I hate when liberals do this

I see that Frances Coppola of Coppola Comment has revived the debate about the distributional consequences of supposedly-easy money. She claims that the tweeners, those rich enough to own fixed income but not equities, have been squeezed by low interest rates, while the equity holders have benefited.

I will leave to others a discussion of the evidence she brings to bear. In my view, this debate can be wrapped up pretty quickly by pointing out that the whole thing is based on a couple demonstrably-false premises.

First, central banks with inflation and/or employment mandates don’t get to pick the real interest rate consistent with achieving their mandates. That is something the real economy imposes on central banks, at least at horizons near or beyond the frequency of the business cycle, which is what we are discussing here.

If Janet Yellen could snap her fingers and make the US (and global) economy (ies) balance at a real interest rate near 4%, she might well do that. Who knows? The point is, she can’t. This point seems to be universally recognized, except when the context is the Fed’s influence on wealth and income distribution.  To me, that suggests motivated reasoning.

Second, the equity  premium seems to be determined more by underlying economic volatility than by the level of interest rates, although precisely what determines it remains a mystery.


But let’s say mean old plutocratic Janet Yellen comes along and just unilaterally reduces the equity premium, as the financial Marxists imply she can. That would REDUCE the pace of wealth accumulation at the upper end, not speed it. Sure there would be a one-off price appreciation, but the prospective real return to equity holders would fall a lot.

Jesse Livermore at Philosophical Economics, as often, does the math so you don’t have to. But logically, this is hardly some huge brain teaser.

I have said this before and I will say it again. If you want to reduce income inequality, then tax the rich guys and give the money to the poor guys (or burn it: fine by me), precisely the opposite of what the new Administration intends to do.

Liberals do their side a huge disservice by pretending this is complicated and has even the least to do with monetary policy.  They should avoid joining the conservatives who also cry crocodile tears over this issue.  Bernanke and Yellen’s reflation efforts should be resisted because they challenge our cherished income equality. Sure pal.

* My proxy of the equity premium is pretty crude, but at least has the advantage of not being data mined.  I define the equity premium as the Shillerized operating earnings yield less the difference between the 10-year real Treasury yield and a time varying estimate of potential growth measured as a deviation from its own full-sample average.  The relationship is hardly perfect, but it beats the idea that Yellen sets the premium by manipulating the 10-year yield.

Just a theory

I like to build my fake centrist cred by slagging liberals on occasion, including for dwelling in minutia. So this will surely prove I am a hypocrite, because right here I am going to dwell in minutia.

Peter Orszag has a great Bloomberg View article explaining his hypothesis that income inequality is literally killing people by shortening life expectancy among the low- and middle-income cohorts.  Importantly, it is not absolute poverty, but income inequality per se that is doing the killing.

The (trivial0 thing is, Peter Orszag presents this as “just a theory.” Grrrrrrr. Theories are the highest form of knowledge available to mere mortals. There is no such thing as “just” a theory.

The idea that the earth revolves around the sun is a theory, such a good one that people take it to be just a fact. But it is not a fact. Facts don’t predict. Theories predict and are superior to facts.  Not to be too essentialist about it, but there is that.

Wandering a bit off topic, I think this might be an American thing.  I think it is peculiarly American to disparage “mere” theories.  Americans are hard checkin practical business oriented people. Not for you these fancy theories!

Separately, I bet that if I pointed this out to Peter Orszag he would just shrug and say, yeah, that is probably right, who cares?

Like I say, minutia.


This is on Business Insider, counting down, as I type. No clue. Then again, I am out of it.


Duh-uh, they meant Fed.