The coal industry has spent tens of millions of dollars trying to convince people that the country should not take measures to stop global warming. NPR contributed to this campaign by running a piece on the politics of Ohio in the election which implied that coal was central to the state’s economy or at least to the area around Akron.
According to the Bureau of Labor Statistics (BLS), Ohio has approximately 12,000 employed in mining and logging. Presumably the vast majority of these workers are employed in coal mining. If we assume that all of them are employed in mining then this would be a bit more than 0.2 percent of its 5.2 million workers.
Turning to the Akron area, BLS doesn’t break out mining and logging separately, but tells us that around 12,000 workers are employed in construction, mining, and logging. If we assume that construction accounts for 3 percent of total employment (roughly the national average), this would leave a bit less than 3,000 workers employed in mining, around 1 percent of its total employment of 320,000.
While the coal industry may want us to believe that the region’s economy depends on a sector that accounts for less than 1 percent of total employment, that is not a plausible story. NPR should not have uncritically presented the industry’s claims about its importance to the region’s economy.
The coal industry has spent tens of millions of dollars trying to convince people that the country should not take measures to stop global warming. NPR contributed to this campaign by running a piece on the politics of Ohio in the election which implied that coal was central to the state’s economy or at least to the area around Akron.
According to the Bureau of Labor Statistics (BLS), Ohio has approximately 12,000 employed in mining and logging. Presumably the vast majority of these workers are employed in coal mining. If we assume that all of them are employed in mining then this would be a bit more than 0.2 percent of its 5.2 million workers.
Turning to the Akron area, BLS doesn’t break out mining and logging separately, but tells us that around 12,000 workers are employed in construction, mining, and logging. If we assume that construction accounts for 3 percent of total employment (roughly the national average), this would leave a bit less than 3,000 workers employed in mining, around 1 percent of its total employment of 320,000.
While the coal industry may want us to believe that the region’s economy depends on a sector that accounts for less than 1 percent of total employment, that is not a plausible story. NPR should not have uncritically presented the industry’s claims about its importance to the region’s economy.
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The Commerce Department reported that durable goods orders fell by 13.2 percent in August, not surprisingly the Wall Street Journal chose to highlight this drop. While the number is dramatic, nearly all of the drop was in the highly volatile transportation component. Excluding transportation, orders fell by a considerably more modest 1.6 percent.
Within transportation, civilian aircraft stood out with a decline in orders of 101.8 percent. Yes, the number was over 100 percent, as apparently there were more orders canceled in August than added.
Clearly there are some issues of timing here, but at the moment not very much cause for concern. If we want to know how businesses are thinking about the future, we might look at orders for non-defense capital goods, excluding aircraft, which rose by 1.1 percent in August, albeit after two sharp monthly declines. Anyhow, the overall picture in this report is negative but certainly not the disaster that the WSJ article implies. Given that weekly unemployment claims hit a new low for the recovery, a wait for evidence view might be appropriate.
Correction: Bill Heffner’s comment below is right. The 359,000 claims reported in the most recent week is higher than two week in July, in which the number of claimsreported were 352,000 and 357,000. It is worth noting that claims are almost always revised upward, but usually by a small amount.
The Commerce Department reported that durable goods orders fell by 13.2 percent in August, not surprisingly the Wall Street Journal chose to highlight this drop. While the number is dramatic, nearly all of the drop was in the highly volatile transportation component. Excluding transportation, orders fell by a considerably more modest 1.6 percent.
Within transportation, civilian aircraft stood out with a decline in orders of 101.8 percent. Yes, the number was over 100 percent, as apparently there were more orders canceled in August than added.
Clearly there are some issues of timing here, but at the moment not very much cause for concern. If we want to know how businesses are thinking about the future, we might look at orders for non-defense capital goods, excluding aircraft, which rose by 1.1 percent in August, albeit after two sharp monthly declines. Anyhow, the overall picture in this report is negative but certainly not the disaster that the WSJ article implies. Given that weekly unemployment claims hit a new low for the recovery, a wait for evidence view might be appropriate.
