The Death of Monetary Policy and the Need for Less Income Inequality

By lowering its benchmark interest rate virtually to zero, the Federal Reserve has eliminated monetary policy as a financial tool to aid the economy. Good riddance, because this was never a financial crisis.

What led to the whole crisis was the stagnation of wages combined with rising income inequality: people who didn’t have a lot of money were competing for housing in an overinflated market (government policies to effectively make loans cheaper didn’t help either).
Wage stagnation is also maintaining the crisis. Who will loan in an environment where wages are stagnant and unemployment will rise? Lenders won’t get their money back. Kevin Drum puts it well (italics mine):

One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more. This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don’t spend enough all by themselves.
The flip side of this, of course, is that rich people are going to have to accept the fact that they don’t get all the money anymore. Their incomes will still grow, but no faster than anyone else’s….
This isn’t just a matter of social justice. It’s a matter of facing reality. If we want a strong economy, we can only get it over the long term if we figure out a way for the benefits of economic growth to flow to everyone, not just the rich. This is, by far, Barack Obama’s biggest economic challenge. Until median wages start rising steadily and consistently, we haven’t gotten ourselves back on track.

Or as Tim F. at Balloon Juice put it:

In other words, the secret to sustainable economic growth is to make sure that a ton of people have a modest amoun[t] of disposable income. Having a few of people with a shitload of income, while the rest worry about medical bankruptcy, worked out less well.

Do we need a stimulus package? Absolutely, if for no other reason that, without one, unemployment will rise and incomes will sink. But what we need are two additional things, which can only come from Congress (not the Federal Reserve):

  1. Infrastructure (physical and human) development for long term growth.
  2. Policies that decrease the after-tax and after-healthcare income disparity.

Until these happen, we’re just tying off the wound.

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7 Responses to The Death of Monetary Policy and the Need for Less Income Inequality

  1. joltvolta says:

    Wouldn’t strengthening the dollar improve the buying power, as well as the rate of spending? Instead of a stimulus package, which would require more deficit spending, would the money be better spent towards our National Debt? I could be talking out my arse though.

  2. yogi-one says:

    The USA, Post WWII, was able to enjoy a brief period where wages did rise and feed growth. After the war, and arguably into the 1960s, we had a strong manufacturing base, and mostly manufacturers competed against other American companies. We had the rise of the union movement, and wages and benefits increased, leading to a kind of golden age where a blue collar guy could support a family with a manufacturing job.
    But the equilibrium of that could not be maintained very long.
    Now we have to compete against Chinese, Vietnamese, and Mexican (and other) workers who will eagerly replace our blue-collar guys for much lower wages, much less benefits, and work in what would be illegally dangerous and dirty workplaces in the USA.
    One of the first place companies look to cut costs to remain competitive is worker’s pay and benefits. If a company can pay less for workers, and pay less for benefits, pollution and safety equipment, then they have a powerful incentive to do so, even if it means shipping the business off to Asia or Mexico.
    So that is one aspect, along with the simple greed and bubble-scheming you mention to transfer money from the average citizen to the pockets of the elites.
    And then when it all breaks down, the elites simply go to Congress (which of course is just more elites like them) and just demands Congress give them the rest of our money. If they have have used up all our money, they just demand Congress create some more debts, so that we can hand them more money. The money they want with no oversight, of course, since that would lead to them having to repay the money, or simply to scandals when their embezzlement of the money is exposed.

  3. Yep, this is exactly correct.

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