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This article doesn't answer the question and seems primary based on nostalgia. My theory: the Fed's zero interest rate policy is very good at inflating asset v
by nostromo 11y ago
This article doesn't answer the question and seems primary based on nostalgia.
My theory: the Fed's zero interest rate policy is very good at inflating asset values: S&P500, housing, you name it.
Rising income is a second-order effect: we hope that rising asset values will lead to increased wages. That used to be the case, but no longer is. Why? Because of automation and globalization probably.
So, the Fed has the pedal to the metal for seven whole years and we get mediocre job growth, no real wage growth, but screaming high housing costs and stock market. And who owns the most real-estate and stocks? The wealthy do, which is why inequality is growing.
Even though I'm critiquing the Fed's policy, I don't have the answers and would probably pursue the same policy. It's a real conundrum. Perhaps basic income, or some other "throw money from helicopters" idea is the solution.
- danieltillett 11y agoThis is not a bug it is a feature. The rich are a lot smarter today than when they were the descendants of feudal landlords - 100 years of meritocracy combined with assortative mating makes for a very clever ruling class. Edit. Spelling.
- withdavidli 11y agoNot exactly true, back in feudal times just being able to read was quite a privilege. They also had a lock on information. We're much more on equal footing in terms of ability to gain information. Whether we act on the information is another issue.
- daveloyall 11y agoAre you kidding? What does a family line which has had uninterrupted, exclusive access to a personal library know? I mean think about it--what is that family like? That family which has held on to the same chunk of physical space, with books and notebooks, for several generations. "Equal footing in terms of ability to gain information", my ass! My own toddler gets confused when he tries to describe his home--probably because he's moved three times in as many years. I remember the encyclopedias I read as a child. But, I don't have them. I can't review them. I can't consult my notes, nor smell them and get connected to the concrete memory of the day I learned about phases of matter or dry cell batteries. Those things are important. They change the slope of the playing field.
- withdavidli 11y agoi don't understand the argument you are trying to make. you cut off the the "more" to make it sound like my statement meant we are equal instead of relatively better than we once were in comparison to the upper class. then proceeded to provide examples of your toddler being able to retain information and yourself retaining information. both are about memory and ability to recall those memories with accuracy.
- daveloyall 11y agoI had to go looking for that 'more'. I guess I cut it off (didn't notice it to begin with) because it's a meaningless modifier when attached to an absolute-sounding phrase like "equal footing". I don't know the name of this writing style pitfall, but here is another example: "The boot hardly annihilated the flower." ...That's a terrible example? Oh, in the first post, my examples are about "ability to gain information [learn]" but you were talking about "ability to gain information [access]". Okay, yes the internet and the public library system are truly wonderful. I do presume that the ruling class (and/or the rich) have some information that is not publicly available, and it's probably very important information, but yes, a poor man can walk into a library today and find treasure laying around. That has improved our footing. :)
- danieltillett 11y agoIn order to have an effective meritocracy you have to have universal education. You then pick the top 0.1% and invite them to join you and marry your son or daughter. The whole economic system is designed to identify the very clever no matter their background and bring them into the ruling class.
- khuey 11y agoIf you banish any of the smart/clever/etc to the underclass they might just start a revolution. Much easier to invite them to join the party.
- danieltillett 11y agoExactly right. The rich found this out early last century with the rise of communism. What they did was very clever; they basically introduced socialism in the 1930s by shifting the majority share of production to the masses to keep them quiet, introduced mass higher education with an emphasis on identifying the very smart (troublemakers if excluded) and brought them into the ruling class. Once this "decapitation of the masses” was in place (1970) they slowly took back their share of production. We are now back to the level the rich had in the 19th C. Impressive if somewhat depressing.
- MaysonL 11y agoDemocracy is the insurance premium the rich pay against the threat of pitchforks and guillotines.
- danieltillett 11y agoDemocracy only works if you have leaders. The non-rich no longer have leaders. We do at least have better bread and circus than the past.
- cinquemb 11y agoIf we build upon your assertion ("to have an effective meritocracy you have to have universal education"), if some of those in power define universal education differently (which would seem to make any concept of universality in education void of such in practice), then it wouldn't be surprising to see a decline in the effectiveness of an economic system, which is what I would suggest is what we are seeing today.
