Charles Lane Is Unhappy That the Fed Is Taking Steps to Create Jobs

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Tuesday, 25 September 2012 16:45

People are used to strange statements on the economy in the Washington Post, hence we have Charles Lane's column complaining about the Fed's "trickle down" economics. Lane somehow has the idea that the main way in which the Fed expects its latest commitment to low interest rates and quantitative easing to create jobs is by raising stock prices. He would know better even if he just read the Post's business section.

The main ways in which the action is supposed to boost demand is by reducing mortgage interest rates, increasing inflationary expectations and lowering the value of the dollar. A higher stock market would be at best fourth on this list. Taking each of these briefly in turn, lower mortgage interest rates improve the situation of those who now hold a mortgage or will be able to buy a house relative to those who lend. The former group admittedly does not include the poorest of the poor, but on average it certainly has a lower income and less wealth than the latter group.

In the case of higher inflationary expectations, the idea is that firms will expect that they will be able to sell their goods at higher prices, therefore they will be more willing to invest than would otherwise be the case. This generates more employment, again a plus for the middle and bottom. Furthermore, if the inflation actually does take place, the value of debt on homes, cars, credit cards and mortgages is reduced; another plus for those lower down the income ladder.

In the case of a lower valued dollar, the effect will be to increase employment in U.S. manufacturing and other sectors open to trade. This will increase the wages of these workers relative to the wages of workers in protected sectors, like doctors and lawyers. Again, this is a plus for those lower down the income ladder.

Lane has some bizarre stories to get the opposite conclusions. Most importantly he has the Fed action increasing the price of oil, food and other commodities. This one doesn't fit the data (in most cases commodities prices have not come close to their 2008 pre-quantitative easing peaks), but more importantly it doesn't make any sense. There is always speculation in commodities (in both directions) and it is cheaper to speculate when interest rates are lower, but how do we get a sustained increase in prices from the Fed's policies. Will quantitative easing lead to a lasting reduction in the world supply of any commodity? Alternatively, will it cause a sustained increase in demand beyond what we would have gotten from growth in any case? 

It is difficult to see how the answer to either of these questions can be yes. If both answers are no, then at worst the Fed policy would lead to a short-term uptick in prices, which will be followed by a period of lower than normal prices after the speculative bubble bursts and the excess supply floods the market. The volatility is not a good thing (financial speculation taxes anyone?), but it does not imply a sustained reduction in the living standards of the poor or middle class. (Lane also misrepresents the impact on the poor by taking their spending on food and gas as a share of their income. Serious people would take it as a share of total expenditures. It gives a very different and more realistic story.)

Lane concludes by mixing in a criticism of the Fed's rescue of too big to fail banks with his complaint about the Fed's latest policy move. High levels of employment unambiguously redistribute income toward the bottom and middle. Insofar as the Fed's actions go this way, they deserve praise. Keeping too big to fail banks going is certainly bad policy, but it is difficult to see the connection to the Fed's latest move.