It’s an article of faith among many in the financial world: The Federal Reserve’s low interest rate policies and other steps meant to boost the economy are driving the value of stocks and other assets to the moon, and thus are a major cause of high wealth inequality.
That idea can be heard in documentaries, newspaper opinion articles and many segments on cable financial news. It may also be backward.
New evidence suggests high inequality is the cause, not the result, of the low interest rates and high asset prices evident in recent years. That is a provocative implication of new research presented on Friday at the Federal Reserve Bank of Kansas City’s annual Jackson Hole economic symposium (which was conducted virtually because of the pandemic).
Seeing how that new notion connects with the boom in markets — and the risks to financial stability whenever it ends — means grappling with just why interest rates are so low, financial asset prices are so high, and what the Fed has to do with it.
Advanced economies have experienced low interest rates for more than a decade. These can be viewed as less a result of central bankers’ decisions and more as a consequence of powerful global forces pushing them downward — creating a corresponding surge in asset prices.
In effect, a global glut of savings has caused a decline in the “natural rate” of interest, also known as r* (and pronounced r-star): the rate that neither stimulates nor slows the economy.
Central bankers, in this story, are the equivalent of drivers on a highway who must adapt their speed to road conditions. The Fed has kept rates low for the last decade because those rates have been the ones that keep the economy stable. If it had tried to push them higher, the result would have been a recession.
“Central banks now appreciate that r-star has fallen, and that means they’re going to have limited ability to tighten monetary policy in the future,” said Kristin Forbes, an economist at M.I.T., in a presentation at the symposium.
But that raises the question of why this savings glut exists at all.
The paper, by Atif Mian of Princeton, Ludwig Straub of Harvard and Amir Sufi of the University of Chicago, looks at two leading explanations: the demographic effects of the baby boom generation’s accumulation of retirement savings, and the effects of higher inequality, given the fact that rich people save a larger share of their income than the middle class and the poor.
They found that the role of higher inequality was far more important than that of demographics.
It’s not that the high earners increased their savings rates. Rather, they were winning a bigger piece of the economic pie; by the researchers’ calculations, the share of income going to the top 10 percent of earners rose to more than 45 percent in recent years, up from about 30 percent in the early 1970s.
The result of high…
Read More: Some Say Low Interest Rates Cause Inequality. What if It’s the Reverse?