- rm_-rf_slash 11y agoMy social networks include a fair number of wealthy people. Some of their kids are dumb as rocks, and they don't have to improve themselves, ever. Those are the real welfare queens. Sometimes a fool can be made a leader by other people in power. Believe me, I'm American.
- danieltillett 11y agoYou might have noticed that I said the rich are smarter than in the past, but the ruling class are very clever. As you rightly point out there are plenty of dumb rich, but relatively few of these dumb rich are ruling. As for leaders who the figurehead is does not matter - ask yourself what do the rulers care more about; who is the POTUS or who is the head of the federal reserve.
- rm_-rf_slash 11y agoAre the ruling classes more clever, or has technology and globalization allowed average cleverness to be more impactful than in the past?
- danieltillett 11y agoThis is not an either or question :) The ruling class is both much clever than the past and technology and globalization has allowed their cleverness to result in more control. In regards the level of control I am most impressed at how subtly it is used. To be able to shift the the share of production from 75% masses / 25% rich to 50% masses / 50% rich in 40 years with barely a peep is truly breathtaking. They have even been able to convince a large section of the population that this is all the fault of people with brown skin.
- rm_-rf_slash 11y agoThis split is why I am not sold on why the rich or ruling classes are more clever than any other point in time, and not simply enabled by technology. I would like to see evidence of increased cleverness over time divorced from technological enabling.
- habitue 11y agoHoly shit. I hope this is sarcastic
- danieltillett 11y agoI am curious to know why you think this?
- api 11y agoYou must be new here. There's a sizable cadre of IQ score worshipping neo-eugenicists around here. More people need to actually study evolutionary biology. Like I mean the real kind with math and combinatorics and stuff. Or maybe I'm just a stupid head.
- danieltillett 11y agoI think you might mean population genetics, not evolutionary biology. If you study population genetics you might discover what results from assortative mating.
- elektromekatron 11y agoHow on earth would you study evolutionary biology without studying population genetics? Is a bit like saying not to study mathematics because you actually need calculus.
- danieltillett 11y agoEvolutionary biology is a real big field. Typically population genetics is its own separate subject at the university level. I was not suggesting to not study evolutionary biology (we should just call it biology as there is no such thing as non-evolutionary biology), just explaining what is the area you need to study if you want to understand the question being discussed.
- elektromekatron 11y ago
- enraged_camel 11y agoCounter-data: Paris Hilton.
- danieltillett 11y agoActually Paris is quite smart, she just plays an idiot for the masses. Even if she was an idiot, it proves nothing. There are plenty of dumb rich as even with assortative mating your children will be normally distributed, just from a higher mean.
- enraged_camel 11y ago>>Actually Paris is quite smart, she just plays an idiot for the masses. People said the same thing about George W. Bush. We have yet to see any evidence for that assertion, both for him and Hilton. >>There are plenty of dumb rich as even with assortative mating your children will be normally distributed, just from a higher mean. Quite a bold claim. I'd like to see a citation.
- danieltillett 11y ago>People said the same thing about George W. Bush. We have yet to see any evidence for that assertion, both for him and Hilton. GWB got a SAT mark that implies a IQ over 130. While he certainly liked to play the fool for his audience, I saw no evidence that he was stupid, just totally corrupt. >Quite a bold claim. I'd like to see a citation. Any trait that has more than a few hundred genes influencing it will be normally distributed with the mean of the offspring the mean of the parents. The genetic component of intelligence is influenced by a few thousand genes so it is not surprising to find that intelligence is normally distributed with the offspring mean the mean of the parents. This is population genetics 101. One of the more interesting observations about human intelligence is the variation in high intelligence is almost all genetics while low intelligence has a quite large environmental component [1]. 1. https://en.wikipedia.org/wiki/Heritability_of_IQ https://en.wikipedia.org/wiki/Heritability_of_IQ
- 11y ago
- eyed 11y agoThere haven't been hundreds of years of meritocracy. For one, women have only even been allowed to attend university since the mid 1800s, and only got the right to degrees much later. You can't have a so-called meritocracy when half te population isn't even allowed to particpate. At best, we've maybe had 35 years of meritocracy. Secondly, where's your evidence? Your statement seems to be total conjecture.
