Cost-Benefit Analysis In A Failing Economic System

Cost-Benefit Analysis In A Failing Economic System

“This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners,” read the standard disclaimer, at the bottom of a new editorial by Lisa Abramowicz, columnist-turned on-air talent.

The piece, “Fed Decries a Wealth Gap It Helps Perpetuate,” summarized the familiar dynamic by which ultra-accommodative monetary policy serves to exacerbate inequality on a number on fronts, the most obvious of which is explained by the distribution of financial assets, which is famously (and hopelessly) skewed. Gains in those assets thus accrue exponentially. The dynamic isn’t linear. The rich are getting richer and the poor are becoming poorer, either outright or relatively.

Notably, this dynamic is class agnostic and cares nothing about partisan politics. It’s why Jeff Bezos and Elon Musk can make (or lose) more on paper in a single week than some of the world’s most legendary fund managers accumulated over their entire careers. Between them, Bezos, Musk and Zuckerberg are worth more than a half-trillion dollars, triple Bridgewater’s AUM — with ~$100 billion to spare.

More generally, the familiar figure (below) guarantees that the bottom 90% of America will become relatively poorer over time assuming financial assets keep appreciating.

This situation became exceptionally ironic last year, when Jerome Powell unveiled tweaks to the Fed’s mandate, which now includes a number of implicit social justice promises. The problem is that the evidence in support of monetary policy’s capacity to facilitate a more inclusive labor market (for example) is much thinner than the readily observable fact that levitating the price of the financial assets disproportionately concentrated in the hands of the wealthy is guaranteed to turn the already gaping wealth divide into an unbridgeable chasm.

Abramowicz noted that,

Fed members have argued that the benefits substantially outweigh the increase in inequality. Easy financial conditions allow companies to more cheaply finance themselves, invest in new businesses and equipment and hire more employees. It fosters growth and general prosperity, which is how all this is supposed to trickle down to all workers, regardless of income.

Simply put, that’s wishful thinking. Abramowicz’s cadence conveyed her own skepticism, but those less inclined to polite discourse have spent years accusing the Fed not just of impoverishing the masses, but of doing so on purpose as part of some far-flung (and far-fetched) international conspiracy.

As ever, the truth is somewhere in the middle — somewhere between Abramowicz’s polite exhortations and the conspiratorial rantings of fringe bloggers who, in central bank conspiracy theories, found a market-based way of dog-whistling to anti-Semites.

There’s a very real sense in which policymakers are lying. It’s wildly implausible (to the point of being barely worth mentioning) to suggest the Fed really believes the benefits of monetary policy operating without a sufficiently strong and persistent fiscal kicker really do outweigh the increase in inequality, assuming you can “weigh” trickle-down economic gains and the widening wealth gap on the same scale. This reality underscores the absolute necessity of expanding the social safety net and spending big on initiatives like infrastructure, which pay dividends over time and provide economic opportunities for the less fortunate in the here and now.

I’m a broken record on this. After 2008, monetary policymakers underestimated the efficiency of the transmission channel between accommodation and financial assets and (grossly) overestimated the efficiency of the transmission channel between lower corporate borrowing costs, higher equities and real economic outcomes.

A dozen years later, there’s no excuse for harboring such delusions. The evidence is clear. The figure (below) has been updated. It now shows that, predictably, the share of assets held by the top 10% began to climb again after dipping during the selloff that accompanied the onset of the pandemic in the first quarter of 2020.

Crucially, the wealth divide isn’t something that expands in a vacuum. It undermines societal cohesion at almost every turn. A fractured society is vulnerable to demagogues and, in extreme scenarios, can spiral into authoritarian rule under the guise of populism.

Watching a show about the fabulous lifestyle of a self-made millionaire might be motivational for young adults in a capitalist system where equality of opportunity is a semblance of real. But there’s a threshold beyond which the divide between the aspiring capitalist and the people at the top of the social hierarchy becomes so wide that aspiration is akin to being naive. The odds of a random child born into the middle class becoming Elon Musk are surely less than the odds of that child winning the lottery. Even if that child enjoys a decent education and a fair shot, she isn’t going to be worth $200 billion.

Where equality of opportunity doesn’t exist (i.e., for children born into poverty), ambition can be tantamount to an economic death sentence to the extent circumstances are such that upward mobility is mostly impossible. In that scenario, someone who persists in the fantasy that they can make it to Harvard and, later, the C-suite, is likely condemning themselves to disappointment after disappointment. Each failure will be made all the more bitter by the realization that merit is meaningless when your skin is the “wrong” color or when you’re a woman attempting to climb the corporate ranks in an organization where your male colleagues have seen too many “Mad Men” episodes.

In her piece, Abramowicz zoomed in on another dynamic, citing a recent study by academics at Princeton, Harvard and the University of Chicago, her alma mater. The work “suggests that the lopsided distribution of wealth is more than a social issue; it’s actually dissuading productive investment,” she wrote, noting that “wealthy people are parking more of their cash in debt funds, which account for a significant proportion of lending to governments and households [meaning] the US and lower-income families are becoming more indebted, rich people have more money tied up in debt funds, and less money goes toward fostering innovation and prosperity.”

