Zero interest rates have side effects.Feb 17, 2014, Vol. 19, No. 22 • By CHARLES WOLF
Income inequality in the United States has been increasing for a generation. The share of pretax income received by the top 1 percent of earners rose from 7.8 percent in 1973 to 17.4 percent in 2010. A broader and widely used measure of inequality—the Gini coefficient—indicates that inequality for the entire range of income recipients rather than only the top 1 percent has risen by 26 percent since the early 1970s.
A caveat: These indicators, as well as most other indicators of inequality—and virtually all public commentary about it—relate to income before taxes. Income inequality after taxes is substantially diminished because of the offsetting effects of taxation. Specifically, the top 1 percent of income recipients pay 37 percent of total tax revenues, and the top 5 percent and 20 percent pay 59 percent and 70 percent, respectively. The bottom 50 percent pay little or no income taxes.
Pretax income inequality has been driven by long-term societal trends that are numerous, complex, and hard to change. Although the drivers are well-known, their relative strength is not. They include education, parenting and family structure, neighborhood, immigration, globalization, and IT-based technology, which often substitutes fewer high-skilled and higher-salaried workers who are fewer in number in place of more numerous and lower-paid labor. Another of the long-term trends is the inertial effect of poverty itself—poverty typically and strongly impedes emergence from it. These drivers continue to affect income inequality in the United States, as well as in many other countries.
Adding to the long-term drivers, and providing a neglected and unexpected but significant boost to rising inequality in recent years has been the Federal Reserve’s pursuit of sharply eased monetary policy. Conceived as a necessary means to stimulate the economy and accelerate the slow pace of recovery from the Great Recession, eased monetary policy (aka Quantitative Easing) injected as much as $4 trillion into the monetary base by Federal Reserve purchases of mortgage-backed securities in order to lower long-term interest rates, while maintaining near-zero short-term rates through control of the Federal Funds rate. The result has been an increase in income inequality in recent years as an unintended side effect of monetary easing, apart from and additional to the long-term trends mentioned earlier. That’s because this monetary policy has induced rapid growth of profits while wages stagnated, hence an increased share of profits and a reduced share of wages in gross national income.
The process has been accompanied by a surge of equity markets to record highs (up 30 percent in 2013), burgeoning IPOs, heightened activities of hedge funds, private equity funds, venture capital financing, and a generalized boom in the financial services industry. Managers of these financial endeavors are uniquely equipped to nimbly deploy the low interest rates in ways that boost the profitability of their activities. As a result, the financial sector’s annual profits increased by $200 billion between prerecession 2007 and 2013. The financial sector’s profits rose from 18 percent of total corporate profits preceding the recession in 2007 to 23 percent in 2013.
Increased financial sector profits mainly accrue to upper-income recipients, who are relatively few in number, while the decreased share of wages affects the relatively larger number of workers—thus, providing a strong fillip to inequality. Since the Great Recession, the share of wages in national income has decreased rapidly—from 65 percent in 2008 to 61 percent in 2013—while the corresponding share of profits has risen from 11 percent in 2008 to 15 percent in 2013. Although small in percentage terms, the shift is quantitatively large. It represents $600 billion less for the wages and salaries of the relatively numerous middle- and lower-income recipients, and correspondingly more for the much less numerous profit recipients, who mainly were already higher earners. Although inequality has also increased among recipients of wages, the far smaller number of profit recipients has had a dominant effect on income inequality in recent years.
A modest proposal for the new Fed chairman. Jan 27, 2014, Vol. 19, No. 19 • By ANDREW FERGUSON
It's been more than a week now and I’m beginning to suspect she’s not going to call, so here I will offer Janet Yellen the advice I’ve been hoping to give her privately since the Senate confirmed her as the new chairman of the Federal Reserve. My advice is: Think about John Cowperthwaite. By this I mean: Really think about
Bill de Blasio and Wall Street. Nov 25, 2013, Vol. 19, No. 11 • By FRED SIEGEL
First, a matter of numbers and nomenclature: Bill de Blasio, who is being hailed like Eliot Spitzer before him as the new face of American liberalism, won his race to be New York City’s next mayor with a near-record victory margin but also record low turnouts in both the primary and the general elections. There was no “populist” surge as reported in the press. De Blasio won 40 percent of the 22 percent who showed up for the Democratic party primary.