- narrator 11y agoThe reason asset prices rise first in a fed led recovery is because new money enters the system through bank loans. Naturally, banks want to lend against hard assets, so the first thing that new money buys is property, stocks and other income producing assets.
- natrius 11y agoThis time is different. The new money enters the system via central bank asset purchases, which lower the returns on those assets. These purchases push investors into asset classes with higher returns, raising the prices of all assets as a result.
- maxerickson 11y agoAn additional buyer shouldn't have the effect of lowering the rate of return on an asset.
- merpnderp 11y agoMore money chasing the same asset will lower its rate of return.
- natrius 11y agoThis ain't any old additional buyer. This buyer prints its own money. http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-5 http://www.economist.com/blogs/economist-explains/2015/03/ec...
- danieltillett 11y agoThis explains the how, but not the why. I have found in life the best way to work out why something happens is to follow the money.
- ExpiredLink 11y ago> If you asked the person in the street, “Why are interest rates so low?”, he or she would likely answer that the Fed is keeping them low. That’s true only in a very narrow sense... http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30-why-interest-rates-so-low http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/30...
- webosdude 11y agoI think that zero interest rate policy should have ended 2-3 years ago when economy got back in shape. The zero interest rates are benefiting housing market thereby increasing housing prices. I don't understand why Feds inflation gauge doesn't take into account the housing prices/rents that well? Every month Feds see unemployment rate and review the rates accordingly. I think they should also take into consideration the housing prices equally. I feel zero-interest rates have benefited wealthy 10 times more than an average person.
- stretchwithme 11y agoSuper low rates are bad all the time. They allow many things to exist that shouldn't, while the viable businesses have to pay higher prices for all their inputs. When you have cheap money, more people think marginal investments now make a lot of sense. But if you create too many online dog food companies, eventually most of them have to be shut down. It would have been better to allow an organic recovery. And remove the impediments to hiring. We seem to ignore the law of supply and demand in the labor markets and then scratch our heads when there is a lot of unemployment.
- roghummal 11y ago>And remove the impediments to hiring. What're those?
- deleted 11y ago[deleted]
- stretchwithme 11y agoAnything that makes labor more expensive than the price the market is willing to pay. Government adds a lot of costs and even fixes the price of unskilled labor in the belief that these workers are benefiting. But if the total cost of labor is higher than employers are able to pay for labor, they won't hire. This is especially true in a downturn. If we want to assist these workers, it would be far better to help them directly instead of forcing employers to do it. We'd avoid distorting the market place and shutting a certain percentage out of it altogether.
- jihjijbjib 11y agoHow about allowing markets to operate as markets instead of a government handout to the wealthy and powerful? fed policy only encourages malinvestment and inefficiency. How about tax and regulatory reform instead of the current corrupt regime of barriers to keep out the innovative and new for the old and established. There's so much which would help, but completely corrupt status quo serves the powerful at everyone else's loss, things are this way because the powerful want it this way.
- gnaritas 11y ago> How about allowing markets to operate as markets instead of a government handout to the wealthy and powerful? How about neither. How about addressing inequality by pumping money where it belongs, down to the poor, lowering taxes on the 99%, raising them on the 1%, and fixing the source of all the actual problems rather than simply treating symptoms? Markets aren't naturally good and crony capitalism isn't either, they both need tamed.
- adam419 11y agoHere's another solution: Respect the wisdom of markets. Allow corrections to take place and don't bury malinvestment under the rug only for it rear it's ugly head worse later on by acting as if you have a better intuition on what the price of money should be. Most people accept the virtue of free markets. Yet many don't see that the actions the Fed has been taking destroys the concept of a market by artificially supplementing supply or demand in an unbounded way based on a perceived sense of greater understanding. The problem is it's really hard for most of these policy makers to build a platform based on "Let's do nothing and let the markets correct themselves". In such complex domains like an economy the action bias is very real, problematic, and the best thing to eliminate if you want to renormalize markets.
- juliangregorian 11y agoMarkets are not wise by any stretch. No one agrees what a "free" market would look like, but in general they tend to favor incumbents and the powerful.