Correction: Bill Heffner’s comment below is right. The 359,000 claims reported in the most recent week is higher than two week in July, in which the number of claimsreported were 352,000 and 357,000. It is worth noting that claims are almost always revised upward, but usually by a small amount.
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Those who wonder why the Post seems to focus obsessively on budget deficits when there are so many larger problems afflicting the country got part of their answer today in an article on the euro crisis. The article focuses exclusively on budget deficits and the risk of insolvency for the troubled economies of southern Europe. It never once raises the issue of the current account deficits that these countries are experiencing.
The fundamental problem in the euro zone is that costs in southern Europe have risen sharply relative to costs in Germany over the last decade. This makes southern Europe less competitive, leading to its large trade deficit. The trade deficit, implies negative national savings (i.e. there is no possible around this outcome). Negative national savings means either that private investment exceeds private savings (which was true in the bubble years) and/or budget deficits. Unless the trade deficit is reduced in these countries, there is no plausible way to get the budget deficits down.
The current route in to lower deficits is by shrinking the economy and thereby reducing private savings. It is not a plausible long-term strategy. Ultimately it will be necessary for costs in Germany and the south to move closer together. It is very difficult to get prices to fall, which means that Germany has no choice but to experience higher inflation.
But Post readers didn’t hear about this issue. They were just told about budget deficits.
Those who wonder why the Post seems to focus obsessively on budget deficits when there are so many larger problems afflicting the country got part of their answer today in an article on the euro crisis. The article focuses exclusively on budget deficits and the risk of insolvency for the troubled economies of southern Europe. It never once raises the issue of the current account deficits that these countries are experiencing.
The fundamental problem in the euro zone is that costs in southern Europe have risen sharply relative to costs in Germany over the last decade. This makes southern Europe less competitive, leading to its large trade deficit. The trade deficit, implies negative national savings (i.e. there is no possible around this outcome). Negative national savings means either that private investment exceeds private savings (which was true in the bubble years) and/or budget deficits. Unless the trade deficit is reduced in these countries, there is no plausible way to get the budget deficits down.
The current route in to lower deficits is by shrinking the economy and thereby reducing private savings. It is not a plausible long-term strategy. Ultimately it will be necessary for costs in Germany and the south to move closer together. It is very difficult to get prices to fall, which means that Germany has no choice but to experience higher inflation.
But Post readers didn’t hear about this issue. They were just told about budget deficits.
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The Raleigh News and Observer has a nice piece on how the large hospitals in the state make big profits on chemotherapy drugs. Yes, this is the sort of thing one expects when the government grants patent monopolies. Where are the foes of big government?
[Correction: I had earlier identified the paper as the Charlotte Observer.]
The Raleigh News and Observer has a nice piece on how the large hospitals in the state make big profits on chemotherapy drugs. Yes, this is the sort of thing one expects when the government grants patent monopolies. Where are the foes of big government?
[Correction: I had earlier identified the paper as the Charlotte Observer.]
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The NYT notes that the deficit is likely to surpass $1 trillion for the fourth consecutive year. It then tells readers:
“Against that headline-grabbing figure, Mr. Obama’s explanation — that the deficit he inherited is actually on a path to be cut in half just a year later than he promised, measured as a percentage of the economy’s total output — risks sounding professorial at best.”
Many people might have thought that newspapers control what goes into their headlines (the headline of this piece is “Obama faces test as deficit stays above $1 trillion). This should mean that they have the ability to write their headlines and articles in ways that best convey information to readers, not fan fears that are promoted by partisans of a particular course of action (i.e. deficit reduction). This means that if President Obama’s explanation for the deficit is valid (it is), then it is the responsibility of the paper to explain it to readers in a way that is understandable to them.
The piece notes projected increases in the ratio of debt to GDP. It then tells readers:
“Many analysts say that a nation’s debt should not exceed 60 percent to 70 percent.”
