Monday, February 11, 2019

D. J. McGuire — Do Lower Interest Rates Actually Make Income Inequality Worse?

In short, Liu et al present an entirely different set of expected consequences for extremely low interest rates. Instead of faster growth, they lead to slower growth. Instead of higher productivity growth, the lead to lower productivity growth. While in theory enabling government to address income inequality, they actually exacerbate it by encouraging market concentration and monopolization.
More time and research is needed, of course, to see how much impact the market concentration effect truly has. More than a few economists will have questions about the paper, as it should be.
However, at the very least, advocates for looser money in general – and MMT in particular – might want to take into account the strong possibility that their methods are running contrary to their avowed policy goals.
Ignores the role of functional finance.

Lower interest rates set by the Fed is an indication of substandard economic performance. The MMT remedy is not increasing interest rates but rather increasing targeted government spending and targeted tax cuts to stimulate lagging effective demand.

Bearing Drift
Do Lower Interest Rates Actually Make Income Inequality Worse?
D. J. McGuire


Andrew Anderson said...

Lower interest rates are GOOD but not if they are produced unethically - as they currently are.

Example: Successful counterfeiting should lower interest rates too.

MMT proposes to do the same thing via legal counterfeiting for the banks via loans from the Central Bank.

Moreover, those loans would be:
1) Unsecured.
2) Unlimited.
3) At zero percent.

One might think a banker had devised MMT bank policy so blatant are the bank privileges contained therein ...

Otoh, a proper (i.e. ethical) way to lower interest rates would be to:

1) Allow all citizens to have accounts at the Central Bank (CB) and to abolish all other privileges, such as government-provided deposit insurance for depository institutions. This, by itself, would likely cause interest rates in fiat to rise because of the increased DEMAND for fiat.

But also:

2) Lower interest rates in fiat as desired by:
a) equal fiat distributions to all citizens into their CB debit/checking accounts.
b) negative interest on large accounts at the CB to encourage lending and to at least partially finance a).

See? Ethics isn't as painful as you thought, is it? Except to those with evil intent?

Bob Roddis said...

Of course they facilitate inequality. I assume that is their purpose like everything else about the marvelous modern funny fiat money system.

The people who can get big loans are upper income people. They can borrow money at low rates and bid up the price of assets to bubble prices and then sell off before the bubble bursts. Poor and middle income people cannot do that. Can you spell "wealth transfer"?

Noah Way said...

Interest rates are inversely proportional to one's wealth.

high net worth = high interest on investments, low interest on loans

low net worth = high interest on loans, low interest on investments (savings)

Andrew Anderson said...

low net worth = high interest on loans, low interest on investments (savings) Noah Way [bold added]

One reason is that the poor are forced to lend the reserves corresponding to their bank deposits to the banks, credit unions, etc. since the poor and all other citizens are not allowed to have inherently risk-free "reserve" (i.e. fiat) accounts of their own at the Central Bank and because of other privileges for "the banks", such as government-provided deposit insurance.

The MMT folks are fine with that, it seems.

Not surprising though since bank toadies seem to be the rule, not the exception.

Btw, risk-free savings are not an investment since investment involves risk.