- deleted 11y ago[deleted]
- tcbawo 11y agoThis is a gray area. If we allowed a large automaker to go bankrupt, we probably would have lost the supply chain and many supporting industries which would be gone (from the US) forever. Same with banks. As much as we detest bailing out bankers, allowing the US to economy to be cut off from credit would create lasting collateral damage.
- WalterBright 11y agoOne thing nobody mentions is the increasing share of the GDP that the government consumes: http://www.usgovernmentspending.com/total_spending_chart http://www.usgovernmentspending.com/total_spending_chart That wealth has to come from somewhere.
- shkkmo 11y agoWhich has pretty much leveled out since the end of the 1970s according to those charts?
- merpnderp 11y agoI like how the charts run to 2020 to hide the massive ramp up in the last few years.
- nickff 11y agoI don't particularly 'like' it, but entitlements will grow at an increasing pace as more of the baby boomers reach Social Security elidgibility.
- dragonwriter 11y ago> I like how the charts run to 2020 to hide the massive ramp up in the last few years. From the data there, spending as a share of GDP peaked in FY 2009, bottomed in FY 2014, and rose slightly from that trough through FY 2016. Extending it to the projected FY 2020 levels provides a bigger ramp up than recent years, since the 2018-2020 ramp up is the fastest one since the FY 2009 peak. The only massive ramp up in recent years was the one leading up to the 2009 peak.
- stretchwithme 11y agoI think the government's interference in the markets for housing, capital and labor are a much bigger problem than how much government consumes. Bubbles happen because borrowing money is subsidized. Unemployment is caused when interference with prices prevent supply and demand from equalizing. Government may waste capital, but I can point to many things that do. I think you can increase taxes if you free markets enough and the economy could still grow. You could GIVE everybody the downpayment for their first house and have a healthy housing market as long as you got rid of all the other subsidies and inducements and tax write-offs. Not proposing that, but you get the idea.
- deleted 11y ago[deleted]
- ArkyBeagle 11y agoThe Fed never touched the pedal. See also "Interest on reserves". Land rents ( which are not the same as "rack rent", what you pay the landlord, but can be related by land prices going up speculatively ) drive out wage rises. Scott Sumner says we should have Nominal GDP Targeting; if Real GDP is < say, 4%, the rest is made up with inflation.
- bhickey 11y ago> Land rents drive (...) out wage rises. Should we address rent seeking with land taxes and other Georgist policies?
- ArkyBeagle 11y agoProbably. It would mean a painful period of adjustment. And the rentiers will fight with everything they have.
- BenoitEssiambre 11y agoThis is incorrect. Fed only increases asset value because it increases the value of an asset relative to its revenue generation capacity. Interest rates are a revenue to asset ratio. This means residences are worth more relative to their rents but not that rents are higher. Rising income may be a second-order effect but the low rate at witch it is happening is because the fed is not stimulating enough and constantly missing its inflation target. If it were, employers would be fighting for employees and wages would grow. It's true that the wealthy own most of the assets that gain value with fed stimulation. However, they can only capture that value if they sell them and spend the money while the feds are stimulating. The total future revenue generation of assets is not greater, only the relative value of selling and spending the money now (which incidentally creates jobs and raises wages). The other thing that becomes highly valued when central banks stimulate is the creation of new assets, another thing that increases employment. The Fed does not have "the pedal to the medal" for that it would need to promise to allow inflation go higher which it seems mortally afraid of.
- 314 11y agoThe answer was mentioned briefly in the beginning of the article, and then the implications discussed through the rest - it was not entirely obvious. Population rises and falls on long time scales. It acts like a commodity in that the supply and demand for people affects prices. When population is high wages are low and living space is expensive. The converse is also true. After WWII the population was very low (because the workforce slice of the demographic was more heavily affected than the other slices), now the population is relatively high (and the workforce slice of the demographic has expanded). More people with money chase a fixed(-ish) number of homes through rent and purchase. Debt is cheap. The result is high prices. Most people in a job can be replaced with a large available pool of others, the result is low wages though lack of negotiating power. The unanswered question in the article is whether Reagan/Thatcher caused these changes through their policies or simply rode into power on their effects. History is nothing but a long-term record of the effect of demographic change on political will.