While it does not identify these analysts, they are obviously people who are ill-informed about budget accounting. If we are only concerned about the ratio of debt to GDP, then the Treasury will be able to buy back long-term debt issued today at very low interest rates at a substantial discount if interest rates rise back to more normal levels as predicted by the Congressional Budget Office and others.
A 30-year bond issued at a 2.75 percent interest rate, would sell at a 40 percent discount if the long-term interest rate rose to a more normal 6.0 percent. This means that if the Treasury had $4 trillion in 30-year bonds outstanding, it would be able to buy them back for 2.4 billion, instantly eliminating $1.6 trillion in debt or roughly 10 percentage points of GDP.
This would of course be silly, the interest burden would not have changed, but budget analysts who think that a nation’s debt should not exceed 60 percent to 70 percent would be made very happy by this action. In reality what matters is the ratio of interest payments to GDP, which is now near a post-World War II low. Remarkably, this fact is never mentioned in this piece.
The NYT notes that the deficit is likely to surpass $1 trillion for the fourth consecutive year. It then tells readers:
“Against that headline-grabbing figure, Mr. Obama’s explanation — that the deficit he inherited is actually on a path to be cut in half just a year later than he promised, measured as a percentage of the economy’s total output — risks sounding professorial at best.”
Many people might have thought that newspapers control what goes into their headlines (the headline of this piece is “Obama faces test as deficit stays above $1 trillion). This should mean that they have the ability to write their headlines and articles in ways that best convey information to readers, not fan fears that are promoted by partisans of a particular course of action (i.e. deficit reduction). This means that if President Obama’s explanation for the deficit is valid (it is), then it is the responsibility of the paper to explain it to readers in a way that is understandable to them.
The piece notes projected increases in the ratio of debt to GDP. It then tells readers:
“Many analysts say that a nation’s debt should not exceed 60 percent to 70 percent.”
While it does not identify these analysts, they are obviously people who are ill-informed about budget accounting. If we are only concerned about the ratio of debt to GDP, then the Treasury will be able to buy back long-term debt issued today at very low interest rates at a substantial discount if interest rates rise back to more normal levels as predicted by the Congressional Budget Office and others.
A 30-year bond issued at a 2.75 percent interest rate, would sell at a 40 percent discount if the long-term interest rate rose to a more normal 6.0 percent. This means that if the Treasury had $4 trillion in 30-year bonds outstanding, it would be able to buy them back for 2.4 billion, instantly eliminating $1.6 trillion in debt or roughly 10 percentage points of GDP.
This would of course be silly, the interest burden would not have changed, but budget analysts who think that a nation’s debt should not exceed 60 percent to 70 percent would be made very happy by this action. In reality what matters is the ratio of interest payments to GDP, which is now near a post-World War II low. Remarkably, this fact is never mentioned in this piece.
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Casey Mulligan takes another stab at explaining the drop in employment since the housing market crash on changes in incentives in the NYT today. The basic story is that the extension of the length of unemployment insurance (UI), the easing of eligibility rules, the increased generosity of food stamps and several other changes in tax and benefit structures gave people less incentive to work. As a result, more people opted to rely on these benefits rather than work, hence the large falloff in employment and the rise in the unemployment rate.
There are many problems with this story, most importantly that people who have looked at what happens to workers whose UI benefits expire (e.g. Jesse Rothstein) find that most of them simply leave the labor force. They do not suddenly start working. Since the extension of UI benefits was by far the most important change in incentives since the start of the downturn, and we don’t see much evidence of an effect on employment, we might have some reason to believe that the other smaller changes had much effect.
But Mulligan presents us with a graph that shows that groups that saw larger increases in effective tax rates (which includes the loss of benefits from working as an implicit tax) had the biggest falloff in average hours worked.
Source: Mulligan, 2012.
Actually, the graph doesn’t quite show this story. We can see that high-middle skilled unmarried heads of households had an effective reduction in marginal earnings of more than 15 percent, yet they had the same or less reduction in hours than all but the highest skill group among married workers, all of whom had considerable smaller increases in effective marginal tax rates. If Mulligan has a case here, it rests on the lowest skill, low-middle skilled and middle skilled group among unmarried heads of households. (To convince yourself of this fact, cover up these three points and see if the graph tells you anything about the relationship between the drop in hours and the change in effective tax rates.)
