National Post (National Edition)

FOR LESS INEQUALITY, RAISE RATES?

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It was surprising last week to hear relatively kind words about Donald Trump from Jared Bernstein, left-wing economist and current nominee for Joe Biden's Council of Economic Advisers. And on a New York Times' podcast, no less (The Argument).

The Times' Ross Douthat raised the fact of the record low unemployme­nt rates for Black and Hispanic Americans, achieved just before the pandemic hit, combined with rising real wages at the bottom end of the wage scale and Bernstein conceded that those were good things and had been made possible by the Federal Reserve's more experiment­al approach to discoverin­g just where economic bottleneck­s ultimately cause prices to start rising. As Douthat noted, that approach was partly due to Trump, who in fall 2018 pushed back hard against the Fed's tentative increase in interest rates.

A deeply indebted former real estate developer probably has love of low interest rates sewn into in his DNA but, whatever Trump's true motivation, the data suggest he was right. The U.S. economy continued to expand into 2020 and inflation remained quiescent. That doesn't mean it will never be a problem. Bernstein compares the dilemma policy-makers face as having to fill a glass whose rim they can't see. At some stage the liquidity they pour in will spill over into inflation. But exactly when that will happen is an empirical question to which no one has the answer. A little humility is therefore required all round.

But surely we can at least agree that low interest rates help people at the low end of the income scale, which disproport­ionately means Black and other non-white people? You might think so but a new New York Federal Reserve Bank staff report from four economists at the Fed Bank, the University of Bonn and NYU suggests that in fact low interest rates disproport­ionately benefit white Americans.

Using state-of-the-art econometri­cs, they run a number of simulation­s to assess the effects of a sustained reduction of interest rates of 100 basis points (or one percentage point).

The employment effects are definitely favourable to Black Americans and other people lower down the income scale — as they clearly were in the Trump era. And reasonable assumption­s about how employment translates into higher earnings lead to plausible estimates of just how much in dollar terms the lower rates benefit the groups whose employment rises more.

But that's not the full extent of the effect. Lower interest rates also mean a lower return to savings accounts, though since Black people are less likely to have such savings, this doesn't hurt them as much as it does white Americans. (The study doesn't look at Americans classified as other than Black or white.)

But that's it for effects that disproport­ionately benefit Black Americans, or don't hurt them as much.

Lower interest rates also mean people can indulge in Americans' favourite financial pastime: refinancin­g their mortgage. But Black Americans have fewer and smaller mortgages than white Americans do, so although they do benefit from this effect, whites benefit more.

All these effects are relatively minor, however, compared with the increase in asset values that lower interest rates also bring. House prices go up and the stock market rises. And since white Americans are more heavily invested in both, they benefit disproport­ionately. Which means that, contrary to what most people probably would have thought, a regime of lower interest rates may actually increase inequality, both across income groups and between Black and white Americans.

Getting a job is obviously a big deal for someone who doesn't have one and usually brings about a sizable increase in their income and income security. But if you spread these big income effects across a population of people who are mostly employed to begin with, as both Black and white Americans mostly are, the society-wide benefits aren't that big. By contrast, all asset-owners benefit from higher asset prices and there are many more asset-owners in both the Black and white population­s than there are people who get new jobs because of lower interest rates. So the asset effects dominate.

So, what's the message here? Should progressiv­es like Jared Bernstein, who want to see less inequality between rich and poor and Black and white, now favour tighter monetary policy? Certainly not. In this study's story, lower interest rates create clear net gains to both Black and white Americans as groups — though that won't always be true: if Bernstein's liquidity glass spills over into inflation, that helps almost no one in the long run, except maybe debtors like Trump.

What the study's results do suggest is that, despite the current intellectu­al vogue among central bankers, monetary policy is probably not the best instrument for addressing inequality. Removing tax and regulatory impediment­s to employment would be a better bet, since employment provides the income that eventually leads to asset accumulati­on.

And, oh yes, of course, almost forgot: Donald Trump's alleged racism. Didn't he push for the lower interest rates that, the data show, disproport­ionately helped asset-owners, who are disproport­ionately white? QED!

WHATEVER TRUMP'S TRUE MOTIVATION, THE DATA SUGGEST HE WAS RIGHT.

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