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JeffersonClay
Jun 17, 2003

by R. Guyovich

quote:

Why the Fed’s policy on interest rates is key to fighting poverty

DEAN BAKER

Despite being home to an industry of think tanks dedicated to combating poverty, Washington anti-poverty policy debates often suffer from a major dose of unreality. As poverty experts struggle with policies that might lift a portion of the poor into the middle class, policies that we know have a huge effect on poverty rates go undiscussed. Rarely mentioned in discussions of poverty is the Federal Reserve Board’s policy on interest rates, which has an enormous impact on the rate of economic growth and the level of unemployment.

As the Fed looks to raise interest rates soon, it’s worth noting that higher interest rates increase the cost of borrowing and effectively reduce car and house buying. All of this slows the economy as well as the rate of job creation. If the Fed raises interest rates, it will in effect prevent the unemployment rate from falling further and prevent low and moderate-income households from seeing the benefits of a strong labor market.

Poverty experts typically treat Fed policy as something like the weather — it just happens, and there is not much that can be done about it. In fact, Fed policy is subject to human control and should very much be the focus of people concerned about poverty and mobility.

The facts are about as simple as it gets. High unemployment disproportionately hits the poor and disadvantaged. In the economic downturn, unemployment for college grads rose by 2.7 percentage points from 2 percent in 2007 to 4.7 percent in 2010. By comparison, for people with just a high school degree, unemployment rose by 6 percentage points from 4.4 percent to 10.4 percent. Those without high school degrees saw a rise of almost 8 percentage points from 7.2 percent to 15.1 percent.

We see the same story by race. For whites unemployment rose from 4.1 percent in 2007 to 8.7 percent in 2010. For Hispanics the rise was 5 percentage points from 5.5 percent to 10.5 percent. The unemployment rate for African Americans went from 8.6 percent before the recession to 16 percent in 2010. It was even worse for African American teens with unemployment going from 29 percent to 43.1 percent — a rise of 13.1 percentage points.

This last recession was not an oddity; when the unemployment rate goes up it always hits those at the bottom hardest. Of course the opposite is also true. In looking at the Bureau of Labor Statistics data on unemployment, it’s clear that those at the bottom benefit most when the unemployment rate falls. And according to Okun’s law, for every person who goes from being unemployed to employed, there is also a person who goes from being considered out of the labor force to being employed.

Thus, if we can knock down the unemployment rate by another percentage point, from its current 5.3 percent level to 4.3 percent level, we might be able to reduce the unemployment rate for African Americans by close to two percentage points and for African American teens by close to six percentage points. To flip this over and talk about employment, a one percentage point drop in the overall unemployment rate would translate into roughly 500,000 jobs for African Americans and 60,000 to 70,000 jobs for African American teens.

Lower unemployment won’t just have a large impact on employment for those at the bottom, it also will help to boost their wages. In my research with Jared Bernstein and John Schmitt, we found that a sustained 10 percent drop in the overall unemployment rate, for example from 5.3 percent to 4.8 percent, would be associated with a 10 percent increase in the hourly wage for a typical low wage worker. This implies that a worker earning $10 an hour would see her wage rise to $11 an hour. That translates into $2,000 a year in additional income for a full-time, full-year worker.

This is exactly the sort of story we saw in the late 1990s when the unemployment rate fell its lowest level in almost three decades, eventually bottoming out at a 4 percent year-round average in 2000. With low levels of unemployment, employers were competing for workers. Even places like McDonalds were offering hiring bonuses, and there were reports of suburban hotels and restaurants chartering buses to transport workers from the inner cities.

There are very few policies that the nation’s poverty experts can identify that will generate remotely comparable benefits for disadvantaged populations. And the great benefit of lower unemployment rates is that they don’t require a major political debate on the merits of a new anti-poverty program and how to pay for it, a long start-up period to get the program up to size or a major new government bureaucracy.

In this case, we can benefit tens of millions of low and moderate-income people simply by preventing an agency of the government, the Fed, from acting. If we stop the Federal Reserve Board from raising interest rates too quickly and by too much, we can keep the rate of employment growth from slowing and allow the unemployment rate to continue to fall.


So we have alternative routes of dealing with poverty. We can get the Fed to allow the unemployment rate to continue to fall, or we can hire lots of poverty experts to craft clever plans. We’ll see which one wins out.

