The blind al­ley of mon­e­tary pop­ulism

Financial Mirror (Cyprus) - - FRONT PAGE -

To say oth­er­wise is a strange claim for any­one to make, es­pe­cially pop­ulists. Af­ter all, low in­ter­est rates ben­e­fit debtors and hurt cred­i­tors, as does the in­fla­tion that can be spurred by mon­e­tary eas­ing. Through­out most of US his­tory, for ex­am­ple, pop­ulists have sup­ported easy mon­e­tary pol­icy as a way to help the lit­tle guy against dis­tant bankers with hard hearts de­voted to hard money.

That was why the An­drew Jack­sons of the nine­teenth cen­tury fought the ef­forts of the Alexan­der Hamil­tons to es­tab­lish a na­tional bank. It was also the ar­gu­ment Wil­liam Jen­nings Bryan made dur­ing his 1896 pres­i­den­tial cam­paign, when he promised eas­ier money to his core con­stituency: Mid­west­ern farm­ers who had been hit hard by high in­ter­est rates and de­clin­ing com­mod­ity prices. And it was the ar­gu­ment made by sup­ply-siders who op­posed US Fed­eral Re­serve Chair Paul Vol­cker’s high-in­ter­est-rate pol­icy in the early 1980s – an ar­gu­ment that spurred Pres­i­dent Ron­ald Rea­gan to ap­point two Fed gov­er­nors to chal­lenge Vol­cker in 1985.

To­day, how­ever, the script has switched – and not only fringe pop­ulists are work­ing from it. Bri­tish Prime Min­is­ter Theresa May, for ex­am­ple, de­clared ear­lier this month that low in­ter­est rates were hurt­ing or­di­nary work­ing-class peo­ple, while ben­e­fit­ing the rich. Fall­ing in­ter­est rates help push up the prices of se­cu­ri­ties – both stocks and bonds – which are dis­pro­por­tion­ately held by the wealthy. “Peo­ple with as­sets have got­ten richer,” said May. “Peo­ple with­out them have suf­fered.”

In a sense, May has a point. In the US, stock prices have reached near-record highs. And the Fed’s 2008 de­ci­sion to re­duce the pol­icy in­ter­est rate vir­tu­ally to zero, to­gether with the sub­se­quent eco­nomic re­cov­ery, surely con­trib­uted to the strong stock-market re­bound that be­gan in early 2009. But there is lit­tle ev­i­dence that low in­ter­est rates have been be­hind the con­tin­ued rise in eq­uity prices from 2012 to 2015 – a pe­riod when mar­kets were an­tic­i­pat­ing an in­ter­est-rate hike.

Pop­ulist ar­gu­ments against easy mon­e­tary pol­icy are flimsy, at best. But so are pop­ulist ar­gu­ments for tight­en­ing mon­e­tary pol­icy – in the US, Don­ald Trump, fol­low­ing Ted Cruz and other Repub­li­can lead­ers, has ad­vo­cated a re­turn to the gold stan­dard. The truth is that mon­e­tary pol­icy – which aims to pro­mote over­all eco­nomic growth, while main­tain­ing price and fi­nan­cial sta­bil­ity – is not an ap­pro­pri­ate lever for ad­dress­ing in­come in­equal­ity. That is a job for pro­gres­sive tax­a­tion, univer­sal health in­sur­ance, fi­nan­cial re­form, and other such tools.

This is not to say that mon­e­tary pol­icy can­not af­fect in­equal­ity. An econ­omy run­ning hot enough to cre­ate jobs at a rapid rate – what some, most re­cently Fed Chair Janet Yellen, have called a “high-pres­sure econ­omy” – will even­tu­ally lead to higher real wages and in­comes for work­ers. This hap­pened in the late 1990s, with a high-pres­sure econ­omy even­tu­ally push­ing the un­em­ploy­ment rate be­low 4%. And it is hap­pen­ing now.

Since early 2010, US em­ploy­ment growth has been run­ning well above the nat­u­ral rate of la­bor-force growth, with the econ­omy adding more than 15 mil­lion pri­vate­sec­tor jobs in the long­est con­tin­u­ous se­ries of monthly em­ploy­ment in­creases on record. This job growth brought the un­em­ploy­ment rate down to 5% last year, from above 9% in 2009-10, and is now pulling pre­vi­ously dis­cour­aged work­ers back into the la­bor force. Thanks to in­creased de­mand for labour, work­ers’ real wages – up 2.5% in the last year – have risen in this busi­ness cy­cle at the fastest rate since the early 1970s.

It was not un­til last month, how­ever, that the full ex­tent of these gains came to light, with the Cen­sus Bu­reau’s an­nual eco­nomic sta­tis­tics show­ing that me­dian house­hold in­come had in­creased by a record 5.2% ($2,800) in 2015. These gains were felt at every level of the in­come dis­tri­bu­tion, with the largest per­cent­age gains go­ing to those in the bot­tom tier and the small­est gains go­ing to those at

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