Hosted by Michael Graham.4:50 PM, Sep 19, 2013 • By TWS PODCAST
THE WEEKLY STANDARD podcast with the American Enterprise Institute's James Pethokoukis on the recent actions by the Federal Reserve.
10:53 AM, Sep 19, 2013 • By GEOFFREY NORMAN
Yesterday, the Fed decided that the economy was not yet sufficiently robust for it to "taper." Wall Street celebrated.
Today, the consumer put in his two cents, which is about what he thinks this "recovery" is worth. As Ben Schenkel at Bloomberg writes:
Consumers views of the U.S. economic outlook deteriorated in September to the weakest level in a year as higher borrowing rates started to chip away at progress in the housing market.
12:00 AM, Sep 7, 2013 • By IRWIN M. STELZER
It’s not that anyone here in Washington begrudges Britain, and to some extent Spain, their fledgling recoveries. But President Obama and other proponents of more government spending aren’t delighted that those nations’ austerity programs seem to be paying off in renewed growth rather than in the perpetual recession the Keynesian try-another-stimulus-crowd in the White House has been predicting. Conservatives are saying that the austerity sauce for the British roast beef would be just as tasty on the U.S. hot dog.
It’s policy that counts, not personalities. Aug 12, 2013, Vol. 18, No. 45 • By JUDY SHELTON
At first, it was fun—this parlor game of guessing who the Obama administration will appoint as the next chairman of the Federal Reserve. We all assumed it would be Janet Yellen, because she’s a woman. And then suddenly we had Larry Summers all over the leading financial newspapers receiving multiple endorsements from respected economists. There were sly references to his intellectual prowess and invaluable experience, not to mention (but they always did) his connections with Obama’s closest advisers on economic and financial matters.
No, no, and no.12:31 PM, Jul 31, 2013 • By ETHAN EPSTEIN
Have you heard the news? Janet Yellen is positively clairvoyant!
Yellen, vice chairman of the Federal Reserve and, evidently, a front-runner to replace Ben Bernanke as chairman in several months, “was one of the first members of the Federal Open Market Committee . . . to realize that the [housing market’s troubles] could cause a major recession.” (Alan Blinder, Wall Street Journal, July 29.)
12:00 AM, Jul 20, 2013 • By IRWIN M. STELZER
Data-driven, legacy-driven. Keep those two descriptives in mind and you will know a good deal about the prospects for a dialing back of asset purchases—“tapering”—by Federal Reserve Board chairman Ben Bernanke.
12:00 AM, Apr 27, 2013 • By IRWIN M. STELZER
The U.S. economy grew at an annual rate of 2.5 percent in the first quarter, well ahead of the paltry 0.4 percent in the final quarter of 2012.
12:00 AM, Dec 15, 2012 • By IRWIN M. STELZER
The fiscal cliff is a diversion, designed by politicians to conceal their inability to come to grips with the fact that they continue to spend too much, and refuse to reform a tax structure that reduces the competitiveness of American companies in world markets. No matter what deal is cut, whether before or after the new year, it will at best nibble at the edges of the trillion-dollar annual deficits that are being piled up.
The Fed's policy is crony capitalism.9:50 AM, Sep 17, 2012 • By MICHAEL WARREN
Last week, Federal Reserve chairman Ben Bernanke announced the central bank would begin another round of quantitative easing, the term of art for the Fed's policy of purchasing securities in an attempt to stimulate the economy.
12:00 AM, Sep 15, 2012 • By IRWIN M. STELZER
So it’s come to this. A former professor of economics turned central banker can keep policymakers and investors on the edge of their seats, waiting for his latest pronouncement. That tells us two things.
12:00 AM, Aug 25, 2012 • By IRWIN M. STELZER
Federal Reserve Board chairman Ben Bernanke now has two reasons to disappoint those who are hoping he will use his speech next week at the conclave of central bankers in Jackson Hole, Wyoming, to launch the good ship QE3.