weaker firms very unconvincing.
      I don’t see how weaker firms necessarily lead to lower wages. A weak firm in downturn of any size will try to cut payroll, meaning jobs, but not wages. In an upturn they need to raise wages to retain workers. In a stagnant economy, weaker firms resist raising wages. But so do strong firms. Hence record corporate profits and stagnant wages (and by implication, corporations are mostly strong). The evidence doesn’t seem to support the weak firm theory.
      Also, unfortunately strong firms are probably benefiting more than weak firms from QE. Strong firms use easy money to borrow for expansion, buy backs, acquisitions and consolidation. Weak firms are made weaker by strong firms able to leverage the QE to greater advantage. In that sense, QE is bad, but not for propping up weak firms, just the opposite.

      Moreover, the drop in labor share can be cause or effect. One can argue the drop is due to stagnant and falling wages, and not the other way around. That is one could say the economy and technology favors capital investment at the expense of labor, thus lower wages and greater inequality. Or one could say wages are held down by the power of business suppressing wages while raising prices (with oligopoly and monopoly), which leads to a greater share for capital.

      I favor the latter interpretation.


      • Edward Lambert says:

        Smith,
        Your preliminary assumptions lead you astray.
        In a downturn all firms cut payroll and productivity rises, but this growth spurt in productivity is not undone as payrolls return to normal. The process of a downturn is supposed to give more productive firms an advantage to increase in prominence. Easy money has worked against this dynamic.
        Firms do not need to raise wages in an upturn. That is a better preliminary assumption.
        Strong productive firms are actually willing to raise wages according to labor research. But the presence of low productive firms inhibits them.


  2. Bud Meyers says:

    Why does the claim need a counterfactual? Why would one fact (standing alone) require a counter-fact? Did quantitative easing really help to create jobs? The total U.S. treasury and mortgage-backed securities held by the Federal Reserve from December 2007 to the present is 2.4 trillion — and the net new jobs created during that period of time is 10.3 million — for a cost of $233,000 per job. We would have been better off with helicopter drops.
    http://www.economicpopulist.org/content/forget-qe-send-helicopters-5581


    • Carl says:

      Bud, this is spot on.

      If the government cared one iota about the unwashed masses, they would give direct stimulus in the form of tax rebates or cash to each and every John/Jane Q. Citizen. Sadly, the government only exists to protect the banks and the 1 percent.


  3. Bud Meyers says:

    The distributional effect of quantitative easing – the question of the redistributive impact of monetary policy has taken on a whole new dimension (by Jérémie Cohen-Setton on 27th October 2014)

    http://www.bruegel.org/nc/blog/detail/article/1467-the-distributional-effect-of-quantitative-easing/


  4. Odikhmantievich says:

    Bernstein’s counterfactual is to assume that in the absence of QE, there would have been no public policy response. This is the same rhetoric that was used to provide cover for bailing out Wall Street: if we didn’t save the banks, nothing would have been done, and the economic situation would have deteriorated further. But the real question is, how does the policy fare when compared to the other options? In this light, it is impossible to conclude anything but that the monetary policy of the United States has been used to further the interests of the ruling class.


  5. Spencer says:

    I am willing to accept that Fed policy in this cycle increased inequality.

    But given the limited set of policy tools they have to work I seriously doubt they could have avoided this.

    Easy money usually works first through the wealth via stock and bond markets and housing.
    This cycle housing did not respond as it normally done.
    But how could the Fed have avoided this?What tool did they fail to use to boost housing?


    • Odikhmantievich says:

      The Fed could have supported recommendations for greater fiscal stimulus and public works programs. But why would it do that when it can instead vote to give its members access to no-interest loans?


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