Every so often people tell me that Fed policy is some sort of conspiracy to favor this group or that group–usually the big financiers on Wall Street. Thus tight money policies favor Wall Street over the poor guy who can’t find a job. Then when the Fed adopts QE we are told that easy money favors Wall Street over the poor housewife who can’t pay her bills. Whatever happens, there’s a ready-made theory to explain it all in dark conspiratorial terms.
But life isn’t like that. The boring truth is that monetary policy has almost no impact on distributional issues. Inequality is a long run issue and money is roughly neutral in the long run.
Even in the short run QE has no significant impact on inequality. It helps all classes, but probably helps the rich (stocks) and the poor (jobs) more than the employed middle class. Sorry to disappoint the grassy knoll crowd.
It’s not that I think the government is too well meaning to engage in conspiracies against the public interest. I’m completely on board with both parties engaging in a conspiracy to turn the US into a giant Panopticon-like dystopia. Neither party seems willing to talk about the fact that it’s become a crime to merely talk about public policies on surveillance.
But monetary policy is different. To conspire, you must first understand. And almost no one in the government understands monetary policy (at least since Christy Romer left.) Obama appoints people to the Fed who he thinks will help him achieve his policy objectives. But they will actually work to undercut him. Not because they are secretly anti-Obama, but because they also fail to understand what sort of policy is in Obama’s interest.
I had to smile when I read this comment by Greg Ip:
One of the seven seats on the Fed’s board is vacant and another five could become vacant in the coming year, given expirations and the tug of other opportunities. To placate Republican opposition, Mr Obama may feel compelled to nominate candidates whose views are not too close to Ms Yellen’s.
That won’t be too hard to do, given that President Obama’s own views are far to the right of Ms. Yellen’s. Ip’s column is mostly good, but he’s too quick to assume Obama is less that completely clueless on monetary policy. Here’s Greg Ip’s colleague Ryan Avent:
. . . one can’t help but notice that two of the three governors leading the charge to taper were appointed by Barack Obama. Who also left seats on the Board of Governors unfilled for an extended period of time despite the rickety state of the economy. And who has also completely misplayed the process of nominating a successor to Ben Bernanke as chair of the Board of Governors.
One is tempted to conclude that Mr Obama simply doesn’t care much about monetary policy, and when he does turn his attention in that direction is mainly concerned with bubble prevention.
Now that his preferred choice to head the Fed has been taken away from him, I expect Obama to appoint some taper supporters to represent his own views, and counterbalance Yellen’s dangerous, bubble-inflating, money-printing views.
PS. Read the comment section; I guarantee at least one commenter will insist that Obama is actually an evil genius who has a secret plan to create a Great Depression with tight money, so that there will be more need for fiscal stimulus. And that he will do this without losing the Senate in 2014. Once you start thinking in terms of conspiracies, there is no end.
PPS. I predict that those people claiming Yellen is very different from Bernanke will look foolish in about 6 months. Expect more of the same.
PPPS. This post is not about Obama. Does anyone think Bush could explain the pros and cons of making forward guidance conditional on the state of the economy? How about Reagan?