The argument is: Low interest rates =>more consumption and business investment => higher demand for labor => lower unemployment and higher wages.

The most effective contemporary policy choice to reduce poverty is low interest rates, because it works, and because the Republican congress can't do poo poo about it.

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plogo
Jan 20, 2009
There is a bit of academic work on this subject, although it all requires some hefty assumptions about the economy and is limited by the lack of data on the very wealthy. I tend to agree with the idea that lower interests are as a whole beneficial for low income people overall. I'm less convinced of the power of monetary policy than Dean Baker is (I feel very weird saying this,) but I see little reason to raise interest rates any time soon.

One approach ye olde Structural Vector Autoregression Approach. This is basically a big regression with many variables, that allows you to show causality GIVEN you believe the assumptions you make to identify causality.

"To characterize the effects of monetary policy on inequality in the U.S., we follow Romer and Romer
(2004, RR henceforth) to identify innovations to monetary policy purged of anticipatory effects related to
economic conditions. RR first construct a historical measure of changes in the target Federal Funds rate
(FFR) at each FOMC meeting from 1969 until 1996. Using the real-time forecasts of the Fed staff
presented in the Greenbooks prior to each FOMC meeting (denoted by F), RR construct a measure of
monetary policy shocks defined as the component of policy changes from each meeting which is
orthogonal to the Fed’s information set, as embodied by the Greenbook forecasts"

Does this (and the extensions made to expand the dataset) identify an unexpected monetary shock? If you believe so, believe these regressions! In this case, loose monetary policy does help out the less wealthy quite a bit.

A summery http://www.voxeu.org/article/monetary-policy-and-inequality-us
The straight dope http://eml.berkeley.edu/~ygorodni/CGKS_inequality.pdf


Alternatively, for those allergic to VARs, here's a nice take (with a good literature review) from the calibration perspective. I'm not gonna try to defend calibration, but I think it can be a useful exercise. However, in this paper there is no role for monetary policy to play for improving aggregate welfare in business cycles if I understand things correctly. Middle class homeowners with a lot of debt are helped a lot, the wealth are hurt, and renters, in this exercise, are pretty much unaffected:

http://www.brookings.edu/~/media/research/files/papers/2015/06/01-quantitative-easing-and-inequality/doepke-et-al_inequality_final.pdf

ronya
Nov 8, 2010

I'm the normal one.

You hate ridden fucks will regret your words when you eventually grow up.

Peace.
the politics of Baker's remarks stems from a historical jealousy for FDR being able to sell a weaker dollar as a popular public policy, whereas it is anathema as a contemporary platform. but if you observe FDR's phrasing

quote:

The Administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed. We do not seek to let them get such a cheap dollar that they will be able to pay bock a great deal less than they borrowed. In other words, we seek to correct a wrong and not to create another wrong in the opposite direction. That is why powers are being given to the Administration to provide, if necessary, for an enlargement of credit, in order to correct the existing wrong. These powers will be used when, as, and if it may be necessary to accomplish the purpose.

then you must first have a populist platform that sees itself as primarily selling commodities (as farmers) rather than consuming them. That's no longer the case, nor is it going to be the case again.

short of wage-level instead of price-level targeting (which I think Scott Sumner has proposed), a weak currency is a hard political sell, even if an SVAR says it favours the bottom and middle class

Junior G-man
Sep 15, 2004

Wrapped in a mystery, inside an enigma


JeffersonClay posted:


The most effective contemporary policy choice to reduce poverty is low interest rates, because it works, and because the Republican congress can't do poo poo about it.

I dunno, the ECB has been keeping interest rates on the floor for years now (I think it's 0.05% now) and it doesn't seem to be doing much.

Then again, the ECB isn't a central bank.

TROIKA CURES GREEK
Jun 30, 2015

by R. Guyovich
Low interest rates can easily lead to situations that gently caress the poor over even more, the best policy is to have the correct rate for economic conditions and fix poverty through more effective and direct measures like GMI or whatever.

Overall the article is very naive and poorly researched.

AreWeDrunkYet
Jul 8, 2006

Current interest rate policy is also resulting in low to non-existent inflation, which (relatively) enriches net creditors at the expense of net debtors. It also makes it viable for individuals and companies to keep their holdings in cash-like instruments, whereas a moderate level of inflation would force them to seek productive investments or see their real wealth diminish.