There are a couple of points to be made about this analysis. First, we had around 10.5 million employed single heads of households in 2007. This means that we can’t hope to explain too large a share of the 10 million lost jobs in the downturn on this group. The second point is that once we begin to divide this group by skills the samples are not very large. We also run the risk that we are picking up other effects, most notably that these are likely to be younger workers who have had particularly bad employment experiences in the downturn.
But let’s accept Mulligan’s work at face value. Note that his endpoint is 2010. The reason is that benefits became notable less generous after 2010 by his calculations as many programs expired. Depending on the group, a quarter to one-third of the disincentive would have been eliminated. This means that we should expect to see a substantial uptick in hours worked for the most affected groups.
It would take a bit of work to reproduce Mulligan’s skill groups, but if we look at the less-skilled segment of the population, those without high school degrees and those with just high school degrees, it is difficult to see much evidence of a gain in employment since 2010 when the work disincentives were lessened. In other words, if these people didn’t respond to the reduction of disincentives when programs expired, it’s hard to believe that they were responding to the increased disincentive whent the programs were expanded.
Employment to Population Ratio of People without High School Degrees
Source: Bureau of Labor Statistics.
Employment to Population Ratio of People with High School Degrees
Source: Bureau of Labor Statistics.
In short, Mulligan has an interesting story, but the data don’t seem to fit.
Addendum: The graph for those without high school degrees was corrected at 10:30. Thanks Barry.
Second Addendum: Since I’m beating up on Mulligan here, I want to give him credit for being right in his previous post. That one took Paul Krugman to task for arguing that anyone who believed that the release of the new version of the iPhone would increase GDP was a Keynesian. Mulligan gave a solidly grounded explanation whereby the new iPhone could simply be seen as the fruit that came from prior years’ investment. Of course Krugman is right that what is going on is a Keynesian boost to demand, but he is wrong that there is no possible non-Keynesian explanation for the iPhone providing a boost to growth.
Casey Mulligan takes another stab at explaining the drop in employment since the housing market crash on changes in incentives in the NYT today. The basic story is that the extension of the length of unemployment insurance (UI), the easing of eligibility rules, the increased generosity of food stamps and several other changes in tax and benefit structures gave people less incentive to work. As a result, more people opted to rely on these benefits rather than work, hence the large falloff in employment and the rise in the unemployment rate.
There are many problems with this story, most importantly that people who have looked at what happens to workers whose UI benefits expire (e.g. Jesse Rothstein) find that most of them simply leave the labor force. They do not suddenly start working. Since the extension of UI benefits was by far the most important change in incentives since the start of the downturn, and we don’t see much evidence of an effect on employment, we might have some reason to believe that the other smaller changes had much effect.
But Mulligan presents us with a graph that shows that groups that saw larger increases in effective tax rates (which includes the loss of benefits from working as an implicit tax) had the biggest falloff in average hours worked.
Source: Mulligan, 2012.
Actually, the graph doesn’t quite show this story. We can see that high-middle skilled unmarried heads of households had an effective reduction in marginal earnings of more than 15 percent, yet they had the same or less reduction in hours than all but the highest skill group among married workers, all of whom had considerable smaller increases in effective marginal tax rates. If Mulligan has a case here, it rests on the lowest skill, low-middle skilled and middle skilled group among unmarried heads of households. (To convince yourself of this fact, cover up these three points and see if the graph tells you anything about the relationship between the drop in hours and the change in effective tax rates.)
There are a couple of points to be made about this analysis. First, we had around 10.5 million employed single heads of households in 2007. This means that we can’t hope to explain too large a share of the 10 million lost jobs in the downturn on this group. The second point is that once we begin to divide this group by skills the samples are not very large. We also run the risk that we are picking up other effects, most notably that these are likely to be younger workers who have had particularly bad employment experiences in the downturn.
