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.