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Thursday, May 23, 2013

'Not Too Late for the Social Credit Helicopters!'

This is the kind of thing I had in mind when I called for bold, creative proposals from the Fed to address the unemployment problem. Via Brad DeLong:

Duncan Black:

Eschaton: Not Too Late For The Helicopters: A big tragedy of the last few years is the failure to recognize that being in a low inflation world at the zero lower bound was a tremendous opportunity to massively enhance human welfare in this country. Mailing out 10 grand checks to everyone would have been an egalitarian massive boost to the economic well-being of huge numbers of people. Instead, the Fed has goosed asset prices, mostly benefiting the rich. Trickle down through another means, but still trickle down. Better than doing nothing, probably, but there were other ways.

How can you oppose a social-democratic economic policy that had the endorsement of Robert A. Heinlein?

I'm trying to imagine Ben Bernanke answering questions about a policy like this in his hearing yesterday before the Joint Economic Committee. Questions from conservative maker-taker types in particular. (See here for a discussion of helicopter money.)

We really don't pay enough attention to distributional issues associated with Fed policy. Duncan Black again:

I'm curious if there's been any "serious" work on the distributional impacts of the Fed's quantitative easing. Whatever it's done for the economy overall, what has it done for rich people?

I haven't read it closely, but one paper is:

Innocent Bystanders? Monetary Policy and Inequality in the U.S., by Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia, NBER Working Paper No. 18170, Issued in June 2012: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.

A bit more from the introduction:

Using these measures of inequality, we document that monetary policy shocks have statistically significant effects on inequality: a contractionary monetary policy shock raises the observed inequality across households in income, labor earnings, expenditures and consumption. These results are robust... In addition, monetary policy shocks appear to have played a non-trivial role in accounting for cyclical fluctuations in inequality over this time period. ... Furthermore, monetary policy shocks can account for a surprising amount of the historical cyclical changes in income and consumption inequality, particularly since the mid-1990s. ...

Two notes. First, it doesn't deal directly with quantitative easing (at least a search of the text does not turn anything up). Second, it works the opposite way from what most "populist" critics assert:

Contractionary monetary policy shocks appear to have significant long-run effects on inequality, leading to higher levels of income, labor earnings, consumption and total expenditures inequality across households, in direct contrast to the directionality advocated by Ron Paul and Austrian economists. Furthermore, while monetary policy shocks cannot account for the trend increase in income inequality since the early 1980s, they appear to have nonetheless played a significant role in cyclical fluctuations in inequality and some of the longer-run movements around the trends.

But there is this at the end of the paper:

the sensitivity of inequality measures to monetary policy actions points to even larger costs of the zero-bound on interest rates than is commonly identified in representative agent models. Nominal interest rates hitting the zero-bound in times when the central bank’s systematic response to economic conditions calls for negative rates is conceptually similar to the economy being subject to a prolonged period of contractionary monetary policy shocks. Given that such shocks appear to increase income and consumption inequality, our results suggest that standard representative agent models may significantly understate the welfare costs of zero-bound episodes.

To the extent that quantitative easing can offset these negative shocks, it ought to improve the income distribution (again, the opposite of what many critics assert). Policies such as "Mailing out 10 grand checks to everyone" ought to work in the same way (at the zero bound), perhaps even better.

Some people within the Fed have a view on this:

While the Federal Reserve's accommodative policies have boosted stocks and helped the rich, it is unclear whether they are doing enough for the broader U.S. economy, a top central bank official said on Monday. "We've made rich people richer...," Dallas Fed President Richard Fisher said on CNBC television. "Question is what have we done for working men and women in America?"

Fisher asks "what have we done for working men and women in America?" Answer: Not enough (and part of the reason is inflation hawks like Fisher). As I said recently, "the risks of inflation and financial instability have been overblown relative to the large costs associated with high long-term unemployment and it’s time for the Fed to address the unemployment problem with the same creativity, boldness, and perseverance it displayed when banks were its main concern."

    Posted by on Thursday, May 23, 2013 at 11:31 AM in Economics, Income Distribution, Monetary Policy | Permalink  Comments (21)


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