But let’s accept Mulligan’s work at face value. Note that his endpoint is 2010. The reason is that benefits became notable less generous after 2010 by his calculations as many programs expired. Depending on the group, a quarter to one-third of the disincentive would have been eliminated. This means that we should expect to see a substantial uptick in hours worked for the most affected groups.
It would take a bit of work to reproduce Mulligan’s skill groups, but if we look at the less-skilled segment of the population, those without high school degrees and those with just high school degrees, it is difficult to see much evidence of a gain in employment since 2010 when the work disincentives were lessened. In other words, if these people didn’t respond to the reduction of disincentives when programs expired, it’s hard to believe that they were responding to the increased disincentive whent the programs were expanded.
Employment to Population Ratio of People without High School Degrees
Source: Bureau of Labor Statistics.
Employment to Population Ratio of People with High School Degrees
Source: Bureau of Labor Statistics.
In short, Mulligan has an interesting story, but the data don’t seem to fit.
Addendum: The graph for those without high school degrees was corrected at 10:30. Thanks Barry.
Second Addendum: Since I’m beating up on Mulligan here, I want to give him credit for being right in his previous post. That one took Paul Krugman to task for arguing that anyone who believed that the release of the new version of the iPhone would increase GDP was a Keynesian. Mulligan gave a solidly grounded explanation whereby the new iPhone could simply be seen as the fruit that came from prior years’ investment. Of course Krugman is right that what is going on is a Keynesian boost to demand, but he is wrong that there is no possible non-Keynesian explanation for the iPhone providing a boost to growth.
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The NYT had an article that reported on Germany’s relative economic success and attributed it to the labor market reforms that reduced benefits for unemployed workers and took other steps to weaken workers’ bargaining power. While these reforms undoubtedly had the effect of reducing Germany’s labor costs and thereby allowing it to accumulate a large trade surplus in the euro zone (which meant that countries like Greece, Spain, and Ireland would have large trade deficits), this is only part of the story of Germany’s success in lowering its unemployment rate.
The fact that Germany has persuaded employers to reduce work hours rather than lay off workers has been at least as important in bringing down Germany’s unemployment rate. Germany’s growth rate since the downturn began has been almost identical to the growth rate in the United States. While the unemployment rate in the United States has risen by 3.6 percentage points over this period, from 4.5 percent to 8.1 percent, the unemployment rate in Germany has fallen by more than 2.0 percentage points from the 7.6 percent to 5.5 percent. It would have been worth noting the policy of promoting work sharing in this discussion.
Source: OECD.
The NYT article also wrongly refers to the official Germany unemployment rate of 7.0 percent instead of the OECD harmonized rate. The official German rate counts people who are working part-time but desire full-time employment as being unemployed. It therefore is not directly comparable to the U.S. unemployment rate. The OECD harmonized unemployment rate uses the same methodology as the U.S. Labor Department.
The NYT had an article that reported on Germany’s relative economic success and attributed it to the labor market reforms that reduced benefits for unemployed workers and took other steps to weaken workers’ bargaining power. While these reforms undoubtedly had the effect of reducing Germany’s labor costs and thereby allowing it to accumulate a large trade surplus in the euro zone (which meant that countries like Greece, Spain, and Ireland would have large trade deficits), this is only part of the story of Germany’s success in lowering its unemployment rate.
The fact that Germany has persuaded employers to reduce work hours rather than lay off workers has been at least as important in bringing down Germany’s unemployment rate. Germany’s growth rate since the downturn began has been almost identical to the growth rate in the United States. While the unemployment rate in the United States has risen by 3.6 percentage points over this period, from 4.5 percent to 8.1 percent, the unemployment rate in Germany has fallen by more than 2.0 percentage points from the 7.6 percent to 5.5 percent. It would have been worth noting the policy of promoting work sharing in this discussion.
Source: OECD.
The NYT article also wrongly refers to the official Germany unemployment rate of 7.0 percent instead of the OECD harmonized rate. The official German rate counts people who are working part-time but desire full-time employment as being unemployed. It therefore is not directly comparable to the U.S. unemployment rate. The OECD harmonized unemployment rate uses the same methodology as the U.S. Labor Department.