High and/or unpredictable inflation is bad for growth, but that's not necessarily true of steady, moderate inflation. I would argue there's a case to be made for interest rate policy that results in consistent 3-4% inflation as a better scenario for anyone without existing substantial wealth.

AreWeDrunkYet fucked around with this message at 17:55 on Jul 28, 2015

Helsing
Aug 23, 2003

DON'T POST IN THE ELECTION THREAD UNLESS YOU :love::love::love: JOE BIDEN
Low interest rates are a way of compensating for the impossibility of getting the US Congress to approve of decent fiscal policies but as others have pointed out they are far from the perfect instrument for address inequality or poverty. Sure they increase house purchasing but they can also massively inflate housing prices and without proper regulation low interest rates can help inflate asset bubbles that eventually pop and leave the poor even worse off than before.

JeffersonClay
Jun 17, 2003

by R. Guyovich

Junior G-man posted:

I dunno, the ECB has been keeping interest rates on the floor for years now (I think it's 0.05% now) and it doesn't seem to be doing much.

Then again, the ECB isn't a central bank.

ECB interest rate policy was less aggressive than the Fed during most of the downturn, particularly in the critical period immediately afterword.



TROIKA CURES GREEK posted:

Low interest rates can easily lead to situations that gently caress the poor over even more, the best policy is to have the correct rate for economic conditions and fix poverty through more effective and direct measures like GMI or whatever.

Overall the article is very naive and poorly researched.

Helsing posted:

Low interest rates are a way of compensating for the impossibility of getting the US Congress to approve of decent fiscal policies but as others have pointed out they are far from the perfect instrument for address inequality or poverty. Sure they increase house purchasing but they can also massively inflate housing prices and without proper regulation low interest rates can help inflate asset bubbles that eventually pop and leave the poor even worse off than before.

Dean Baker, the author of the article, predicted the housing crash remarkably accurately. He's not trying to argue that low interest rates are always good (and certainly not that a lack of regulation is good), just that they're good for the poor now. At the point they're causing significant inflation or inflating obvious asset bubbles, low rates stop being good policy.

Rodnik
Dec 20, 2003
You want to know who benefits even more from low interest rates than the very poor? The very rich. Borrowing money from the fed for nearly free and then loaning it out 10 times over is really fun.

Rodnik fucked around with this message at 19:08 on Jul 28, 2015

Badger of Basra
Jul 26, 2007

AreWeDrunkYet posted:

Current interest rate policy is also resulting in low to non-existent inflation, which (relatively) enriches net creditors at the expense of net debtors. It also makes it viable for individuals and companies to keep their holdings in cash-like instruments, whereas a moderate level of inflation would force them to seek productive investments or see their real wealth diminish.

High and/or unpredictable inflation is bad for growth, but that's not necessarily true of steady, moderate inflation. I would argue there's a case to be made for interest rate policy that results in consistent 3-4% inflation as a better scenario for anyone without existing substantial wealth.

Low interest rates don't lead to low inflation though (under normal conditions). Raising them definitely won't increase inflation.

Rodnik
Dec 20, 2003

Badger of Basra posted:

Low interest rates don't lead to low inflation though (under normal conditions). Raising them definitely won't increase inflation.

That's why we need negative interest rates.

JeffersonClay
Jun 17, 2003

by R. Guyovich

Rodnik posted:

You want to know who benefits even more from low interest rates than the very poor? The very rich. Borrowing money from the fed for nearly free and then loaning it out 10 times over is really fun.

The study plogo posted suggests this isn't the case.


And even if it is true, opposing a policy that helps the poor because it helps the rich even more seems like cutting your nose to spite your face. If more employment and higher wages occur because buisinesses are growing, both rich and poor benefit.

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AreWeDrunkYet
Jul 8, 2006

Badger of Basra posted:

Low interest rates don't lead to low inflation though (under normal conditions). Raising them definitely won't increase inflation.

Short of negative interest rates, there's not much the Fed can do. We need aggressive fiscal, not monetary, policy at this point.

e: My original post was more of a preemptive response to the inevitable hand-wringing from Very Serious People about inflation concerns since the Fed is set to consider raising rates in the near future.

AreWeDrunkYet fucked around with this message at 19:39 on Jul 28, 2015

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