When people ask whether QE worsened inequality they think they are asking a coherent question. But that merely shows how poorly most people understand monetary economics.
Let’s ask a different question: Did Obama’s appointment of Ben Bernanke increase inequality? Any sensible listener would ask: “Compared to what?” After all, most models are roughly linear, at least for very small changes (I’m rusty at math, so tell me if that is wrong.) In other words, whatever impact monetary policy has on inequality, the impact of picking Bernanke over a more dovish alternative (Romer) would have been the opposite of Obama picking Bernanke over a more hawkish alternative (Summers.) I can’t imagine anyone being able to make sense of the question “did Bernanke increase inequality” without knowing the counterfactual Fed chair. And of course the same is true for Fed policies, is the counterfactual more or less contractionary than the actual policy?
Now some people will say; “the obvious implication is that the counterfactual was no QE, and that this was a more contractionary alternative.” This is very likely how people think about it, but of course that assumption is wrong. My preferred policy would have been far more expansionary, and hence would have involved far less QE. Let’s break this down into 2 questions:
Does monetary stimulus increase inequality?
Does delivering monetary stimulus via QE affect inequality more than some other method?
I’ll take the second question first. Suppose Bernanke did not do QE, but rather some equally effective stimulus method. Perhaps slightly raising the inflation target, or going to level targeting. Would that make any difference for inequality? I hope it’s obvious that it would not. The mechanics of QE are totally uninteresting. You are just swapping one Federal government interest bearing liability (reserves) for another federal government interest bearing liability (T-bonds.) Any “Cantillon effects” are trivial. I hope I don’t have to explain to people that this “money” did not “go into the stock market”:
a. The money went into bank reserves, or currency.
b. Money never goes into markets; there is no giant safe on Wall Street storing all the money invested in stocks. Money goes through markets. You buy, someone else sells.
If there were no QE, but equally fast NGDP growth produced by a higher inflation target, stocks would have done equally well. Indeed stocks responded more strongly to forward guidance than QE3 in late 2012.
So now we can rephrase the QE question: “Did Bernanke’s monetary policy since 2009 worsen inequality?” Now it’s much easier to see that we need a counterfactual. You might prefer to describe that policy as 1.5% inflation, or perhaps 4% NGDP growth (my choice.) Either way it’s a fairly contractionary policy. And it’s no longer “obvious” what the counterfactual is, would it be 3% or 5% NGDP growth? In my view 5% growth would have helped the unemployed and the rich more than the middle class with stable jobs (say teachers.) So that has mixed effects on inequality, indeed so ambiguous that it’s probably not worth even thinking about, as the effect would be trivial compared to the net gain to America from a stronger economy.
If you think the alternative to QE was a more contractionary policy, say 3% NGDP growth, then it would hurt the rich and poor more than the middle class. In order to favor that policy you’d have to hate the rich so much that you be willing to impoverish millions of poor people to screw the rich. But even someone who hates the rich as much as Paul Krugman favors QE.
Sorry, but “does QE increase inequality?” is a really, truly moronic question. I apologize for wasting your time.
PS. Here’s Buttonwood at the Economist:
This is at the heart of the matter. Even if the Fed does not increase rates next year, it will surely take a big economic shock to make it resume QE. The markets have relied on the central banks for so long, like a small child holding his dad’s hand when learning to ride the bike. It is time to let go of the hand now, but there will be a few bumps and bruises along the way.
This is truly a horrible metaphor, and helps explain how the developed world got so far off course. Taken literally, the counterfactual to “using monetary policy” is barter. Obviously that’s not what people mean when they say it’s time to stop using monetary policy. Buttonwood probably means that we are propping up the economy with an excessively expansionary monetary policy. But of course that’s confusing the tools (fed funds targets, the monetary base, etc.) with the actual policy itself (1.5% inflation, 4% NGDP growth, etc.)
By 2007 almost no serious economist in America believed that money was “easy” in the early 1930s, despite ultra-low interest rates and massive QE. And now almost all serious economists believe monetary policy has been “easy” in recent years precisely because of ultra-low rates and massive QE. This fact is appalling. The intellectual decline in mainstream macroeconomics since 2007 is stunning–nothing like this regression has happened since the early 1970s, or perhaps the late 1930s. And this time the worst mistakes are being made by those on the right.
By the way, the right metaphor is not training wheels, but rather which way do you want to steer the bicycle? No serious pundit is advocating walking.