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That’s what Brad Plumer tells us. As we like to say here at BTP, if everyone in Washington agrees, it’s got to be wrong.
That’s what Brad Plumer tells us. As we like to say here at BTP, if everyone in Washington agrees, it’s got to be wrong.
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I really don’t want to waste my time talking about Governor Romney’s tax returns, but come on folks. He was asked on 60 Minutes about whether it was fair that he paid a 14 percent tax rate on his income, compared to the much higher tax rate paid by many middle income families. According to the Huffington Post’s account, he responded by saying:
“It is a low rate, … And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.”
If the question is why does Mitt Romney pay a low tax rate, this answer is wrong. The bulk of his income comes from Bain Capital. Bain Capital is organized as a partnership. This means that income is not taxed at the corporate level. It is only taxed when partners like Mitt Romney receive it. So the story of double taxation simply does not fly in Romney’s own case.
For those who are making a sport of dissecting the Romney tax returns, this is a really big one to let slide through the cracks. Other folks who get dividends or capital gains from owning shares of stock can tell the double taxation story (even here it doesn’t really fit; they got the benefits of corporate status in exchange for the corporate taxes), but in Romney’s case this justification doesn’t pass the laugh test.
I really don’t want to waste my time talking about Governor Romney’s tax returns, but come on folks. He was asked on 60 Minutes about whether it was fair that he paid a 14 percent tax rate on his income, compared to the much higher tax rate paid by many middle income families. According to the Huffington Post’s account, he responded by saying:
“It is a low rate, … And one of the reasons why the capital gains tax rate is lower is because capital has already been taxed once at the corporate level, as high as 35 percent.”
If the question is why does Mitt Romney pay a low tax rate, this answer is wrong. The bulk of his income comes from Bain Capital. Bain Capital is organized as a partnership. This means that income is not taxed at the corporate level. It is only taxed when partners like Mitt Romney receive it. So the story of double taxation simply does not fly in Romney’s own case.
For those who are making a sport of dissecting the Romney tax returns, this is a really big one to let slide through the cracks. Other folks who get dividends or capital gains from owning shares of stock can tell the double taxation story (even here it doesn’t really fit; they got the benefits of corporate status in exchange for the corporate taxes), but in Romney’s case this justification doesn’t pass the laugh test.
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People are used to strange statements on the economy in the Washington Post, hence we have Charles Lane’s column complaining about the Fed’s “trickle down” economics. Lane somehow has the idea that the main way in which the Fed expects its latest commitment to low interest rates and quantitative easing to create jobs is by raising stock prices. He would know better even if he just read the Post’s business section.
The main ways in which the action is supposed to boost demand is by reducing mortgage interest rates, increasing inflationary expectations and lowering the value of the dollar. A higher stock market would be at best fourth on this list. Taking each of these briefly in turn, lower mortgage interest rates improve the situation of those who now hold a mortgage or will be able to buy a house relative to those who lend. The former group admittedly does not include the poorest of the poor, but on average it certainly has a lower income and less wealth than the latter group.
In the case of higher inflationary expectations, the idea is that firms will expect that they will be able to sell their goods at higher prices, therefore they will be more willing to invest than would otherwise be the case. This generates more employment, again a plus for the middle and bottom. Furthermore, if the inflation actually does take place, the value of debt on homes, cars, credit cards and mortgages is reduced; another plus for those lower down the income ladder.
In the case of a lower valued dollar, the effect will be to increase employment in U.S. manufacturing and other sectors open to trade. This will increase the wages of these workers relative to the wages of workers in protected sectors, like doctors and lawyers. Again, this is a plus for those lower down the income ladder.
Lane has some bizarre stories to get the opposite conclusions. Most importantly he has the Fed action increasing the price of oil, food and other commodities. This one doesn’t fit the data (in most cases commodities prices have not come close to their 2008 pre-quantitative easing peaks), but more importantly it doesn’t make any sense. There is always speculation in commodities (in both directions) and it is cheaper to speculate when interest rates are lower, but how do we get a sustained increase in prices from the Fed’s policies. Will quantitative easing lead to a lasting reduction in the world supply of any commodity? Alternatively, will it cause a sustained increase in demand beyond what we would have gotten from growth in any case?
