Geitnerism

OVER AT EQUITABLE GROWTH: COMMENT ON: AYAKO SAIKI AND JON FROST: "HOW DOES UNCONVENTIONAL MONETARY POLICY AFFECT INEQUALITY? EVIDENCE FROM JAPAN" by DeLong

Over at Equitable Growth: Comment on: Ayako Saiki and Jon Frost: "How Does Unconventional Monetary Policy Affect Inequality? Evidence from Japan" 

I want to make three big points: READ MOAR 

Figuring out what we expect QE to mean for income and wealth inequality is difficult because we are not sure what QE is supposed to do for the macroeconomy. Is it a way of credibly committing to lower nominal interest and higher inflation rates in the long run by goosing the monetary base at the zero lower bound? Is it a way of reducing the supply of assets subject to risk and thus reducing the risk premium? If the first, it is the government imposing--relative to the baseline--a transfer from those who are going to save, who are going to cut their spending below their income and shift purchasing power into the further future, and to those who are going to borrow and to those who have saved in the past. If the second, it is the government imposing--relative to the baseline--a transfer from those who are going to supply risk-bearing services to those who will lay off risks into the future and those who have already committed to bearing risk in the past. In either case, it is bound to be the rich today who have born risk in the past (and been lucky) or who have saved in the past. So today's inequality should, we think, rise. It is nice to see that it is true--and it is interesting that the effects look to be so large...

Looking forward, however, QE seems to be a piece of what Keynes called the euthanasia of the rentier--or of the risk-bearer. Wealthholders who are going to stay influential wealthholders must reinvest at rate n+g, so their true free cash is only r-n-g. What if they spend more? Keynes thought that there was a social compact: if the rich do not accumulate--if they spend more than r-n-g--then the political process will soon take their wealth away. Thus a world of QE is a world in which the rich have extremely high wealth levels, yet surprisingly little weight, given their wealth, on consumption patterns. There is high wealth inequality. And there is very high income inequality along the transition path as asset prices attain their new equilibrium levels. But less spending inequality.

The Geithner view of the world: monetary policy is unreliable witchcraft, fiscal policy is "sugar" that makes you feel really good for four hours before you drop into a diabetic coma, the only source of durable prosperity is to reinforce business and financial prosperity by giving them the returns they think they deserve--and then a little more. I parody. But this is the dominant view in the North Atlantic, at least. Basically, the bankers and investors and CEOs have us by the plums. If QE reinforces business confidence, it is worth doing in spite of its inequality effects. If, on the other hand, QE scares our upper class by (a) making them fear that asset prices are unsustainably high and will crash, and (b) making them fear that their future deals will have to squeeze returns out of an eyedropper, then the inequality effects are yet another reason to exit as fast as possible. Now I am not a believer in Geithnerism. But many people are. And it is certainly a live analytical position...

I think it's helpful to distinguis DeLong as a "soft" neoliberal from Geithner who is a "strong" neoliberal. He even had the Treasury working at cross purposes with the Fed over QE. Was this in his book? I hope Bernanke will discuss it.