June 03, 2013
Annie Lowrey at the NYT continues a mini-debate about whether the Fed is promoting inequality with its quantitative easing program. The argument is that by pushing down interest rates it is contributing to the run-up in stock prices and housing prices. Since stock is hugely disproportionately held by the wealthy and homeowners are better off than the population as a whole, this policy is increasing inequality.
This is undoubtedly true, although the extent of the impact can be debated. (High corporate profits are also a big factor behind the rise in stock prices. Also, they began their run-up at unusually depressed levels.)
However, a little income accounting here would go along way in helping this discussion. The country has an output gap of around 6 percent of GDP. This is due to the plunge in residential construction following the collapse of the housing bubble and also the lost consumption that resulted from the loss of $8 trillion in housing equity. Standard measures of the housing wealth effect imply that a reduction of $400 billion to $560 billion in annual consumption.
There are a limited number of channels to fill this lost demand and thereby make up the 9 million jobs deficit we now face. One route is large government deficits, either from increased spending or tax cuts. That is probably the quickest and surest way to make up the demand gap, but the Serious People insist that we can’t run large deficits.
Another obvious route, and probably the best long-term solution, is to get the dollar down. This will improve the international competitiveness of U.S. goods and bring the trade deficit closer to balance. Unfortunately this has not been a high priority for the Obama administration. There are powerful interests like Walmart, many large manufacturers, and the financial sector which benefit from an over-valued dollar. As a result, getting the dollar back to a more sustainable level has not been a priority for the administration.
When these routes are excluded there are not many other options to increase growth and create jobs. Low interest rates will help by allowing homeowners to refinance their mortgages and free up money for other spending. However this effect will be limited. Even if all $8 trillion in mortgage debt were refinanced at a 1.0 percentage point lower interest rate that would only free up $80 billion. And, this is offset by the fact that those lending the money will have less to spend.
The bigger impact is likely to be the stock and housing wealth effects. These likely explain the fact that the savings rate is now hovering near 3.0 percent, as opposed to an 8.0 percent pre-bubble average.
At this point neither the stock or housing market are obviously in a bubble, which means that the Fed actions simply helped them to recover to their long-term trend levels. However if price rises continue to outpace GDP growth in the stock market or inflation in the housing market, then we will be looking at bubbles. This would not be good news, since bubbles burst and wreck economies. That would be the far more important issue than the temporary shift in wealth and income to the rich.
It is unfortunate that at the moment political considerations have largely cut off other avenues to full employment. It would be helpful if reporters gave more attention to the simple facts of basic national income accounting. If more people knew them it could expand the range of politically acceptable action.
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