Meant to share this the other day - a paper by Jon Wisman in the CJE: Wage stagnation, rising inequality and the financial crisis of 2008.
What's interesting is how he moves past the normal inequality/MPC argument to talk about the implication of inequality for other influences on macroeconomic performance. First, the normal MPC weakening from inequality is argued to have driven policymakers to increasingly low interest rates to encourage growth. In a sense the claim is that the Taylor Rule isn't as effective in the lower MPC environment, driving the Fed to lower rates. The second argument is that greater household leveraging was a consequence of rising income inequality. The third argument is that with increased concentration of wealth, the wealthy had considerably greater power over shaping ideology, which lead to bad policy.
All seem plausible. All are more interesting then the plain old lower MPC story. I couldn't say how substantial in practice each of these effects is, though.
Wednesday, July 24, 2013
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I can only view the abstract right now, but I wonder about that first implication. Of course, we can point to periods of low interest rates over the past 35 years, but haven't those usually been in response to external conditions in the economy? I'm thinking about the Fed's response to the downturn in the early '90s, as well as the Fed's response to the popped dot-com bubble. The low interest rate policies made good sense given the context.
ReplyDeleteI'm not sure how we'd distinguish between low interest rates as a response to low MPC, and low interest rates as a response to a typical downturn. I guess that's sort of saying the same thing, but the abstract makes it sound as though Fed policy has been driven specifically by an understanding that MPC has generally been lower than it should be, instead of having been driven by all sorts of other factors.
Does that make sense? Maybe he addresses that in the paper.
Let's say that the rich have been getting their way in terms of ideology. In that case why is the propensity to invest so low among businesses and the rich?
ReplyDeleteBecause presumably investment isn't (always) in the best interest of the rich?
DeleteProfits are quite high. Isn't that much more directly relevant to questions of the interests of the rich?
Like I said, I'm not sure how much these mechanisms matter in practice, but I'm not sure I'd look at propensity to invest as the metric here.
What Wisman is saying in his abstract is the the rich have encouraged an ideology that favours low taxes for them. Looking at the behaviour of a lot of prominent rich people, such as Buffett, I don't think that's necessarily true. But, if we accept that it is then it should make business conditions easier, which should encourage more investment. Low taxes encourage investment.
DeleteCurrent profits are only a small part of the return on an investment. More important is it's overall value, the net present value of all future dividends. That depends on ongoing investment. If the rich actually believed they were getting things they wanted then they'd be investing. Their reluctance to do so show that, in their opinion, other views are prevailing.
Naturally, I rather hope that Wisman is right, but I doubt it.
Apart from the typo in the title of this post...congratulations to your Professor for getting his article published, Daniel Kuehn!
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