Easy Money Isn't the Source of Prosperity
Most debates about monetary policy actions of central banks are concerned with the "aggregative effects." That is, the questions addressed are about whether the stance of policy can accurately be construed as expansionary or contractionary, easy or tight, stimulative or restrictive. While it is certainly useful to debate whether central bank actions are promoting faster or slower economic growth, lower or higher employment, faster or slower inflation, it is also important to understand that actions by central banks affect people in other significant ways.
Far too little attention is paid to the "allocative effects" of discretionary actions of monetary authorities-inflation also affects the distribution of income and wealth in an economy. Economists simply are not in agreement about whether monetary policy actions can cause more or less growth or employment to occur than otherwise would be the case, so they debate. However, there is little disagreement about who gains and who loses as a result of monetary inflation. Generally, higher inflation transfers wealth from creditors to debtors. Homeowners with long-term, fixed-rate, mortgages get richer as a result of inflation, renters do not. Governments with lots of debt pay back interest and principal with depreciating currency-which is why economists say inflation is an unlegislated tax imposed on the government's creditors.
Most importantly, inflation is a regressive tax-richer people are able to protect themselves from inflation (and may even gain), while poorer people tend to be renters and have fewer ways of gaining from inflation. To the extent that prices of goods and services rise more rapidly than after-tax wages, people who live paycheck-to-paycheck suffer declining standards of living. In other words, the distribution of income is made worse by inflation-the rich really do get richer while the poor are made poorer.
While some attention has been given to the effects on savers of "low interest rate policies" of central banks, the deliberate inflating of asset prices as a tool of monetary authorities is not much discussed. Clearly, pumping up prices of common stock and real estate as a means of creating a "wealth effect" to stimulate consumer spending doesn't directly help people who don't own any common stock or real estate. In a recent column in the Washington Post, opinion writer Charles Lane usefully acknowledges that there may be conflicts of objectives for advocates of "easy" monetary policies who also espouse desires for less income or wealth disparities. Unfortunately, Lane does not seem to be aware that the widening of income and wealth distribution disparities over the past several decades reflects the regressive effects of inflation.
Hand-wringing about declining real wages of middle and low-income households while at the same time cheering on central bank objectives of higher inflation makes no sense at all. Even the economists who favor higher inflation admit that the way it is supposed to work is through the lowering of real wages-they contend that nominal paychecks don't rise as fast as the prices in baskets of consumers goods, and that is a good thing in their view. The argument is that nominal wages are "sticky," so the only way to lower real wages in order to increase total employment is to have inflation that is higher than nominal wage increases.
If true, it means that widening the distribution of income is an objective of expansionary monetary policies! So why do some of the same pundits feign surprise when a period of pedal-to-the-metal monetary actions is characterized by widening of the income distribution? If they had been listening more carefully they would have understood that policies to "stimulate aggregate demand" can be successful in promoting more output and employment only if the wealth and real incomes of lots of (mostly poor) people are reduced.
Inflation is a regressive, dishonest and divisive tax-yet politicians will always prefer it to the difficult decisions to curtail spending or raise explicit taxes. The deliberate pursuit of higher inflation is a cynical cop-out on the part of policymakers who claim to be in favor policies to promote greater prosperity. Monetary policies cannot correct the mistakes of the rest of government-perverse tax and regulatory regimes will not be washed away by wide-open monetary spigots. In fact, the political will to remove the actual obstacles and barriers to entrepreneurship is lessened by any belief (or hope??) that central banks can accomplish what legislatures are unwilling to do.
Encouragingly, after two "lost decades" in Japan the administration of the current Prime Minister has become focused on the structural reforms-taxation, regulation, labor laws, international trade-that are essential to sustainable prosperity. Even in Europe there are early indications that structural reforms in Spain are starting to yield better results than in stagnant places relying on misplaced faith in stimulus from central banks.
Probably debates among economists will not settle the question about whether monetary policies can create employment and wealth. More likely, the observed experience of countries that get good results from structural reforms of tax, environment, energy, labor and other legislation and regulatory policies may encourage imitation by those places that are increasingly frustrated with the failure of easy money to generate greater prosperity.