It is difficult to see how the answer to either of these questions can be yes. If both answers are no, then at worst the Fed policy would lead to a short-term uptick in prices, which will be followed by a period of lower than normal prices after the speculative bubble bursts and the excess supply floods the market. The volatility is not a good thing (financial speculation taxes anyone?), but it does not imply a sustained reduction in the living standards of the poor or middle class. (Lane also misrepresents the impact on the poor by taking their spending on food and gas as a share of their income. Serious people would take it as a share of total expenditures. It gives a very different and more realistic story.)
Lane concludes by mixing in a criticism of the Fed’s rescue of too big to fail banks with his complaint about the Fed’s latest policy move. High levels of employment unambiguously redistribute income toward the bottom and middle. Insofar as the Fed’s actions go this way, they deserve praise. Keeping too big to fail banks going is certainly bad policy, but it is difficult to see the connection to the Fed’s latest move.
People are used to strange statements on the economy in the Washington Post, hence we have Charles Lane’s column complaining about the Fed’s “trickle down” economics. Lane somehow has the idea that the main way in which the Fed expects its latest commitment to low interest rates and quantitative easing to create jobs is by raising stock prices. He would know better even if he just read the Post’s business section.
The main ways in which the action is supposed to boost demand is by reducing mortgage interest rates, increasing inflationary expectations and lowering the value of the dollar. A higher stock market would be at best fourth on this list. Taking each of these briefly in turn, lower mortgage interest rates improve the situation of those who now hold a mortgage or will be able to buy a house relative to those who lend. The former group admittedly does not include the poorest of the poor, but on average it certainly has a lower income and less wealth than the latter group.
In the case of higher inflationary expectations, the idea is that firms will expect that they will be able to sell their goods at higher prices, therefore they will be more willing to invest than would otherwise be the case. This generates more employment, again a plus for the middle and bottom. Furthermore, if the inflation actually does take place, the value of debt on homes, cars, credit cards and mortgages is reduced; another plus for those lower down the income ladder.
In the case of a lower valued dollar, the effect will be to increase employment in U.S. manufacturing and other sectors open to trade. This will increase the wages of these workers relative to the wages of workers in protected sectors, like doctors and lawyers. Again, this is a plus for those lower down the income ladder.
Lane has some bizarre stories to get the opposite conclusions. Most importantly he has the Fed action increasing the price of oil, food and other commodities. This one doesn’t fit the data (in most cases commodities prices have not come close to their 2008 pre-quantitative easing peaks), but more importantly it doesn’t make any sense. There is always speculation in commodities (in both directions) and it is cheaper to speculate when interest rates are lower, but how do we get a sustained increase in prices from the Fed’s policies. Will quantitative easing lead to a lasting reduction in the world supply of any commodity? Alternatively, will it cause a sustained increase in demand beyond what we would have gotten from growth in any case?
It is difficult to see how the answer to either of these questions can be yes. If both answers are no, then at worst the Fed policy would lead to a short-term uptick in prices, which will be followed by a period of lower than normal prices after the speculative bubble bursts and the excess supply floods the market. The volatility is not a good thing (financial speculation taxes anyone?), but it does not imply a sustained reduction in the living standards of the poor or middle class. (Lane also misrepresents the impact on the poor by taking their spending on food and gas as a share of their income. Serious people would take it as a share of total expenditures. It gives a very different and more realistic story.)
Lane concludes by mixing in a criticism of the Fed’s rescue of too big to fail banks with his complaint about the Fed’s latest policy move. High levels of employment unambiguously redistribute income toward the bottom and middle. Insofar as the Fed’s actions go this way, they deserve praise. Keeping too big to fail banks going is certainly bad policy, but it is difficult to see the connection to the Fed’s latest move.
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