Coming full circle, Abramowicz’s piece was apparently a case where the column does reflect the opinion of the editorial board, and likely of Bloomberg LP and its owners too. A separate editorial attributed to the Editorial Board itself called on Jerome Powell to go ahead and telegraph his intention to “phase out QE.” There was no mention of inequality. Rather, the argument was about preserving (or rather, reclaiming) optionality.

Either way — that is, whether it’s untying policymakers’ hands at a critical juncture or putting the brakes on policies which may be contributing to the very social ills Powell committed the Fed to fighting this time last year — the message is the same. “The costs of extending the commitment to maximum stimulus have come to outweigh the benefits,” as the Editors put it.


9 thoughts on “Cost-Benefit Analysis In A Failing Economic System

  1. Key point: ultra-accommodative monetary policy is (at best) just another form of trickle-down economics. That that has been our political-economic reality tells me that Ronald Reagan, not FDR, was the most consequential president of the 20th century.

  2. Fiscal policy is better at producing more robust outcomes due to stimulus being shared better that way. During the GFC, Obama was overly cautious and the Republicans took advantage of his reticence and inexperience. Long on rhetoric short on accomplishments. Bernie Sanders missing the nomination was a bullet dodged for the Democrats. That said, it appears to be Nancy Pelosi’s last hurrah as speaker- not mind you because she is not a good speaker. She is one of the best House Speakers ever. But because history and gerrymander will probably cost the Democrats enough seats to switch to Speaker McCarthy (g-d help us).

  3. PS- That is the reason the Democrats need to pass as much of their agenda as possible by the early Spring of next year. It may be awhile before they can do this again. (House/Senate/President control).

  4. I wonder if Powell understands that his own getting reelected as Chairman next year, is vastly less important than the well-being of millions of Americans.

    There is a perception that a rising stock market helps people. But it’s just a perception. The reality is, the share of the total pie, for most everyone, is getting smaller.

    The metric of interest should be real, inflation-adjusted wealth. And that metric should be applied to ordinary people, not just billionaires.

    The so-called “job creators” do not create jobs. They will only hire if they can profit, and in every case look to cut a job or send it overseas, where possible. Trickle down does not trickle. It’s all b*******.

    We need an economic system that works for everyone, not just for Mark Zuckerberg or Jeff Bezos.

    The populism that brought us the most incompetent and corrupt moron ever, Trump, will only get worse if the wealth cap continues to grow.

    1. Elmer

      Too right! Trickle down is the biggest con job at least since WWII. It occurred to me as I read H’s post that what is happening to America now is that it looks a lot like 18-19th Century England. The uber rich are in much the same position as England’s peers of the realm, they own or control most everything of value in the country. They invested for themselves and their offspring. Everyone else had to find a place and be happy with it. The merchant class sold the country’s goods but rarely got rich. After the Industrial Revolution, there was a rising management hierarchy, financed by a few merchant bankers. Many of the lower class went into “service” for the rich (see Upstairs/Downstairs). Entrepreneurs in various crafts trained young apprentices, who were often essentially indentured slaves whose parents sold them to their masters. Everyone pretty much had a place they (and their children) occupied with little hope of advancing out of their class assignment. Scions of the rich didn’t have to work if they had an “income” from a trust fund. 100,000 pounds could be placed in trust by a rich parent and create a safe income of “2000 a year” which could support a young gentleman, and perhaps even a servant, as long as the young man didn’t have a gambling problem. Look as us today. Not a whole lot different.

      H also added a quote to the effect that: “… wealthy people are parking more of their cash in debt funds, which account for a significant proportion of lending to governments and households [meaning] the US and lower-income families are becoming more indebted, rich people have more money tied up in debt funds, and less money goes toward fostering innovation and prosperity.” I would extend that thought to companies who have $2 tril or more in cash and equivalents and are more disposed to use that money to buy back stock to enrich the management class than to invest in innovation and job creation.

    2. I agree 100% with EF & Mr. Lucky in regard to the inequities in our system. Being from Chicago, I watched first-hand from the time of boss Richard J. Daley as inequalities in living standards and education unfolded across the racial divide in the city. It was disgusting. But that was only the beginning of the inequity I saw during my lifetime. The divides grew exponentially during the 80’s, 90’s and through the early decades of the 2000s.

      Needless to say, I also favor tipping the balance in favor of broader prosperity and innovation. If we are to complete, I would prefer that all of our people can fully participate in the economy. I don’t reckon the current Fed will have the guts to address the financial inequities, let alone the racial inequities. Powell will leave it in Biden’s hands through raising taxes on the relatively wealthy.

      Taxes can be a help in this regard. But upsetting as it may be for markets, I would look forward to standing and cheering loudly, if and when the President chooses his own Fed Chair.

      The current infrastructure spend in Congress to mitigate climate change also may support broader economic participation. Radical innovations, perhaps safe nuclear (maybe Thorium 232?), and similar radical ideas, sorely needed to save the earth from its people, can also support new type of jobs and participation in the economy.

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