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March 10, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Liberty, Equality, Efficiency

Posted: 10 Mar 2014 12:24 AM PDT

Reducing inequality "would probably increase, not reduce, economic growth":

Liberty, Equality, Efficiency, by Paul Krugman, Commentary, NY Times: Most people, if pressed on the subject, would probably agree that extreme income inequality is a bad thing... But what can be done about it?
The standard answer in American politics is, "Not much." Almost 40 years ago Arthur Okun ... published a classic book titled "Equality and Efficiency: The Big Tradeoff," arguing that redistributing income from the rich to the poor takes a toll on economic growth. Okun's book set the terms for almost all the debate that followed: liberals might argue that the efficiency costs of redistribution were small, while conservatives argued that they were large, but everybody knew that doing anything to reduce inequality would have at least some negative impact on G.D.P.
But it appears that what everyone knew isn't true. Taking action to reduce the extreme inequality of 21st-century America would probably increase, not reduce, economic growth.
Let's start with the evidence..., does reducing inequality through redistribution hurt economic growth? Not according to two landmark studies by economists at the International Monetary Fund...
In short, Okun's big trade-off doesn't seem to be a trade-off at all. ...
At this point someone is sure to say ... that we should seek equality of opportunity, not equality of outcomes. That may sound good...; but for those with any reality sense, it's a cruel joke. Almost 40 percent of American children live in poverty or near-poverty. Do you really think they have the same access to education and jobs as the children of the affluent?
In fact, low-income children are much less likely to complete college than their affluent counterparts, with the gap widening rapidly. And this isn't just bad for those unlucky enough to be born to the wrong parents; it represents a huge and growing waste of human potential — a waste that surely acts as a powerful if invisible drag on economic growth.
Now, I don't want to claim that addressing income inequality would help everyone. The very affluent would lose more from higher taxes than they gained from better economic growth. But it's pretty clear that taking on inequality would be good, not just for the poor, but for the middle class...
In short, what's good for the 1 percent isn't good for America. And we don't have to keep living in a new Gilded Age if we don't want to.

Links for 3-10-14

Posted: 10 Mar 2014 12:06 AM PDT

'The Federal Reserve and Wealth Inequality'

Posted: 09 Mar 2014 01:54 PM PDT

From the new blog by Atif Mian and Amir Sufi:

The Federal Reserve and Wealth Inequality: The Federal Reserve has a well-defined dual-mandate: stabilize prices and maximize employment. However, in trying to achieve these objectives, the Fed can inadvertently favor some segments of the population more than others. This was indeed the case from the perspective of households' net worth position during the Great Recession. ...
When the economy slows down and there is a sharp decline in house prices, it is ... debtors' net worth that is most heavily impacted, and from a recovery standpoint it is the debtors' net worth that is in most need of repair...
The Federal Reserve may help in boosting the net worth position of households. But does it boost household net worth where it is needed the most? Unfortunately, quite the opposite is true. The Fed directly controls short term interest rates, and hence has the strongest and quickest influence on bond prices. Bond prices are inversely related to interest rates... Those holding long term bonds profited handsomely from the decline in interest rates.
Unfortunately for the macro-economy, the gains in long-term bonds were a unique benefit to creditors. Debtors with a levered claim on house prices remained stuck. This was one of the great limitations of how effective the Federal Reserve could be in the midst of the Great Recession.
Many have placed much blame on the Federal Reserve for increasing wealth inequality. That is unfair — it is not the Fed's fault that only the very rich hold bonds and other financial assets. But it is true that a by-product of looser monetary policy is a rise in wealth inequality–the Fed was unable during the Great Recession to boost the net worth of debtors.

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